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New Strategic Asset Allocation Framework
- 1. Deep-dive session –
Investment Management
Cecilia Reyes
Chief Investment Officer
© Zurich Financial Services Ltd
- 2. Key messages – Investment Management
A clear mission, and a disciplined and structured approach are the
basis for long term value creation
We continuously refine our investment approach to manage risks
and use capital more efficiently
Our framework allows us to deal proactively with the challenges
of persistently low yields and the debt crisis
We are well positioned to deal with market uncertainties and
preserve the strength of our balance sheet
© Zurich Financial Services Ltd
December 1, 2011 Investors' Day - Focus on Execution 83
- 3. Our ALM-focused investment strategy results
in consistent and sustainable excess returns
relative to liabilities…
Cumulative total investment return against the minimum risk investment strategy
50%
45% 46.1%
40% 41.0%
35%
30%
25%
20%
15%
10%
5%
0%
Q1 03
Q4 03
Q3 04
Q2 05
Q1 06
Q4 06
Q3 07
Q2 08
Q1 09
Q4 09
Q3 10
Q2 11
© Zurich Financial Services Ltd
Total return on minimum risk investment strategy
Total return on investment strategy
December 1, 2011 Investors' Day - Focus on Execution 84
- 4. … also compared to peers throughout the
crisis
Peer Benchmarking Q1 2007 – HY 20111
Performance based on return and risk
Ranking based on information ratio4
1 Peer 1 -0.09 1st on volatility of
Return2 excess return basis
2 ZFS -0.11
0%
3 Peer 2 -0.12
4 Peer 3 -0.13 Peer 1
5 Peer 4 -0.18 ZFS
-5% Peer 2 Peer 5 3rd on
6 Peer 5 -0.23 Peer 4 Peer 7 excess
Peer 8
7 Peer 6 -0.29 return
Peer 3 Peer 6 Peer 10
8 Peer 7 -0.32 -10% basis
Peer 11
9 Peer 8 -0.37
Peer 9
10 Peer 9 -0.38 Peer 14
-15% Peer 15
11 Peer 10 -0.44 Peer 13
12 Peer 11 -0.47 Peer 12 Peer 16
13 Peer 12 -0.48 -20%
14 Peer 13 -0.50 Peer 17
15 Peer 14 -0.65
16 Peer 15 -0.68 -25% Peer 18
17 Peer 16 -0.69
Risk3
18 Peer 17 -0.86
© Zurich Financial Services Ltd
-30%
19 Peer 18 -1.39
1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 5,5 6,0
Source: companies’ website, financial reports
Note: peer universe defined as DJ Global Insurance Titans. Some peers were not included in the analysis due to data availability and quality issues
1 The analysis performed is based on quarterly returns 2007 - 2011. Prior data not available in required quality
2 Return = Cumulative excess returns (chain linked)
3 Risk = Standard deviation of excess returns
4 Modified information ratio is used to account for negative returns
December 1, 2011 Investors' Day - Focus on Execution 85
- 5. Our mission provides a clear focus to steer
the portfolio through a turbulent market
environment
Investment Management’s mission
Achieve superior risk-adjusted investment returns
relative to liabilities
© Zurich Financial Services Ltd
December 1, 2011 Investors' Day - Focus on Execution 86
- 6. We invest based on a clear and shared
investment philosophy and through a
structured and disciplined approach
Clear Systematic
investment philosophy and disciplined
Manage assets relative
Maximize economic value
to liabilities
Capital markets generally Diversify sources of risk
do work and return
Clear governance structure
© Zurich Financial Services Ltd
State-of-the-art investment information solutions
December 1, 2011 Investors' Day - Focus on Execution 87
- 7. Allocation of capital to market/ALM and
investment credit risk stands at the
beginning of the investment process
Risk Allocation of Zurich, as of 1 January 2011
Total RBC estimate: USD 34 billion
8% USD 15.3bn
Risk Based
13% Market/ALM risk
Capital allocated
37% Investment credit risk to Investment
Business risk Management
1%
4% P&R risk3 (IM)
Re-ins credit risk
Life insurance risk
Natural cat risk
23%
6% Operational risk
8%
© Zurich Financial Services Ltd
1 Total allocated capital = USD 34bn RBC plus USD 2bn direct allocation to Farmers
2 Includes Other Operating Businesses and Non-Core Businesses
3 Premium & reserving risk
December 1, 2011 Investors' Day - Focus on Execution 88
- 8. We continuously refine our investment
approach to manage risks and capital more
efficiently
Investment Management value chain
Asset Liability Analysis
Strategic Asset Allocation
Tactical Asset Allocation
Manager Selection
Local Adaptation and
Portfolio Construction
Security Selection and
Trade Execution
© Zurich Financial Services Ltd
Asset Manager Oversight &
Investment Reporting
December 1, 2011 Investors' Day - Focus on Execution 89
- 9. We are taking our ALM/SAA framework one
step further by fully integrating risk factors
directly into both assets and liabilities
Risk factors Typical insurance balance sheet exposures
Assets1 Liabilities1 Zurich net exposure
Equity Risk
Liquidity
Risk Equity
Liquidity Risk Risk
8%
Interest Rate Risk 21%
Interest
Term Structure Risk 9% Rate
Risk
48%
14%
Commodity Risk Term
Credit Structure
(Spread) Risk
Credit (Spread) Risk Risk
© Zurich Financial Services Ltd
1 Darker shades indicate higher exposures
December 1, 2011 Investors' Day - Focus on Execution 90
- 10. The framework allows the management of
investments based on risk factor exposures
and expected alpha in a fully integrated way
Risk factors Translation into selected asset classes1
Passive Active Sovereign Corporate Real
Equities Equities Bonds Bonds Estate TAA2
Equity Risk
Liquidity Risk
Interest Rate Risk
Term Structure Risk
Commodity Risk
Credit (Spread) Risk
© Zurich Financial Services Ltd
Alpha
1 Simplified illustration with some asset classes missing
2 Tactical Asset Allocation
December 1, 2011 Investors' Day - Focus on Execution 91
- 11. The enhanced framework will lead to more
