Planning for the Future & the Role of Forecasting

Transcription

1 Planning for the Future & the Role of Forecasting Navigating Knowns, Known Unknowns, and Unknown Unknowns March 17, 2016 CONNING One Financial Plaza Hartford, CT Conning, Inc.

2 Serving the Global Insurance Industry Assets by Client Type Founded in % 46.8% 3.4% 1.5% 1.8% Life Pension Other Managed Care Property-Casualty Insurance specialists for more than 50 years Investing insurance assets for nearly 3 decades Manage approximately $89 billion for 150 clients* 308 employees *As of December 31, 2015, includes Conning, Inc., Conning Asset Management Limited, Cathay Conning Asset Management Limited, Goodwin Capital Advisers, Inc., and Conning Investment Products, Inc. C11#

3 Conning s Software Product Suite Investment Optimizer Overlays seamlessly with all three levels of our software products: ADVISE Enterprise Risk Modeler Analyze holistically FIRM Portfolio Analyzer Invest with confidence GEMS Economic Scenario Generator Understand your environment 2016 Conning, Inc. ADVISE, FIRM, and GEMS are registered trademarks of Conning, Inc. Copyright Conning, Inc. All rights reserved. ADVISE, FIRM, and GEMS are proprietary software published and owned by Conning, Inc. 3

4 Today s Agenda Forecasting is hard and our instincts aren t helpful Dynamic financial modeling adds insight to Business Planning Planning for the future: Using insights from financial modeling to move beyond risk to opportunity 4

5 FORECASTING IS HARD AND OUR INSTINCTS AREN T HELPFUL START WITH A LOOK AT FINANCIAL FORECASTS 5

6 Forecasting Has Never Been Easy It s Hard to Make Predictions. Especially When It s About the Future. Yogi Berra 6

7 10-Year Treasury Yield Even the Experts Struggle 10-Year Treasury: Forecast & Actuals 6% 2 years Prior 1 year Prior Actual 5% 4% 3% 2% 1% 0% F 2017F Prepared by Conning, Inc. Source: Federal Reserve Board and Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters ( ( ). 7

8 10-Year Treasury Yield Belief Perseverance - Will Rates Return to Normal? Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 Japan Versus U.S. 10-Year Yield 6% US (Jan-2006 to Feb-2016) Japan (Jan-1993 to Feb-2016) 5% 4% 3% 2% 1% 0% Prepared by Conning, Inc. Source: U.S. Department of the Treasury ( ) 8

9 More Challenges Statistical Challenges Association Correlation Causation Scope of Data 9

10 5-Year Treasury Yield Art and Science for Planning and Investing Stochastic Simulations Stochastic Views: Encompassing Scenarios---Do You See Japan in Here? U.S. 5-Year Treasury Yield (simulated from 2015Q4) 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% F 2017F 2018F 2019F 2020F Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury (2015) data. 10

11 Can This Work Looking Forward? U.S. Treasury Rates 11% 9% Historical 5Y US Treasury Yield (Dec 2004-Sep2009) 7% 5% 3% 1% -1% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury ( ) data 11

12 Can This Work Looking Forward? U.S. Treasury rates 11% 9% Historical 5Y US Treasury Yield (Dec 2004-Sep2009) GEMS 2005 Q4 Range of Outcomes 7% 5% 3% 1% -1% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury ( ) data 12

13 Can This Work Looking Forward? U.S. Treasury rates 11% 9% Historical 5Y US Treasury Yield (Dec 2004-Sep2009) GEMS 2005 Q4 Range of Outcomes GEMS 2006 Q4 Range of Outcomes 7% 5% 3% 1% -1% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury ( ) data 13

14 Can This Work Looking Forward? U.S. Treasury rates 11% 9% Historical 5Y US Treasury Yield (Dec 2004-Sep2009) GEMS 2005 Q4 Range of Outcomes GEMS 2006 Q4 Range of Outcomes GEMS 2007 Q4 Range of Outcomes 7% 5% 3% 1% -1% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury ( ) data 14

15 GDP (% YOY change) Forecasting Economic Growth Static Projection U.S. Nominal GDP Year-Over-Year (simulated from 2015Q4) 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% F 2017F 2018F 2019F 2020F Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury (2015) data 15

16 GDP (% YOY change) Forecasting Economic Growth Scenario Views: Encompassing Upside and Downside Scenarios 14% 12% 10% Upside Projection Scenario Static median projection Downside Projection Scenario U.S. Nominal GDP Year-Over-Year (simulated from 2015Q4) 8% 6% 4% 2% 0% -2% F 2017F 2018F 2019F 2020F Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury (2015) data 16

