章节4机构投资者和组合管理经济学分析ss6-任务1讲义06.v1cfa三级8jihc

CFA㧞゗㞁䁖㼏㚠SS6:Portfoliomanagementfor【梦轩考 专业提供CFAFRM全 CFA㧞゗㞁䁖㼏㚠SS6:PortfoliomanagementforTopicTopicinCFALevelSS1SSSSPRIVATEWEALTHMANAGEMENTSSPRIVATEWEALTHMANAGEMENTSSSSSSSS EPORTFOLIOMANAGEMENTSS EPORTFOLIOMANAGEMENTSSEQUITYPORTFOLIOSSSSRISKSSSSTRADING,MONITORINGANDSSSSGLOBALINVESTMENTPERFORMANCE2-2-FrameworkofSS6:PortfolioManagementforInstitutional ManagingInstitutionalInvestor LinkingPensionLiabilitiesto3- 【梦轩考 专业提供CFAFRM全 InstitutionalInvestors–PensionPensionCharitableDefined(RiskborneDefined(Riskborneuseoffunds,aftermeetingloanuseoffunds,aftermeetingloandemandbutplayskeyroleinmanagingrisk(market&credit)&liquidityvs.liabilitiesNonandcasualty,andsurety)Hybridplansdesirablefeatures(toofDCplansbyparticipants)andDBplans(benefitguarantees,linkedtoyearsofserviceandsalary)e.g.cashbenefitplans,benefitplans,floorplansDCplansthatinvestall/themajorityofplanassetsinemployercontributionisa%ofdependsonvestingschedule,levelofinvalueofstockpertomatchliabilities,plussurplus4-4-InstitutionalInvestors–SixtypesofinstitutionalinvestorsintheLevel3PensionLifeinsuranceNon-lifeinsurance5- 1.1GeneralPensionGeneralPensionApensionplanisaportfolioofassetsthatsupportsfutureretirementbenefits.Thepromiseisaliabilityoftheplansponsor.Theplansponsoristheorganization(e.g.,acorporation,aernmententity,anonprofitorganization)thatfundsthepensionplan.Planparticipantsarethosereceivingapromiseofretirement efromthepensionplan.6- 1.1GeneralPensionDefinitions—TypesofPensionDefined1.1GeneralPensionDefinitions—TypesofPensionDefinedContribution(DC)=IndividualEmployer'sonlyobligationistomakecontributionstoemployees'pensionplansandprovideanadequatenumberofalternativeinvestmentchoicesEmployeeownsassets(portable),makesinvestmentdecisions,andbearsallinvestmentrisk,receivestaxdeferralbenefitsandinretirementselectslumpsumorpaymentsDefinedBenefitEmployermustmanagetheplanassetsandbearinvestmentPensionbenefitsaretheemployer'sfinancialEmployeereceivespaymentsbutissubjecttoearlyterminationriskifleavethefirm7- 1.1GeneralPensionDefinitions—DCPensionDefined-contribution(DC)pensionplanscomeintwoforms:Participant-directedandsponsor-directed.Inasponsor-directedDC(e.g.,profitsharingplan),thesponsorselectsInaparticipant-directedDCplan,theemployeesallocateretirementfunds(employeeandemployercontributions)amongalistofmutualfundsprovidedbythesponsor.8- 1.1GeneralPensionDefinitions—TypesofPensionCashbalanceAhybriddefined-benefitplanthatmaintainsindividualaccountrecordsforplanparticipantsshowingtheircurrentvalueofaccruedbenefit.Theseplansdifferslightlyfromtraditionaldefined-benefitplansinthatanaccount,ratherthananactualfund,ismaintainedforeachindividual.ProfitsharingDefined-contributionplanwhosecontributionsareestablishedsomewhatbytheprofitabilityoftheplansponsor.9- 1.1GeneralPensionDefinitions—CashBalanceLike1.1GeneralPensionDefinitions—CashBalanceLikeaDBplan,employerbearsinvestmentLikeaDCplan,participantreceivesaalizedstatementshowingtheaccountbalanceThebalanceonlyrepresentsaliability,notanactualaccountinwhichfundshavebeendepositedFacilitatesportabilitytoanew10- 1.1GeneralPensionDefinitions—EmployeestockownershipAnemployeestockownershipPlan(ESOP)isatypeofdefined-contributionplanthatallowsemployeestopurchasethecompanystock,sometimesatadiscountfrommarketprice.Thepurchasecanbewithbefore-orafter-taxdollars,andthefinalbalanceinthebeneficiary'saccountreflectstheincreaseinthevalueofthefirm’sstockaswellascontributionsduringemployment.ESOPsreceivevaryingamountsofregulationindifferent 1.1GeneralPensionDefinitions—EmployeeStockOwnershipTheseareDCplansthatinvestmostoralloftheplan'sassetsinemployerContributionssetatapercentageofemployeeKeyissueforparticipantisifthecompanyfails,participantcouldfindvalueofESOPdropaswellasbeingunemployedESOPvalueatrisk=EmploymentatDiversifyawayfromcompanyCompanieshaveusedESOPsLiquidatelargeblocksofcompanyAvoidpublicFendoffhostiletakeoverssincemoststockheldbycompany12- 