CCRIF – A Captive for all Seasons
Cayman Captive Forum 2013
William Dalziel, Partner
London & Capital Asset Management Ltd
5th December 2013
Background
•
London & Capital were appointed in 2007. We are currently responsible for the management of
the largest part of the Insurer’s funds, in a wholly Fixed Income mandate.
•
CCRIF’s Investment Policy Statement is reviewed no less than annually to ensure it continues to
meet the Insurer’s evolving requirements.
•
The IPS includes a range of risk control criteria, including minimum ratings, concentration and
geographical limits, and strategic asset allocation with bounded limits for each sub asset class.
•
In addition, it also recognises the need to avoid adding to enterprise risk (exposure to
Insurers/Reinsurers, issuers in the same geographical zone as its Policyholders), the need to
maintain liquidity in line with the Insurer’s claims paying commitment, and limiting portfolio
volatility.
2
London & Capital’s Delegated Responsibilities
•
Examine, understand and assist the Board to articulate its investment objectives and risk appetite
•
Understand CCRIF’s investment constraints whether imposed by risk appetite, regulation, liability
profile, policyholders or owners
•
Specifically, be aware of CIMA’s Supervisory framework
–
Insurance Law 2010 and implementing Regulations (Dec 12)
–
Risk Management Rule (Dec 2010)
•
Translate all of the above into a best estimate prospective return and volatility expectation based
on the Macro Economic environment
•
Minimise portfolio exposure to unrewarded and operational risks
•
Provide the Board with information and analysis of sufficient granularity to enable them to assess
and control the portfolio risk and our own effectiveness
•
Work closely with other service providers to facilitate a high standard of service, and
•
Decide how to invest the assets, trade and manage the portfolio.
3
Accountability
Single point of reference,
coordination and
accountability to client.
Partner
Separation of powers – risk
exploitation and risk control
are overseen independently
Strategic AA is a Risk
Management Function,
Tactical AA is an Investment
Team function
Investment
Strategist
CIO
Tactical Asset
Allocation
Portfolio
Construction
Compliance /
Risk Modelling
4
Active management and the Business Cycle
Stages of the
Economic Cycle
Recession
Recovery
Boom
Slow-down
Asset
Cash
Govt bonds
Asset
IG Corp bonds
HY Corp bonds
Equities
Asset
Equities
HY corp bonds
Commodities
Asset
Cash
Govt bonds
Above trend
Below trend
Source: London & Capital
•
Different investments perform differently at different points in the business cycle
•
Portfolio management needs to adjust accordingly – tactical asset allocation and duration changes
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How CCRIF’s Objectives impact the Portfolio
Strategic Objective
Be able to meet claims
within 14 days of loss event
Liquidity – Able to strike NAV on any trading day, and liquidate assets
at T+2
Liquidity – Limit acceptable assets to issuers with average daily
liquidity at least xxx
Asset Selection – Exclude assets that could be negatively impacted
by Hurricane or Volcanic Eruptions in the Caribbean Basin
Asset Selection – Exclude Insurers/Reinsurers (correlated to CCRIF’s
own business cycle)
Asset Selection – Exclude the use of Funds to avoid illiquidity traps
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How CCRIF’s Objectives impact the Portfolio
Strategic Objective
Preserve Policyholder
Capital and Reserves
Portfolio Construction – Manage the portfolio to a target volatility of
3.5% and maximum volatility of 5% with a 70% confidence interval
Tactical AA – The Portfolio can revert to high levels of cash to protect
the nominal value of the assets in periods of extreme stress
IPS - Set an absolute return, rather than relative return portfolio
objective (Cash plus)
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How CCRIF’s Objectives impact the Portfolio
Strategic Objective
Understand Portfolio Risk
Strategic AA – Model alternative SAA’s and aim to optimise on
medium term objectives
Risk Management – Attribution and Factor Analysis to flesh out
sources of past performance and understand portfolio sensitivity to
future changes in these factors
Risk Management – Conduct regular Macro Economic top-down
analysis of the investment environment to identify build up of tail risks
and to estimate 1-year return and volatility parameters for FI sub-asset
classes
Monitor portfolio
compliance with IPS
Client Meetings – Board reports to include confirmation of
compliance, and portfolio analytics on key risk metrics
Controls - Data on portfolio composition, compliance and performance
independently sourced by the Board from the Custodian
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One way to think about Risk Categories
Operational
Liquidity
Financial
Risk
Areas
Market
Aggregation /
Diversification
Credit
Underwriting
Frictional
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How we control Portfolio Risk
Strategic Asset Allocation:
Agreed mid-term combination of asset classes designed to deliver target returns
through the cycle, within volatility limits
Tactical Asset Allocation:
Optimise portfolio within SAA limits to select asset classes that have the most
attractive risk/reward characteristics
Portfolio Construction:
Eliminate Idiosyncratic risk, credit analysis, appropriate security weighting,
relative value analysis.
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Risk & Portfolio Reporting
L&C reports Risk to the Board by reference to a range of factors that each contribute to a balanced
understanding of the whole:
• Portfolio Compliance with IPS
• Macro Economic Analysis – How the (prospective) outlook for assets is being affected by
market, business and ratings cycles, thematic and other forces
• Scenario Analysis – Sources of return, impact of a one Standard Deviation move in each factor
• Portfolio Correlation
• Value at Risk (VaR)
• Ratings
• Portfolio Concentration
• Sharpe Ratio
Performance is reported across two dimensions:
• The change in the value of the portfolio over a given time as a result of
• Income generated, plus/minus
• Change in market value, and
• The risk accepted in achieving this
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Example Scenario Analysis
Source: Bloomberg
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