17 GDP (% YOY change) The Full Distribution Can Help Control for Human Errors Stochastic Views: Encompassing Scenarios---Which Risks Do We Want to Avoid? U.S. Nominal GDP Year-Over-Year (simulated from 2015Q4) 14% 12% 10% 8% 6% 4% 2% 0% -2% F 2017F 2018F 2019F 2020F Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury (2015) data 17

18 Science and Art Projections With Probabilities Scenario Views: Full Distribution U.S. Nominal GDP Year-Over-Year 10% 9% 8% 7% 6% 5% 4% 3% 2% 90th Percentile 75th Percentile 50th Percentile 25th Percentile 10th Percentile 1% 0% Dec Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Dec F Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury (2015) data 18

19 DYNAMIC FINANCIAL MODELING IN A BUSINESS PLANNING CONTEXT: THE IMPORTANCE OF INSIGHT INTO VOLATILITY 19

20 Simulation Modeling Approach 20

21 External Disruptors: Known Unknowns and Unknown Unknowns Which of These Affect the Underlying Risk of Your Business? 21

22 The Competitive Race: Keeping Up With the Pack Compete against new products Compete for new markets Compete against new entrants Compete against new business models What happens to your market assumptions? Your challenge responding faster to competition (and innovating to take the lead) 22

23 Regulation Piling on Regulations PBR HUD Disparate Impact DOL Fiduciary Rule FIO NAIC Consumer Protection Act ORSA Solvency II Affordable Care Act McCarran- Ferguson 23

24 Disruptive Impact on Planning Regulatory Uncertainty You ll be forecasting more variables Your margin for error will be smaller You ll face changing volatility More Variables Forecasting More Uncertainty You ll have regulatory pressures And as if that wasn t enough Less Room for Error Disruptors tend to compound their effect! 24

25 Compounded Effect Anticipating Unknown Unknowns 1980 IRS approves 401(k)s 1994 GOP Assumes Control of House 1960: VALIC invents NQ VAs 1986 Last Baby Boomer turns Financial Crisis 25

26 Increasing Share of Annuities Increases Underlying Volatility 100% Direct Premiums: Individual Life Renewal & Single Individual Life 1st Year Premium Individual Annuity 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% The industry moved from protection to asset management Prepared by Conning, Inc. Source: A.M. Best Company used by permission. 26

27 Individual Annuity Liabilities are Volatile, Life More Stable Year on Year Change in Life Industry General Account Statutory Reserves 30% 25% 20% 15% 10% 5% 0% -5% -10% Ind Annuities YOY Growth in Reserves Ind Life YOY Growth in Reserves Total Industry Prepared by Conning, Inc. Source: 2015 A.M. Best Company used by permission. 27

28 Interest-Sensitive Liabilities Source: Prepared by Conning; hypothetical data 28

29 Benefits in $ 000s Policyholder Behavior: Dynamic Surrender Assumptions in Guaranteed Products Excess Surrenders Versus Profile of Spread Between Competitor Rates and Credited Rates Excess Surrenders Spread (Competitor - Credited) 12, % 10, % 8, % 6, % 4, % 2, % 0-2.0% Years Prepared by Conning using hypothetical data. 29

30 Investment Strategy: Economic Value (EV) Efficient Frontiers Integrated ALM Identify investment strategy to meet specific risk/reward profile Understand dynamic liabilities as well as dynamic assets Maximize economic value not just investment returns for various levels of risk This may change under different liability scenarios Current Portfolio Source: Conning ADVISE Enterprise Risk Modeler 30

31 Expected Results and Range of Results Return Return Efficient Frontier Probability Distribution % 75 90% 50 75% 25 50% 10-25% 5-10% + mean Risk Each point on the efficient frontier, defined by a single risk and a single reward measure, is based on the results of 1,000s of scenarios We usually want the investment strategy that on average gives the "best" reward for a given level of risk However, we also want to know the downside risk how bad could results be? We evaluate this risk by looking at the range of potential results; for example, how bad is the 5% probability level (1 year in twenty), and can we accept that much risk? Source: Conning ADVISE Enterprise Risk Modeler 31

32 PVDE vs Economic Value (EV) Efficient Frontiers Reward Reward EV Regime PVDE Regime Risk EV under EV PVDE under EV Risk PVDE under PVDE EV under PVDE Source: Conning ADVISE Enterprise Risk Modeler 32

33 PLANNING FOR THE FUTURE: CHALLENGE THE STATUS QUO 33

34 GDP (% YOY change) The Tactical Opportunity: Better Planning in Understanding Risk Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Don't rely on single path forecasts take a stochastic approach to consider knowns, known unknowns and unknown unknowns Incorporate modern tools and approaches as appropriate seek insight, not answers Realize Disruptors will challenge your current forecasting methods Understand that compounding forces accelerate disruptive results Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury (2014) data 34