comprehensive, transparent and explicit
SAA decisions
Risk factors Asset classes
Optimize Beta Risk Factor Exposure Optimize Alpha (Budget Allocation)
Equity Risk
Tracking Error Budget
Liquidity Risk (relative to risk factors)
Interest Rate Risk Excess return
+ = relative to
Term Structure Risk liabilities
Information Ratios by (active)
Commodity Risk
Asset Class
Credit (Spread) Risk
© Zurich Financial Services Ltd
Capital
All risk factors ‘compete’ for
Beta budget + All asset classes ‘compete’ for
Alpha budget
allocated to
investments
December 1, 2011 Investors' Day - Focus on Execution 92
- 12. Managing economic risks on a more granular
basis under the enhanced framework allows
to protect the strength of our balance sheet
Risk factors Examples
Exposure Assets Liabilities Net
Delta Long Short Long
Equity Risk
Vega Long Short Short
Liquidity Risk
Exposure Assets Liabilities Net
Interest Rate Risk Delta1 Long Short Short
Gamma2 Long Short Short
Term Structure Risk
Vega3 Long Short Short
Commodity Risk
Exposure Assets Liabilities Net
Credit (Spread) Risk Delta Long Short Long
© Zurich Financial Services Ltd
1 First order sensitivity to underlying risk factor
2 Second order sensitivity to underlying risk factor (convexity)
3 Sensitivity to implied volatility
December 1, 2011 Investors' Day - Focus on Execution 93
- 13. Where securities cannot be used to hedge
ALM risk, derivatives are used selectively
Interest rate convexity in the German Life book
USD USD USD USD
MCEV (excl.
MCEV (RHS)
Swaptions)
Swaptions
MVA (LHS)
+ = MCEV (incl.
Swaptions)
MVL (LHS)
© Zurich Financial Services Ltd
-150 -100 -50 0 50 100 150 -150 -100 -50 0 50 100 150 -150 -100 -50 0 50 100 150
Interest rate shock in bps
MCEV: Market consistent embedded value; MVA: Market value of assets; MVL: Market value of liabilities;
RHS: Right hand scale; LHS: Left hand scale
December 1, 2011 Investors' Day - Focus on Execution 94
- 14. The enhanced ALM/SAA approach…
Provides a comprehensive, robust and transparent framework for
investment decisions
Captures risk factors such as liquidity and term structure risk that
are highly relevant in an insurance context
Requires us to be explicit about risk and return expectations,
e.g. alpha potential for actively managed asset classes
Enables us to manage economic risks more accurately through
selective use of derivatives where cash securities are ineffective
© Zurich Financial Services Ltd
December 1, 2011 Investors' Day - Focus on Execution 95
- 15. Key messages – Investment Management
A clear mission, and a disciplined and structured approach are the
basis for long term value creation
We continuously refine our investment approach to manage risks
and use capital more efficiently
Our framework allows us to deal proactively with the challenges
of persistently low yields and the debt crisis
We are well positioned to deal with market uncertainties and
preserve the strength of our balance sheet
© Zurich Financial Services Ltd
December 1, 2011 Investors' Day - Focus on Execution 96
- 16. Appendix – IM achieves transparency of
and focus on core capabilities through a
clearly defined value chain
Value Chain and Core Competences
Earn risk-free investment return by understanding Create effective
Asset Liability Analysis the risk-free investment position and efficient
governance for
Define the long-term SAA based on allocated risk
investments
Strategic Asset Allocation capital
Manage strategic
Earn market risk premia
innovation and
Generate skill-based returns based on market leverage central
Tactical Asset Allocation strategies value levers
Operations
Select high performing asset managers at right Define and
price implement HR
Manager Selection Systematically monitor and act on manager strategy
performance Define and
Local Adaptation and Ensure efficient implementation of investment implement
Portfolio Construction strategies Communication
strategy
Security Selection and Monitor alpha generation by internal and external Effective
Trade Execution specialist asset managers investment
© Zurich Financial Services Ltd
planning and
Asset Manager Oversight & Provide timely, high quality information for management of
Investment Reporting decision making in the investment process budgets
December 1, 2011 Investors' Day - Focus on Execution 97
- 17. Appendix – Where securities cannot be
used to manage certain ALM/Market risks
effectively, derivatives are used selectively
Examples of specific ALM/Market-related implementation action using derivatives
Starting Point Implementation
1 Very long-dated interest rate risk Systematic portfolio restructuring
German
traditional with- Liability analysis revealed substantial and purchase of long-dated EUR
profits endow- negative convexity zero-coupon government bonds
ment book (since 2008)
Swaption programme (started 2010)
2 Long-dated and convex interest rate Long term CHF receiver swaptions
Swiss traditional
with-profits risk due to long-dated CHF liabilities portfolio (started 2006)
endowment book with embedded options
3 Large and convex exposure to both Dynamic equity and interest rate
US run-off variable
annuity book interest rates and equity markets hedging (started 2010)
4 Future fee income from unit-linked Short forwards on major equity indices
UK unit-linked fee
assets is exposed to declining equity (started 2009)
© Zurich Financial Services Ltd
income
markets
5 Asymmetric risk profile of Eurozone Purchase of EuroStoxx 50 equity puts
Eurozone tail risk
sovereign debt crisis tail risk event (started 2011)
equity hedge
Timely implementation required
December 1, 2011 Investors' Day - Focus on Execution 98