How do I invest millions of dollars of insurance premiums (OPM) into the stock market?
I used to manage (sold company) the seperate accounts for a small insurance company. They had about 40mm in assets. They were extremely conservative. They didn't buy junk and seldom (-5%) bought equities. The reason was that this guy had been through several bull an bear markets including credit collapse and crash. Multiple times he lost out on whole positions (Lehman Brothers Corporate Bonds for example), but this is inevitable. They came to me after the market had done most of it's shedding in 2010. I say this because you have to be careful with other people's money. Regardless of your intentions there will be a day where you look bad for buying certain things even though your intentions were good. So, with that here are my guidelines and some advice. Don't invest over 20% of assets into equities. This is quantified in fact and back-tested return for risk driven metrics using modern portfolio theory and days and days of Monte Carlo simulations looking at the worst that can happen (specific to an insurance company and those premiums). Trust me on this one. Stay away from hybrid equity/bond type of investment vehicles. (Like structured notes). They are not why you think they are and should be classified as a single bank holding (the underwriter) and as a bond if that writer. For example a JP Morgan S&P 500 structured note would be considered a JP Morgan Bond at wherever it's credit rating. If your going to buy equities there should be no reason to own small cap, alternatives or any cash equitizatuon type strategies or products. So stick to Large cap and limited mid. On real estate only buy companies, not products and stay away from pitched deals like Hines REIT, etc. These locked up and provided no return of principle in the credit crunch. This can happen again and probably will some day. If you get a flush of claims this may constrain your cash flow, liquidity, etc. Only buy companies that are Large or Mid sized in the REIT space. The only reason to be in this space anyway is for the income. Max allocation to REITs is about 10% any given day. You need to split the $$ into buckets that represent each products premiums. Then you need to know your bogey or what yield is required for that product. For example if you've sold DI, Life and Fixed Annuities you'll want to split each out and invest based on each with assumptions like mortality, future income streams, required yield to pay x % of claims average, etc., etc. I'll assume you know your assumptions (actuarial) for claims, etc. If not you should probably hire an actuary for each line. If not, you'll end up killing the company. Also, state regulators will want to know what your invested in, how you make those decisions, etc. They have regulations on this and "What you should invest in" is actually documented by your state insurance regulator or via the NAIC with published guidelines. So, now that that is out of the way I would invest the following way. 12% Large Cap dividend paying equities5% Large Cap Real Estate dividend paying equities 3% Mid Cap Dividend Paying Equities The rest (80%) in bonds invested specific to your lines. You'll always want to consider the following: No bonds below investment grade (BBB)All bonds YTW (yield to worst) +\- 1.5% of FMC (Fair Market Curve). This means when buying bonds they need to be fairly priced so your going to need a measure for this. The FMC provides you the specific tool to make sure your paying a fair price for your bonds. Without it your getting taken advantage of by the broker, dealer, etc. So if a AA corporate 5 yr utility bond is yielding 2%, then the FMC should show extremely close to 2%, within about 40-50 basis points (FMC is a printout via bloomberg terminal showing all bonds on the curve with a table showing the same, like an average price list for all bonds based on category, rating and maturity, this exists no where else that I am aware of in real time, etc.)Bonds should be diversified across and within fixed income asset classes:Government (not just Treasuries, but TVA and things like this)CorporateHigher Yield (without junk)Taxable Muni ( like build America bonds, also look at the county and research if their trying to get bankruptcy protection, if in California). Agency (GNMA/etc)Etc.Factors:Credit ratingName MaturityYTMYTWYTC (yield if called)# of bonds (always buy 25 bonds at a minimum per order)PriceSpreadMaterial credit eventsI just realized I could write a book on this topic, and could go one for 100 pages. I'll leave it here but I think you get the picture. A tool I think you might consider would be ETFs. I always thought I probably could have condensed this company/clients holding down to about 10 position from 300 using ETFs, but they wouldn't ever do it because it goes back to not owning any vehicles. On Wall Street vehicles are products built for one purpose. To make your money. So we stayed away from them. But, I'm not as risk adverse personally and could do the same with them. Check out black rocks site under the IShares ETF site and look for their fixed income tool. It is a montage that basically looks like a market carpet for bonds, but you could in theory once you know your bogeys use this tool to get the perfect risk/reward trade off with maturity, duration and yield for a bond mix using ETFs exclusively. You just put in your parameters and risk and it spits out a mathematically correct and backtested algo solution to the weighting of which is perfect for this in my opinion. I could do more if consulting, but hopefully you get what it takes, how to invest this $$, etc. But, I do think you need an actuary to run some real #s for you for liability reasons alone, not to mention a stated, factual and perfected measure of what it's going to take to pay claims based on your assets and premium flow. Also, one last thing. Your going to need to write an IPS or Investment Policy Statement that spells all this out and sigh it and have anyone else sigh it as well who has anything to do with the decisions in this portfolio. Good luck.