35 GDP (% YOY change) GDP (% YOY change) GDP (% YOY change) The Strategic Opportunity: Look for the Advantage Sep-14 Sep-14 Sep-14 Dec-14 Dec-14 Dec-14 Mar-15 Mar-15 Mar-15 Jun-15 Jun-15 Jun-15 Sep-15 Sep-15 Sep-15 Dec-15 Dec-15 Dec-15 Mar-16 Mar-16 Mar-16 Jun-16 Jun-16 Jun-16 Sep-16 Sep-16 Sep-16 Dec-16 Dec-16 Dec-16 Mar-17 Mar-17 Mar-17 Jun-17 Jun-17 Jun-17 Sep-17 Sep-17 Sep-17 Dec-17 Dec-17 Dec-17 Mar-18 Mar-18 Mar-18 Jun-18 Jun-18 Jun-18 Sep-18 Sep-18 Sep-18 Dec-18 Dec-18 Dec-18 Mar-19 Mar-19 Mar-19 Jun-19 Jun-19 Jun-19 Sep-19 Sep-19 Sep-19 16% 14% From Risk Management to Competitive Advantage 12% 10% 8% 6% 4% 2% 0% -2% -4% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Prepared by Conning, Inc. Source: GEMS Economic Scenario Generator using U.S. Department of the Treasury (2014) data 35

36 Old English Proverb: A Smooth Sea Never Made a Skilled Mariner A good sailor hopes for the best, but is prepared for the worst! And you ll never win the race if the wind doesn t blow! 36

37 Disclosure Conning, Inc., Goodwin Capital Advisers, Inc., Conning Investment Products, Inc., a FINRA-registered broker dealer, Conning Asset Management Limited, Cathay Conning Asset Management Limited, and Octagon Credit Investors, LLC are all direct or indirect subsidiaries of Conning Holdings Limited (collectively, Conning ) which is one of the family of companies owned by Cathay Financial Holding Co., Ltd., a Taiwan-based company. Conning has offices in Hartford, New York, London, Cologne, Hong Kong and Tokyo. Conning, Inc., Conning Investment Products, Inc., Goodwin Capital Advisers, Inc., and Octagon Credit Investors, LLC are registered with the Securities and Exchange Commission ( SEC ) under the Investment Advisers Act of 1940 and have noticed other jurisdictions they are conducting securities advisory business when required by law. In any other jurisdictions where they have not provided notice and are not exempt or excluded from those laws, they cannot transact business as an investment adviser and may not be able to respond to individual inquiries if the response could potentially lead to a transaction in securities. Conning Investment Products, Inc. is also registered with the Ontario Securities Commission. Conning Asset Management Limited is Authorised and regulated by the United Kingdom's Financial Conduct Authority (FCA#189316), and Cathay Conning Asset Management Limited is regulated by Hong Kong s Securities and Futures Commission for Types 1, 4 and 9 regulated activities. Conning primarily provides asset management services for third-party assets. Conning predominantly invests client portfolios in fixed income strategies in accordance with guidelines supplied by its institutional clients. All investment performance information included within this material is historical. Past performance is not indicative of future results. Any tax related information contained within this presentation is for informational purposes only and should not be considered tax advice. You should consult a tax professional with any questions. For complete details regarding Conning and its services, you should refer to our Form ADV Part 2, which may be obtained by calling us. Legal Disclaimer 2016 Conning, Inc. This document and software described without are copyrighted with all rights reserved. No part of this document may be reproduced, transcribed, transmitted, stored in an electronic retrieval system, or translated into any language in any form by any means without the prior written permission of Conning. Conning does not make any warranties, express or implied, in this document. In no event shall Conning be liable for damages of any kind arising out of the use of this document or the information contained within it. This document is not intended to be complete, and we do not guarantee its accuracy. ADVISE, FIRM, and GEMS are trademarks of Conning, Inc. Copyright Conning, Inc. All rights reserved. ADVISE, FIRM, and GEMS are proprietary software published and owned by Conning, Inc. This document contains information that is confidential or proprietary to Conning (or their direct and indirect subsidiaries). By accepting this document you agree that: (1) if there is any pre-existing contract containing disclosure and use restrictions between your company and Conning, you and your company will use this information in reliance on and subject to the terms of any such pre-existing contract; or (2) if there is no contractual relationship between you and your company and Conning, you and your company agree to protect this information and not to reproduce, disclose or use the information in any way, except as may be required by law. This material is for informational purposes only and should not be interpreted as an offer to sell, or a solicitation or recommendation of an offer to buy any security, product or service, or retain Conning for investment advisory services. This information is not intended to be nor should it be used as investment advice and should not be copied or distributed without the prior consent of Conning. C: