TopicinCFALevelIII

SS1-2

ETHICS&PROFESSIONALSTANDARDS

SS3

BEHAVIORALFINANCE

SS4

PRIVATEWEALTHMANAGEMENT(1)

SS5

PRIVATEWEALTHMANAGEMENT(2)

SS6

PORTFOLIOMANAGEMENTFORINSTITUTIONALINVESTORS

SS7

APPLICATIONSOFECONOMICANALYSISTOPORTFOLIOMANAGEMENT

SS8

ASSETALLOCATIONANDRELATEDDECISIONSANDINPORTFOLIOMANAGEMENT(1)

SS9

ASSETALLOCATIONANDRELATEDDECISIONSANDINPORTFOLIOMANAGEMENT(2)

SS10

FIXED-INCOMEPORTFOLIOMANAGEMENT(1)

SS11

FIXED-INCOMEPORTFOLIOMANAGEMENT(2)

SS12

EQUITYPORTFOLIOMANAGEMENT

SS13

ALTERNATIVEINVESTMENTSFORPORTFOLIOMANAGEMENT

SS14

RISKMANAGEMENT

SS15

RISKMANAGEMENTAPPLICATIONSOFDERIVATIVES

SS16

TRADING,MONITORINGANDREBALANCING

SS17

PERFORMANCEEVALUATIONANDATTRIBUTION

SS18

GLOBALINVESTMENTPERFORMANCESTANDARDS

FrameworkofSS6

SS6:PortfolioManagementforInstitutionalInvestors

R13 ManagingInstitutionalInvestorPortfolios

R14 LinkingPensionLiabilitiestoAssets

Endowments(providepermanentfunding)

Foundations

(grant-making)

Charitablebodies

Nonlife

(inc.health,propertyandcasualty,andsurety)

Securitiesportfolioisresidualuseoffunds,aftermeetingloandemandbutplayskeyroleinmanagingrisk(market&credit)&liquidityvs.liabilities

Banks

Life

Knowpros

DefinedContribution

(Riskbornebyemployee)

DefinedBenefit

(Riskbornebyemployer)

Pensionplans

andcons

ESOPs

DCplansthatinvestall/themajorityofplanassetsinemployerstock

contributionisa%ofpayvalueofplanforemployee

dependsonvestingschedule,levelofcontributions,andchangeinvalueofstockper

share

Hybridplanscombine

desirablefeatures(toemployee)ofDCplans(portability,

easeofadmin,comprehensibilitybyparticipants)andDBplans(benefitguarantees,linkedtoyearsofserviceandsalary)

e.g.cashbenefitplans,pensionequityplans,targetbenefitplans,floorplans

Portfoliossegmentedtomatchliabilities,plussurplus

Insurance

Companies

InstitutionalInvestors–Overview

InstitutionalInvestors–Framework

SixtypesofinstitutionalinvestorsintheLevel3curriculum:

Pensionplans

Foundations

Endowments

Lifeinsurancecompanies

Non-lifeinsurancecompanies

Banks

GeneralPensionDefinitions

GeneralPensionDefinitions

Apensionplanisaportfolioofassetsthatsupportsfutureretirementbenefits.Thepromiseisaliabilityoftheplansponsor.

Theplansponsoristheorganization(e.g.,acorporation,agovernmententity,anonprofitorganization)thatfundsthepensionplan.

Planparticipantsarethosereceivingapromiseofretirementincomefromthepensionplan.

GeneralPensionDefinitions—TypesofPensionPlans

DefinedContribution(DC)=IndividualIPS

Employer'sonlyobligationistomakecontributionstoemployees'pensionplansandprovideanadequatenumberofalternativeinvestmentchoices

Employeeownsassets(portable),makesinvestmentdecisions,andbearsallinvestmentrisk,receivestaxdeferralbenefitsandinretirementselectslumpsumorpayments

DefinedBenefit(DB)

Employermustmanagetheplanassetsandbearinvestmentrisk

Pensionbenefitsaretheemployer'sfinancialliability

Employeereceivespaymentsbutissubjecttoearlyterminationriskiftheyleavethefirmearly

GeneralPensionDefinitions—DCPensionPlan

Defined-contribution(DC)pensionplanscomeintwoforms:Participant-directedandsponsor-directed.

Inasponsor-directedDC(e.g.,profitsharingplan),thesponsorselectstheinvestments.

Inaparticipant-directedDCplan,theemployeesallocateretirementfunds(employeeandemployercontributions)amongalistofmutualfundsprovidedbythesponsor.

GeneralPensionDefinitions—TypesofPensionPlans

Cashbalanceplan

Ahybriddefined-benefitplanthatmaintainsindividualaccountrecordsforplanparticipantsshowingtheircurrentvalueofaccruedbenefit.

Theseplansdifferslightlyfromtraditionaldefined-benefitplansinthatanaccount,ratherthananactualfund,ismaintainedforeachindividual.

Profitsharingplan

Defined-contributionplanwhosecontributionsareestablishedsomewhatbytheprofitabilityoftheplansponsor.

GeneralPensionDefinitions—CashBalancePlans

LikeaDBplan,employerbearsinvestmentrisk

LikeaDCplan,participantreceivesapersonalizedstatementshowingtheaccountbalance

Thebalanceonlyrepresentsaliability,notanactualaccountinwhichfundshavebeendeposited

Facilitatesportabilitytoanewplan

GeneralPensionDefinitions—Employeestockownershipplans

AnemployeestockownershipPlan(ESOP)isatypeofdefined-contributionplanthatallowsemployeestopurchasethecompanystock,sometimesatadiscountfrommarketprice.

Thepurchasecanbewithbefore-orafter-taxdollars,andthefinalbalanceinthebeneficiary'saccountreflectstheincreaseinthevalueofthefirm’sstockaswellascontributionsduringemployment.

ESOPsreceivevaryingamountsofregulationindifferentcountries.

GeneralPensionDefinitions—EmployeeStockOwnershipPlans

ESOP

TheseareDCplansthatinvestmostoralloftheplan'sassetsinemployerstock

Contributionssetatapercentageofemployeepay

Keyissueforparticipantisifthecompanyfails,participantcouldfindvalueofESOPdropaswellasbeingunemployed

ESOPvalueatrisk=Employmentatrisk

Diversifyawayfromcompanyholdings

CompanieshaveusedESOPsto:

Liquidatelargeblocksofcompanystock

Avoidpublicofferings

Fendoffhostiletakeoverssincemoststockheldbycompanyemployees

PensionPlanFunding

Fundedstatusistherelationshipbetweenthepresentvalueofthepensionplanassetsandthepresentvalueofthepensionplanliabilities.

Fullyfundedmeansthepresentvalueofthepensionplanassetsisgreaterthanorequaltothepresentvalueofthepensionliabilities.Sponsorscanatleasttemporarilystopmakingcontributionstotheplan’sassetbase.

Underfundedmeansthepresentvalueofpensionplanassetsislessthanthepresentvalueofthepensionplanliabilities.Underfundedplansmayrequirethesponsorstomakespecialcontributionstotheplaninadditiontotheusual,regularcontributions.

Surplusisthedifferencebetweenthepresentvalueofpensionplanassetsandthepresentvalueofpensionplanliabilities.

PensionPlanLiabilities

Accumulatedbenefitobligation(ABO)isthetotalpresentvalueofpensionliabilitiestodate,assumingnofurtheraccumulationofbenefits.Ineffect,ABOisthepensionbenefitsduetoparticipantsiftheplansponsorterminatedexistence.

Projectedbenefitobligation(PBO)istheABOplusprojectionsoffutureemployeecompensationincreases.ThePBOisthepensionliabilityforagoingconcernandistheliabilityfigureusedincalculatingfundedstatus.

Totalfutureliabilityisameasureofpensionliabilitythatisthemostcomprehensive,becauseittakesintoaccountnotonlycompensationchanges,butalsochangesintheworkforceandbenefitchangesassociatedwithinflation.Totalfutureliabilityisoftenusedwhensettingobjectiveswithintheinvestmentpolicystatement(IPS).

Retiredlivesisthenumberofplanparticipantscurrentlyreceivingbenefits(i.e.,retireescurrentlyreceivingretirementincome).

Activelivesisthenumberofplanparticipantsnotcurrentlyreceivingpensionbenefits(i.e.,thoseworkingtowardretirement).

