Innovations

Portage Bay Insurance Diversifies

by Chris Malins

Did you know that the University has its own insurance company? Portage Bay Insurance (PBI) is a wholly owned subsidiary of the UW and is responsible for insuring the University for medical malpractice, auto liability, employment practices liability, and general liability. As a separate entity, PBI has its own set of financial statements, including a Balance Sheet and a Statement of Operations. The liabilities of PBI are what you would expect, current and expected claims and related costs. On the asset side of the balance sheet some recent improvements have been made to assure the future fiscal health of the University’s liability program.

Since forming in 2002 and until very recently, PBI had invested its premium revenues in high grade government bonds (also known as fixed income securities). While this type of investment is safe and secure, it has also been a very low returning asset in recent years due to historic lows in interest rates. PBI relies on the income from its investments to pay claims and keep premiums low for participants in the program. Something needed to be done.

The best way to increase long term return on a portfolio of assets is to diversify—that is, to spread the money around in many different investment areas. So when one “asset class”, for example fixed income, is underperforming, another may be overperforming, and vice versa. Thus by diversifying the portfolio, the overall long term return is higher.

The solution for PBI was right in front of us. Instead of separately investing the PBI assets with a single fixed income manager, the money could be invested in the University’s operating funds. The operating funds are a large pool of university assets that are invested in high quality fixed income as well as having some investments in equities (e.g., stocks). This pool has a long-term return expectation of nearly 10%. PBI’s return while invested only in fixed income was under 5%. This increased return will have a large effect on the growth of PBI’s assets over time. Since the total invested assets of PBI are creeping up to $30 million, the diversified approach to investing can add over $1.5 million annually to PBI’s bottom line.

The diversified investment approach to PBI was implemented in July of 2005 and has already increased PBI’s investment returns. It has also simplified the reporting of PBI assets. Rather than waiting for reports from a fixed income manager in Boston, the reporting is done by the Treasury Office’s operations team. This is a solution that has not only increased the flow of dollars to PBI, but has made accounting and reporting much simpler. A true quality improvement!