View
278
Download
0
Category
Preview:
Citation preview
Getting a Grip on Key Investment Issues
Alton R Cogert, CFA, CPA, CAIAPresident and Chief Executive Officer
Excerpted from presentation toThe Conference for Risk Retention PoolsOrganized by Aon Global Risk Consulting
La Jolla, CAAugust 4, 2009
Getting a Grip on Key Investment Issues
Today’s Investment Environment
Your Pool’s Investment Process
What to Watch For in the Near Future
2
Not Very Long Ago…
Prior to 2008 Interest rates fell – lower yields for risk free securities Spreads narrowed – less compensation for credit risk &
prepayment risks Housing prices had been rising
Investors Reached for yield, took more risk, with less compensation Found “attractive” yield in sub-prime mortgages
Investment Banks Created new structure to create more yield with leverage and less
transparency Packaged sub-prime mortgages & utilized those securities within
their structured vehicles to provide more yield Rating agencies
Accommodated by giving higher ratings in structures where the risks were not fully understood
3
How did this turn into a crisis?
In 2008, when interest rates started to rise Sub-prime mortgages increased default Structured products unraveled Leveraged financial institutions brought close to collapse Lehman bankruptcy seized credit markets – trading halted Credit problems extended into a global markets crisis Developed into deepest recession since the Great Depression
“Spread-products” (corporate bonds, mortgage-backed bonds, and structured products) underperformed risk-free (Treasury) bonds as spreads widened through March of 2009 2nd quarter 2009 spreads narrowed & corporate bonds recovered
Yet, defaults and bankruptcies increased Defaults increased in sub-prime mortgages Some structured products (backed by sub-prime & defaulted
bonds) have not recovered
4
And Today…
Spreads still historically above averages, but what average should be used?
US Government spending like drunken sailors…but is it enough?
Unusually steep ‘risk free’ US Treasury yield curve…but how risk free is it?
Concerns about inflation….and deflation. Equities – too high or the deal of the decade?
Rating agencies…on the prowl, trying to justify their improper business model. Few have 100% trust in rating agencies, but no investment policy excludes ratings from their list of limits.
Regulators…accommodative (fair value, ‘permitted practices’) but still concerned about some insurers.
Accountants…the politicization FASB potentially means anything can be ‘up for grabs’.
5
Your Pool’s Investment Process
9
Consistent Investment Results REQUIRE aConsistent Investment Process
10
What to Watch For in the Near Future
Greater Emphasis on Risk Management, because Uncertainty Will Grow not Subside Over Time
Look for hidden risk. It’s there, but not being discussed to any great degree.
Consider the ‘next shoes to drop’
Linked Effects of Investments – ‘Hidden’ Correlations
Continued Politicization of Accounting
Continued/Increased Board Interest in the Investment Process
Expect to Hear More of ‘We’ve Never Seen This Before in Our Lifetimes’….Is Your Pool Prepared?
Recommended