Types

Employer

Employee

DB

Liabilityofemployer

Determinedbystatedcriteriausuallyrelatedtoyearsofserviceandsalary

Sponsor(employer)isresponsibleformanagingtheplanassets

Receiveperiodicpaymentsstartingatretirementorotherdate

Subjectto“earlytermination”riskifemployeeisterminatedearly

Notbearrisk/returnconsequencesofinvestment

DC

Firmkeepsallcontributionscurrent.

Onlyfinancialliabilityismakingcontributionstoemployee’saccount.

Theplanmustoffersufficientinvestmentvehicles

Owntheplanandcantransportaccounttootheremploymentsituations.

Bearallrisk/returnconsequencesofinvestment

Mustmakeallinvestmentdecisionsgivenavailableinvestmentvehicles.

Pensionriskfactors:Plansurplus,sponsorfinancialstatusandprofitability,sponsorandpensionplanfundcommonriskexposures,planfeatures,workforcecharacteristics

DBPensionPlans:ReturnObjective

Goalisforassetstogeneratereturnsufficienttocoverpensionliabilities:PVA>PVL

Specificreturnrequirementdependsonfundedstatusandcontributions

(assets)relativetoaccruedbenefits(liabilities)

Minimizationofcontributionsisamorerealisticobjective.

Returnobjectivemaybehigherifthesponsoristryingtolowerfuturecontributionsorwantstorecognizepensionincomeonitsincomestatement

Typicalreturnobjective:Adequatefundingrate,inflationadjusted

Thereturnobjectiveisgenerallyestablishedbytheactuarialdiscountratedeterminedbyanactuaryusingan"asset-liabilitystudy'

DesiredReturnvs.RequiredReturn

Desired/Stretchreturnisareturnthatisoftendesiredbymanagementandgenerallyhigherthantherequiredreturn

Sethigherthanrequiredreturnwiththegoaltoreduceoreliminatefuturepensioncontributions

Ratemaybetoohighandexposeassetstounnecessaryriskandvolatility

Maynotbeintheinterestofplanparticipants

Returnobjectivemaybemoreaggressivewhentheworkforceisyounger

Lessaggressiveforretiredlivesportion

Returnobjectivemaybeseparateforactiveandretiredlivesportionofpensionplanontheexam,examinethecasecarefully

風(fēng)險(xiǎn)目標(biāo):收益確定型養(yǎng)老金的風(fēng)險(xiǎn)容忍度主要取決于計(jì)劃的盈虧狀態(tài)，發(fā)起人的財(cái)務(wù)狀況和盈利能力，發(fā)起人和退休金計(jì)劃基金的風(fēng)險(xiǎn)暴露共性，計(jì)劃本身特征和勞動力特征等，詳見下表：

Category

Variable

Explanation

Planstatus

Planfundedstatus(surplusordeficit)

Higherpensionsurplusorhigherfundedstatusimpliesgreaterrisktolerance

Sponsorfinancialstatusandprofitability

DebttototalassetsCurrentandexpectedprofitability

Lowdebtratiosandhighercurrentandexpectedprofitabilityimplygreaterrisktolerance

Category

Variable

Explanation

Sponsorandpension

fundcommonriskexposures

Correlationofsponsoroperatingresultswithpensionassetreturns

Thelowerthecorrelation,thegreaterrisktolerance,allelseequal.

Planfeatures

Provisionforearlyretirementprovisionforlumpsumdistribution

Suchoptionstendtoreducethedurationofplanliabilities,implyinglowerrisktolerance,allelseequal

Workforcecharacteristics

Ageofworkforce,Activelivesrelativetoretiredlives

Theyoungertheworkforce

andthegreatertheproportionofactivelives,thegreaterthedurationofplanliabilitiesandthegreatertherisktolerance.

Increasedrisktolerance(ability)

Largerplansurplus...PVA>PVL

Greaterfundedstatus...higher"cushion"

Lowerfirmdebt...lowerdebt/equityratio

Higherprofitability...higherexpectedprofitability

Youngeraverageage/greateractivelives...

Goingconcernplan...

