FIG (Banks & Insurance)
How does investment income drive an insurer's ROE? An insurer holds $30B of investments against $10B of equity and portfolio yields rise 100bp — quantify the effect.
Model answer
Investment leverage = investments/equity = 3.0x, so a 100bp yield increase adds $300M of annual investment income — a 3.0 percentage-point lift to PRE-TAX ROE — before any change in underwriting.…
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