Session 3a ALM in a Volatile Environment Paul Sandhu, ASA Jonathan Kwan, MBA
ALM in a Volatile Environment PAUL SANDHU/JONATHAN KWAN Head of Investment Solutions/ Manager, Investment Solutions Conning Asia Pacific Limited Monday 29 th August Introduction The objective is to describe the benefits and methodology of a dynamic investment solutions to achieve performance objectives in a volatile environment. Motivation Increased volatility of markets requires flexible/higher-response approach. Methodology Utilizes stochastic projections of company state. Optimized allocation adjustments designed to meet specific company objectives. Example Practical example of dynamic asset allocation strategies. 2
Investment Process The investment process has varying levels of integration with liabilities and regulations. Based on level of integration with liabilities/regulations, applicable time span and decision making framework, each objective is owned by one or more of the processes below. Risk Reduction APM Sector rotation, stock/bond valuation, fundamental analysis, etc. TAA Incorporates short term market cycles in order to adjust asset allocation to further align with investment objectives. SAA Optimizes the portfolio asset allocation over a longer term horizon incorporating both sides of balance sheet and regulatory/accounting specifications. 3 Solvency to Investment Performance Gross Investment Yield Shows the Gross Investment Return vs. Surplus Ratio Size of bubbles shows relative size of total invested assets for companies Equity-Asset Ratio Gross Investment Yield Shows the Gross Investment Return vs. Solvency Ratio Size of bubbles shows relative size of total invested assets for companies Solvency Ratio 4
Narrowing Investment Opportunity & Market Turbulence Bond returns have been volatile in less developed countries and have drifted lower recently Overall investment yields have drifted lower Leads to spread compression issues when this is sustained Over the time series Asia s markets have become more and more correlated with developed markets This leads to lowered benefits from diversification Asia exhibits a higher frequency of extreme events, which leads to a higher capital cost 5 Summary Market volatility and regulatory changes are advancing the need for fully integrated asset management. Risk focused investment solutions better translates directly to the specific performance and risk metrics insurance companies focus on. Solutions are available to help insurance companies achieve their objectives in this changing investment and regulatory environment. 6
Biographies Paul Sandhu Head of Investment Solutions Paul is the Head of Investment Solutions at Conning Asia Pacific Limited ( ). He started his career in the life insurance industry as an actuary in the liability management unit at USAA in the US, where he created and managed many of the processes used for SAA/ALM/ERM and annuity pricing. He also created strong processes for re-enforcing the relationship between the asset management and actuarial units. In 2008, he joined Conning and has been working closely with clients to help them with their enterprise risk management and strategic asset allocation. Paul graduated from the University of British Columbia with Honors Bachelors in Science with a specialization in Theoretical Physics, he focused his research on the theory of black holes, where he created and analyzed simulations of a stars evolution into black holes by solving Einstein s equations using numerical techniques. He is an Associate of the Society of Actuaries. Jonathan Kwan Manager, Investment Solutions Jonathan is an Investment Solutions Manager at Conning Asia Pacific Limited ( ). He specializes in capital management and framework implementation. He holds a Bachelor of Business Administration in Finance and Mathematics from the University of Notre Dame, Indiana with a focus on International Business. Contact us: Paul Sandhu Jonathan Kwan Paul.sandhu@hk.conning.com Jonathan.kwan@hk.conning.com 852 3551 1610 852 3551 1622 Conning Asia Pacific Limited 19/F, LHT Tower, 31 Queen s Road Central, Hong Kong www.conning.hk 7 Disclaimer Conning, Inc., Goodwin Capital Advisers, Inc., Conning Investment Products, Inc., a FINRA-registered broker dealer, Conning Asset Management Limited, Conning Asia Pacific 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. 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