Provisionsforearlyretirementandlump-sumdistributionsreduceabilitytotakerisk

ForDBplans,riskrelativetoliabilitiesiskey

Asset/Liabilitymanagementisasubsetoftheoverallriskmanagement

Typicalriskobjectivesinclude:

Standarddeviationintermsofthesurplus

100%fundedstatusvs.futureliability

Fundedstatustoavoidreportingpensionliability

Obtainacertainleveloffundingstatus

Liquidity

1.WorkforceMix(retiredvs.activelives)

Greaterretiredlives,increasedliquidityneeds

2.Sponsorcontributionsvs.benefitpayments

Higherprofitabilityreducesliquidityneeds

3.Planfeatures

Earlyretirementorlumpsumprovisionsincreaseliquidityneeds

TimeHorizon

Determinedbytwofactors:Whethertheplanisagoingconcern(multi-stage)orisaterminatedplan(singlestage)

Theactivelivesportionoftheplanwillindicateatimehorizonassociatedwithexpectedtermtoretirement.

Theretiredlivesportionwillindicateatimehorizonasafunctionoflifeexpectancyforthosecurrentlyreceivingbenefits.

LegalandRegulatory

Mostcountriesfederallyregulatepensionplans

Managershouldconformtothelocalregulations

IntheU.S.,ERISArequiressponsorstoexerciseduediligencewhenmakinginvestmentdecisions

ERISA'soverridingstandardisthattheassetsshouldbemanagedfortheplanparticipants,notthesponsor

Consultationwithappropriatelegalexpertsisencouraged

TaxesandUniqueCircumstances

Pensionplansaretax-exempt,notaxconstraints

ERISArequiresduediligence,butsmallsponsorsmaynothavetheplanresourcesorexpertisetothoroughlyinvestigatealternativeassets(e.g.,derivatives,hedgefunds,etc.)

Pensionplansmayimposerequirementsthatprohibitinvestmentinsometraditionaloralternativeassetchoices

InstitutionalInvestors–Framework

SixtypesofinstitutionalinvestorsintheLevel3curriculum:

Pensionplans

Foundations

Endowments

Lifeinsurancecompanies

Non-lifeinsurancecompanies

Banks

Foundationsandendowmentsprovidevitalsupportformuchoftoday’s

philanthropicandcharitableactivities.

Foundationsaretypicallygrant-makinginstitutionsfundedbygiftsandinvestmentassets.(Ford,Rockefeller,andGatesfoundations)

Endowments,ontheotherhand,arelong-termfundsgenerallyownedbyoperatingnon-profitinstitutionssuchasuniversitiesandcolleges,museums,hospitals,andotherorganizationsinvolvedincharitableactivities.(Harvard,YaleandPrincetonuniversities)

Foundation

Type

Description

SourceofFunds

Decision-MakingAuthority

AnnualSpendingRequirement

IndependentFoundation

(privateorfamily)

Independentgrant-makingorganizationestablishedtoaidsocial,educational,charitable,orreligiousactivities.

Generallyanindividual,family,orgroupofindividuals.

Donor,membersofdonor’sfamily,orindependenttrustees.

Atleast5%of12-monthaverageassetvalue,plusexpensesassociatedwithgeneratinginvestmentreturn.

Company-sponsored

foundation

Alegallyindependentgrant-makingorganizationwithclosetiestothecorporation.

Providingfunds.

Endowmentand/orannualcontributionsfromaprofit-makingcorporation.

Boardoftrustees,usuallycontrolledbythesponsoringcorporation’sexecutives

Sameasindependentfoundation.

FoundationType

Description

SourceofFunds

Decision-MakingAuthority

AnnualSpendingRequirement

Operatingfoundation

Organizationthatusesitsresourcestoconductresearchorprovideadirectservice(e.g.,museum,zoo,publiclibrary)

Largelythesameasindependentfoundation.

Independentboardofdirectors.

Mustspendatleast85%ofinterestanddividendincomeforitsownoperation.Somearealsosubjecttoannualspendingrequirementequalto3.33%ofassets.

Communityfoundation

Apubliclysupportedorganizationthatmakesgrantsforsocial,education,charitable,orreligiouspurposes.Atypeofpubliccharity

Multipledonors;thepublic.

Boardofdirectors.

Nospendingrequirement.

Return

Thereturnobjectivedependsonthetimehorizonstatedforthefoundation.Ifthefoundationwascreatedtoprovideperpetualsupport,thepreservationofrealpurchasingpowerisagoal.

