Investment Policies Alton Cogert, CFA, CPA, CAIA, CGMA

President and CEO

Strategic Asset Alliance

www.saai.com

Session #304

Investment Policy and Guidelines – One Part of the

Investment Process Value Chain

Investment Process Value

Chain

Investment Policy &

Guidelines

Strategic Asset Allocation

Peer Group Analysis

Investment Manager

Evaluation & Selection

Portfolio Monitoring

Performance Measurement &

Analysis

Strong investment results

require a strong investment

process. This goes beyond

choosing the right investment

manager.

The SAA Philosophy: A

consistent, proven approach to

adding value that is

documented for senior

management and the Board.

3

Review of Investment Policy and Guidelines

The SAA Philosophy: Perform a Periodic “Best Practices” Review

Provide peace of mind that the policy is relevant to today’s capital markets

and the unique requirements of your insurer.

Protect your insurer from the managers taking actions that have been a

problem in other cases.

Key components of ‘Best Practices’ Investment Policy:

Preamble – Who? What? Roles and Responsibilities

Investment Return and Management Objectives

Asset Allocation and Risk Management Guidelines

Investment Performance and Reporting

Investment Policy and Guidelines Evaluation

4

Strategic Asset Allocation

SAA Philosophy:

Start with the insurer’s goals and objectives

Understand the insurer’s lines of business

Understand the Board’s and senior management’s risk appetite

Don’t be fooled by fancy models, and never use historical stats without

skepticism; common sense is the final arbiter

Over 90% of investment returns are determined by asset allocation

Core fixed income versus ‘risky bucket’

Components of the ‘risky bucket’

5

210% of Net Assets allocated to risk assets

6

Insurer Case Study ( Early 2008)

Asset Class% of

Portfolio

Expected

Return

Expected

Volatility

Investment Grade Core Fixed Income 69% 4.50% 3.75% 1.00

Risk Assets (US Equity, International Equity, High Yield) 32% 7.50% 16.50% 0.15 1.00

Ratio of Risk Asset Metric to Core FI 166.7% 440.0%

Net Assets as % of Total Portfolio 15%

Risk Assets as % of Net Assets 210% 7.50% 16.50%

Core Fixed Income as % of Net Assets 0% 4.50% 3.75%

Total Portfolio 5.45% 6.13%

Net Asset Portfolio 15.75% 34.65%

Correlation

Impact of Change in Risk Assets on Surplus

7

Max Loss = 13%

Max Loss = 33%

Max Loss = 52%

Max Loss = 62%

2.5x 4.8x

4.0x

Downside exposure is measured by:

1. The magnitude of the downside movement;

2. The frequency of downside movement; and

3. The duration of downside movement.

Next Steps towards an improved Investment Policy

Move your company’s policy and guidelines closer to ‘best

practices.’

Understand the risk appetite of the Board and senior

management.

DO NOT solely rely upon the so-called ‘efficient frontier’.

Make regular investment policy review one part of an

improved Investment Process Value Chain.

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