INVESTMENT INCOME PROJECTION - IASA 2015... · Rule-based Portfolio Projection (Simplification) Data Area Insurance Technique Investment related cash Investment Sales Available Capital

IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

INVESTMENT INCOME PROJECTION & FORECASTING

Session 703


AGENDA

Conceptual Fundamentals

Market expectations and projection

Investment scenarios and forecasts for various asset classes

Reporting

Field Report of Investment Forecasting in Practice

Necessity of an investment forecast

Components of the investment forecast

Challenges

Potential System Support


CONCEPTUAL FUNDAMENTALS

Two important Questions to answer:

What is my risk today?

What will my income statement look like at the end of the

year?


CONCEPTUAL FUNDAMENTALS

INVESTMENT FORECAST AND PLANNING IS AN ASPECT

OF AN OVERALL INVESTMENT CONTROLLING APPROACH


MARKET EXPECTATIONS AND PROJECTION

FACTORS IN THE INVESTMENT FORECAST PROCESS


INVESTMENT SCENARIOS

Scenario Based Planning is an excellent way of controlling

risk



Market Data Assumptions


1

2

3

4

5

6

78

910

0.0000%

0.2000%

0.4000%

0.6000%

0.8000%

1.0000%

1.2000%

1.4000%

1.6000%

1.8000%

2.0000%


With only little parameter input a projection about future

interest rates has to be generated

Tenor April, 9 2015 Dec. 31, 2015

Muni Yield

1 yr 0.2900% 0.300%

2 yrs 0.5500% 0.500%

3 yrs 0.7867% 0.700%

4 yrs 1.0233% 0.900%

5 yrs 1.2600% 1.100%

6 yrs 1.4040% 1.220%

7 yrs 1.5480% 1.340%

8 yrs 1.6920% 1.460%

9 yrs 1.8360% 1.580%

10 yrs 1.9800% 1.700%

Input Parameter



Rule-based Portfolio Projection (Simplification)

Data Area Insurance

Technique

Investment

related cash

Investment

Sales

Available

Capital

Portfolio

Management

Current

Portfolio

External Input Generated by

holdings and

conditions

From

different

investment

systems

Automated

Calculation

Directly loaded

from investment

management

system

Projection

External Input

with historical

distribution

Automatically

calculated under

reinvestment

assumption and

investment

scenario

Free planning

under

scenario and

on different

aggregation

level

Automated

Calculation

Management of

available capital

for future

investment

scenario


PROCESS OF THE PLANNING & PROJECTION PROCEDURE


FIELD REPORT OF INVESTMENT FORECASTING IN PRACTICE


Necessity of an Investment Forecast

Investment income may be the bottom line!

Important part of Company budget

Required for quarterly analyst guidance

2014: Co A Co B Co C Co D

Net Investment Income $ 1,394 $ 549 $446 $138

Net Income $ 2,861 $ 721 $830 $197

NII / NI 49% 76% 54% 70%


Components of an Investment Forecast

1 - Cash Flows

2 - Investment Assets / Average Assets

3 - Net Investment Income

4 - Analysis


Components of an Investment Forecast CASHFLOWS - Sources

Investments Cashflows

Investment Systems: Maturities and

paydowns, interest and dividends

FP&A: Insurance operations, with

monthly seasonality, reinsurance

premiums, etc

Tax Department: tax payments

Capital Group: M&A, stock or debt

repurchases, debt issuance,

shareholder dividends

Investment managers:

reinvestment rates, calls, investment

strategies, required cash balances

Treasury & Other: Other significant

inflows or outflows


Components of an Investment Forecast CASHFLOWS

Build monthly activity:

• Beginning cash balance

• Cash in from investments

• Cash in/out from insurance operations, capital activity

Assess activity:

• Need to sell bonds to support insurance ops?

• Have excess to invest? What do you invest in?

• This month’s activity impacts the remainder of the year…


Components of an Investment Forecast INVESTMENT ASSETS

Investment Assets, Average Assets

• Start with actual assets

• Build monthly change in assets using cashflow data:

purchases or sales of bonds, equities, mortgages, etc.

• Calculate average assets so you can watch your yields, monitor

fluctuations


Components of an Investment Forecast INVESTMENT INCOME - Sources

Net Investment

Income

Investment Systems: Current portfolio yield – coupon,

dividends, amortization(?)

Calculation: Add income related to purchases and

changes in asset mix from cashflow model

Calculation: Reduce income for

maturities, calls and sales from cashflow

model

Investment managers:

assumptions for defaults, consent

fees, special dividends,

partnerships

Business Partners: Investment expenses

Other: Foreign currency rates


Components of an Investment Forecast INVESTMENT INCOME & YIELDS

Build monthly income

Current portfolio

+ Income from new assets purchased

+ Income from projected consent fees

- Lost income from sales, calls

- Lost income from defaults

Calculate forecasted earned yields using NII and average

assets


Components of an Investment Forecast ANALYSIS

THIS IS THE HARD PART!

• Why is this forecast different from the prior forecast?

• Why is next year different from this year?

We calculate variances caused by:

• Higher/lower cash flows

• Higher/lower yields

• Higher/lower currency exchange rates

• Different asset mix


Components of an Investment Forecast ANALYSIS

To help address variables, we develop sensitivity analysis

for new money rates and foreign currency

Trends:

• Maturities, calls and sales are depleting NII at a greater rate than the

rate at which we can reinvest


Challenges

Systems

Accuracy of yields, cashflows, etc.

Analysis

Reporting


POTENTIAL SYSTEM SUPPORT



Potential System Support



MAJOR TARGETS FOR IMPLEMENTING THE PROJECTION

TOOL (1/2)



MAJOR TARGETS FOR IMPLEMENTING THE PROJECTION

TOOL (2/2)



Typical System Architecture (1/2)



Typical System Architecture (2/2)


Contact: Kay Malloy Jorg Pappert

Hanover Insurance Group, Inc. COMPIRICUS Inc.

[email protected] [email protected]

mailto:[email protected]

mailto:[email protected]


Please Complete the Session Evaluation Form on the Conference App

Documents

INVESTMENT INCOME PROJECTION - IASA 2015... · Rule-based Portfolio Projection (Simplification) Data Area Insurance Technique Investment related cash Investment Sales Available Capital