Aminimumreturnequaltotherequiredpayoutplusexpectedinflationandfundexpenses

Risk

Morefluid,creativeandaggressivethanpensionfundsbecausetheyhave

nocontractuallydefinedliability

Asset-onlyapproachtoassetallocation

Themaindriveristhelongtimehorizon

Duetolowspendingrequirements,theyusuallyhaveabove-averagerisktolerance.

Liquidity

Anticipatedandunanticipatedneedsforcashinexcessofcontributionsreceived

Otherthanthe5%minimum,foundationscanchooseanyspendingratetheydesire

Mostfoundationsmaintainareserveof10%to20%ofannualspendingtocompensatefordownyearsinfinancialmarkets

Timehorizon

Establishedormanagedwiththeintentoflastingintoperpetuity,usuallyverylong

Exceptionisthosethatarerequiredtospenddowntheirassets

Taxes—Nontaxable,except.,

UBIT—Unrelatedbusinessincome(donatedbusiness).istaxedatcorporateincomerate.(e.g.,museumgiftshop)

Investmentincome(Div&Int)lessexpensesistaxedat2%

Reducedto1%ifspendingequaltoorexceeds5%

LegalandRegulatory

MoststateshaveadoptedUMIFA(UniformManagementofInstitutionalFundsAct)

PrudentInvestorRulegenerallyapplies

Skill,care,prudence,diligence,defraycosts,diversify,delegateexpertise

Investmentsshouldbeconsideredinadiversifiedportfoliocontext

Canvarybycountry

UniqueCircumstances:issuerstolookfor

Concentratedholdingsofalargesinglestockthattheyareprohibitedbydonorfromselling

Unrelatedbusinessincome—donatedbusiness

Sociallyresponsibleinvesting

Adequatepersonneltoperformduediligence

InstitutionalInvestors–Framework

SixtypesofinstitutionalinvestorsintheLevel3curriculum:

Pensionplans

Foundations

Endowments

Lifeinsurancecompanies

Non-lifeinsurancecompanies

Banks

Endowments:ReturnObjective—SpendingRules

Simplespendingrule

Spendingt=S(marketvaluet-1)

where:S=thespecifiedspendingrate

Rolling3-yearaveragespendingrule

Dampenvolatilitythatcanimpacttheendowment’sportfoliovalueandthe

sponsor’soperatingbudget

) 3

marketvaluet-1marketvaluet-2marketvaluet-3Spendingt=(spendingrate

Geometricspendingrule

Thisspendingruleaddressesoneofthecriticismsoftherollingaveragespendingruleinthatextraordinarychangesinportfoliovaluemaycausedramaticshiftsinspending.

Spendingt=(R)(Spendingt-1)(1+It-1)+(1-R)(S)(marketvaluet-1)where:

R=smoothingrate(0.6~0.8),I=rateofinflation,S=spendingrate

Endowment:ReturnObjective

Endowmentsaredesignedtopermanentlyfundandprovidebudgetarysupportforuniversities,colleges,hospitals,etc.

Maintainperpetualpurchasingpoweriskey

Creativetensionexistsbetweentheneedforincomeagainstpreservationofpurchasingpower

3S's=significant,stableandsustainablecashflowtosupportoperations

Totalreturnapproachisappropriate(spendfrombothincomeandcapitalgains)

Thelong-termspendingratemustbelessthantheexpectedrealrateofreturn

Problem:spendingrate>5%canleadto-erosionofprincipal

Minimizingspendingvolatilityusingaspendingruleisalsoimportant

Mostendowmentshavehighrisktoleranceduetotheirlongtimehorizon

Lowerabilitytotolerateriskif:

Higherspendingrate

Heavyrelianceupondonations,10%ormoreitsabilitytotolerateriskisdiminished

Greaterbudgetdependency

Nospendingruleinplace

Smallersizeofendowment

LiquidityandTimeHorizon

Lowliquidityrequirements

Spendingneedsvs.giftsanddonations

Largecashoutlaysmaysometimesbeneededforcapitalimprovements

–newlibrary

Timehorizonisverylongterm(typicallyinfinite)

Canbemultistageifamajoroutlayisneeded

TaxesandLegalandRegulatory

Tax-exempt

Dividendsonnon-U.S.securitieswithholdingtax

Unrelatedbusinessincomemaybetaxable

MoststateshaveadoptedUMIFA—delegation,care,prudence,maintaincorpusandrespectdonorrestrictions.Prudentinvestorrulesapply.

