Investment policy decisions are a vital part of a successful investment process for insurers. Related to this: Strategic asset allocation and how best to manage in a low interest rate environment. This presentation was given at the IASA Conference in San Diego, June, 2012

2. Investment Policies
Alton Cogert, CFA, CPA, CAIA, CGMA
President and CEO
Strategic Asset Alliance
www.saai.com
Session #304

3. Investment Policy and Guidelines – One Part of the
Investment Process Value Chain
 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.
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4. 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
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5. 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’
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6. Insurer Case Study ( Early 2008)
Net Asset Volatility
-0.522 0.837
2.5% 95.0% 2.5%
0.0% 100.0% 0.0%
7
% of Expected Expected
Asset Class Correlation
Portfolio Return Volatility
6
Investment Grade Core Fixed Income 69% 4.50% 3.75% 1.00
N et A sset V olatility
Risk Assets (U S E qu ity, Inte rn atio nal E q u ity, H igh Yie ld ) 32% 7.50% 16.50% 0.15 1.00
5 Ratio of Risk Asset Metric to Core FI M inimum -1.3719
166.7% 440.0%
M aximum 1.8071
M ean 0.1575
Net Assets as % of Total Portfolio 15%
S td Dev 0.3465
4
Risk Assets as % of Net Assets V alues
210% 100000
7.50% 16.50%
Core Fixed Income as % of Net Assets 0% 4.50% 3.75%
Total P ortfolio V olatility
3
Total Portfolio M inimum 5.45%
-0.2152 6.13%
M aximum 0.3436
2 M ean 0.0545
Net Asset Portfolio S td Dev 15.75%
0.0613 34.65%
V alues 100000
1
0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
210% of Net Assets allocated to risk assets
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7. Impact of Change in Risk Assets on Surplus
4.0x
Max Loss = 13% Max Loss = 52%
2.5x 4.8x
Max Loss = 33%
Max Loss = 62%
Downside exposure is measured by:
2.The magnitude of the downside movement;
3.The frequency of downside movement; and
4.The duration of downside movement.
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8. 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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