501(c)(3)IRSregulationsstatethatincomeshouldbenefitagroupnotindividuals

Littlegovernmentoversight

UniqueCircumstances

Duetotheirdiversity,endowmentfundshavemanyuniquecircumstances.

Investmentinalternativeinvestmentsrequiresignificantresourcesandexpertise

Socialissues(e.g.,defensepoliciesandracialbiases)aretypicallytakenintoconsiderationwhendecidinguponindividualinvestments

InstitutionalInvestors–Framework

SixtypesofinstitutionalinvestorsintheLevel3curriculum:

Pensionplans

Foundations

Endowments

Lifeinsurancecompanies

Non-lifeinsurancecompanies

Banks

LifeInsuranceCompanies

Wholelifeinsurancepoliciesprovidealeveldeathbenefitforthe“whole”ofthe

insured’slife.thepolicyprovidesdeathbenefitandcashvaluecomponentswherethedeathbenefitportionremainsconstantbutthecashvalueportionincreaseswiththecreditedrate(i.e.,theinterestratecreditedtothepolicyholder).

Termlifeinsurancepoliciesprovidealeveldeathbenefitforastated“term”ofthepolicyholder’slife.Mosttermlifepolicieshavenocashvalue,buttheirpremiumsaremuchlowerthanwholelifepolicies.

Universallife(萬能險(xiǎn))policiesarecomposedofalifeinsurancepolicypayinganadjustabledeathbenefitandanattachedsavingsaccountofferingcompetitive

currentmarketreturns.Incomeonthesavingscomponentaccumulatestaxdeferred.

Variablelife(可變保費(fèi)壽險(xiǎn))productslinkthedeathbenefitandthecashvaluecomponentstoreturnsgeneratedbyabroadrangeofinvestmentvehicleschosen

bythepolicyholder.

ReturnObjective

Minimumreturn:Ratesetbyactuariesbasedonmortalityratestomeetfundaccumulationrates

Enhancedmargin:Spreadmanagement(abovecreditedrates)usedtobemorecompetitive

Maximizeinterestearnedovercreditedrates

Surplus(PVassets-PVliabilities):Focusongrowth;useequityinvestmentsinrealestate,venturecapital,taxableaccount

Publicpolicyviewsinsurancecompanyinvestmentportfoliosasquasi-trustfunds.

AssociationofInsurancecommissioners(NAIC)directslifeinsurancecompaniestomaintainanassetvaluationreserve(AVR)asacushionagainstsubstantiallossesofportfoliovalueorinvestmentincome

Factors:

Valuationconcerns:Marketvolatilitycanleadtosurpluswrite-down,whichwouldlowerrisktolerance(ability)andcreateacapitaladequacyproblem

Cashflowvolatility:Loss,delayorvolatilityofcollectingincomecreatessignificantproblems

Timelyreinvestmentofcashflowisessentialtoincreasethesurplusaccount

Reinvestmentrisk:reinvestingcouponincomeataratelowerthantheoriginalcouponorpurchaserate

Ifinterestratesfall,profitabilityfalls;thisriskismanagedusingduration

Prevalentwithannuitybusiness

Creditriskisamajorconcernandismanagedthroughdiligentcreditanalysisandportfoliodiversification

Threeprimaryconcerns:

Disintermediation:asinterestratesincreaseduetoinflation,policyholdersborrowagainsttheirpoliciesorsurrenderpoliciesleavingLifeInsuranceCompanieswithsignificantoutflows

Consequently,liabilitydurationsshorten,andliquiditybecomesmoreimportant

Utilizemultiplescenarioforecastingofinterestrateexposuretomanageliquidityneeds

Asset-liabilitymismatch:Asinterestratesincrease,disintermediationoccurs,andthecompanymayhavetoliquidateorconvertlongdurationassetstocash,sometimesataloss,tomeetliquidityneeds

Mismatcharisessinceliabilitydurationschangemoreslowlythanassetdurations

Managingdurationandliquiditybecomescritical

Assetmarketabilityrisk:Traditionally,insurancecompanieshaveinvestedinlessliquidassetssuchas:

Privateplacementdebt,commercialmortgageloans,equityrealestate,andventurecapital

Liquidityisbecomingincreasinglyimportantwhichhasledto

constrainedcommitmentstotheseassetclasses

LifeInsuranceCompanies:TimeHorizon

Traditionally,lifeinsuranceportfoliosconcentratedonholdingperiodsof20–40years.

Thetimehorizonforlifeinsurancecompanieshasbecomeprogressivelyshorterasthedurationofliabilitieshasdecreasedduetoincreasedinterestratevolatilityandcompetitivemarketfactors

Individualsegmentsoftheoverallportfoliowillhavetheirowntimehorizons.Ingeneralterms,timehorizonshavesimplybecomeshorter

Taxes:

Twosegmentsoftheportfolio:

Policyholder'sshare(nottaxed)

Corporateshare,namelyfundstransferredtosurplus(taxed),whichaccruestoshareholder'softhecompany

LegalandRegulatory

Threemainareasofregulation:

Eligibleinvestments:Therearequalitystandardsandlimitsplacedonassetclasses

Equitieslimitedto20%

Non-USinvestmentsarealsolimitedtosomeextentasa%ofadmittedassets

Bondsinterestcoverageratiomustmeetminimumstandardsorminimumcreditrating

PrudentInvestorRule:Allowsinsurancefirmsincreasedflexibilityininvestmentchoicesandoptions

ValuationMethods:UniformvaluationofsecuritiesismandatedbytheNAICthroughtheuseoftheSecurityValuationBook

Uniquecircumstances

Concentrationofproductofferings,companysize,andlevelofsurplusaresomeofthemostcommonfactorsimpactingtheuniquenessoflifeinsurancecompanies.

InstitutionalInvestors–Framework

SixtypesofinstitutionalinvestorsintheLevel3curriculum:

Pensionplans

Foundations

Endowments

Lifeinsurancecompanies

Non-lifeinsurancecompanies

Banks

Asset/LiabilityManagement

Liabilitiesofacasualtycompanydifferfromthoseofalifeinsurancecompanyinthattheclaimsreporting,processing,andpaymentprocesscantakeyearstocomplete.Thisisreferredtoasthe“l(fā)ong-tail”natureofcasualtyliabilities.

Theliabilitystructureismainlyafunctionoftheproductmixthatacompanysells.

Liabilitydurationstendtoberelativelyshort.

Theunderwritingcycletendstofollowgeneralbusinesscycles.

Theliquidityneedsofanonlifecompanyaregenerallydictatedbyitsunderwritingcycle.

Theunderwritingcyclecorrespondstoa3-to5-yearcycleinwhichunderwritinglossesarenegligibleattheoutsetandbecomeprogressivelyworse,turningintosignificantlossesattheendofthecycle.

Nonlifefirmsfacegreateruncertaintythanlifeinsuranceduetothepossibilityofhigherclaimsfrequency.

However,theyarenotasinterestratesensitivesincetheirpoliciesdonottypicallypayperiodicreturns.

Theprimaryrequirement:

Maximizethereturnontheirfixed-incomeportfolioforpurposesofmeeting(i.e.,immunizing)claims.

Usereturnsfromtheequityportionoftheirportfoliotogrowthesurplus.

Usethesurplusportfoliotoprovidefundsforunexpected,largeliabilityclaims

Nonlifeinsurancecompaniesholdagreaterpercentageofequity-typeinvestmentsintheirportfoliosthanlifeinsurancecompanieshold.

Largestockandbondholdingsaredesignedtoprovidehighlevelsofcurrentincome,andcapitalappreciationtobuildthesurplusbase.

Themainfactorsimpactingnonlifeinsurancecompanyreturnobjectives:

Competitivepricingpolicy.Today,mostnonlifecompaniesrecognizethatinvestmentincomecanbeusedtoreducepremiumsand,hence,makethefirmmorecompetitive.Competitionisamajorinfluenceinsettingpremiums.

Profitability.Investmentincomeandtotalreturnoftheinvestmentportfolioarenowprimarydeterminantsofprofitability.Investmentreturnusuallyservestosmooththeearningsvolatilityofthetypicalunderwritingcycle.

Growthofsurplus.Commonstocks,convertiblesandalternativeinvestmentsarethefavoredinvestmentsforsurplusgr