1.1GeneralPensionDefinitions—DBPensionPension1.1GeneralPensionDefinitions—DBPensionPensionPlanFundedstatusistherelationshipbetweenthepresentvalueofthepensionplanassetsandthepresentvalueofthepensionplanliabilities.Fullyfundedmeansthepresentvalueofthepensionplanassetsisgreaterthanorequaltothepresentvalueofthepensionliabilities.Sponsorscanatleasttemporarilystopmakingcontributionstotheplan’sassetbase.Underfundedmeansthepresentvalueofpensionplanassetsislessthanthepresentvalueofthepensionplanliabilities.Underfundedplansmayrequirethesponsorstomakespecialcontributionstotheplaninadditiontotheusual,regularcontributions.Surplusisthedifferencebetweenthepresentvalueofpensionplanandthepresentvalueofpensionplan13- 1.1GeneralPensionDefinitions—DBPensionPensionPlanAccumulatedbenefitobligation(ABO)isthetotalpresentvalueofpensionliabilitiestodate,assumingnofurtheraccumulationofbenefits.Ineffect,ABOisthepensionbenefitsduetoparticipantsiftheplansponsorterminatedexistence.Projectedbenefitobligation(PBO)istheABOplusprojectionsoffutureemployeecompensationincreases.ThePBOisthepensionliabilityforagoingconcernandistheliabilityfigureusedincalculatingfundedstatus.Totalfutureliabilityisameasureofpensionliabilitythatisthemostcomprehensive,becauseittakesintoaccountnotonlycompensationchanges,butalsochangesintheworkforceandbenefitchangesassociatedwithinflation.Totalfutureliabilityisoftenusedwhensettingobjectiveswithintheinvestmentpolicystatement(IPS).Retiredlivesisthenumberofplanparticipantscurrentlyreceivingbenefits(i.e.,retireescurrentlyreceivingretirement Activelivesisthenumberofplanparticipantsnotcurrentlyreceivingpensionbenefits(i.e.,thoseworkingtowardretirement).14- 1.11.1SummaryofDB&LiabilityofDeterminedbystatedcriteriausuallyrelatedtoyearsofserviceandsalarySponsor(employer)isresponsibleformanagingtheplanassetsReceiveperiodicpaymentsstartingatretirementorotherdateSubjectto“earlytermination”riskifemployeeisterminatedearlyNotbearrisk/returnconsequences1.FirmkeepsallOnlyfinancialliabilityismakingcontributionstoemployee’sTheplanmustoffersufficientinvestmentvehiclesOwntheplanandcantransportaccounttootheremploymentBearallrisk/returnconsequencesofMustmakeallinvestmentdecisionsgivenavailableinvestmentvehicles.Pensionriskfactors:Plansurplus,sponsorfinancialstatusandprofitability,sponsorpensionplanfundcommonriskexposures,planfeatures,workforce15-15-1.2DBPensionPlans:ReturnDBPensionPlans:1.2DBPensionPlans:ReturnDBPensionPlans:ReturnGoalisforassetstogeneratereturnsufficienttocoverpensionliabilities:PVA>PVLSpecificreturnrequirementdependsonfundedstatusandcontributions(assets)relativetoaccruedbenefits(liabilities)MinimizationofcontributionsisamorerealisticReturnobjectivemaybehigherifthesponsoristryingtolowerfuturecontributionsorwantstorecognizepension eonits Typicalreturnobjective:Adequatefundingrate,inflationThereturnobjectiveisgenerallyestablishedbytheactuarialdiscountdeterminedbyanactuaryusingan"asset-liability16- PlanPlanfundedstatus(surplusordeficit)HigherpensionsurplusorhigherfundedstatusimpliesgreaterrisktoleranceSponsorfinancialstatusandprofitabilityDebttototalassetsCurrentandexpectedprofitabilityLowdebtratiosandhighercurrentandexpectedprofitabilityimplygreaterrisk1.2DBPensionPlans:ReturnDesiredReturnvs.RequiredDesired/StretchreturnisareturnthatisoftendesiredbymanagementandgenerallyhigherthantherequiredreturnSethigherthanrequiredreturnwiththegoaltoreduceoreliminatepensionRatemaybetoohighandexposeassetstounnecessaryriskandMaynotbeintheinterestofplanReturnobjectivemaybemoreaggressivewhentheworkforceisLessaggressiveforretiredlivesReturnobjectivemaybeseparateforactiveandretiredlivesportionpensionplanontheexam,examinethecase17- 1.3DBPensionPlans:Riskⴈ㻶㚠⢋:㬶䅇㦘Ⰹ㾮䂙㎰㆑⭥ⴈ㻶㦾㦭Ⱙ䑘䄋㦂㉗䇻ェ⿏䇐㌘□ⳃ㡑㦬⭥⤧㹒䓕㌗⼮䇐㏜㚽㑇゗ⳃ㡑㦬⼮㵬㾾㆑ェ⿏〚㆑ⴈ㻶㔗゗㾵゗ェ⿏㪎㲹䎘⼮㎮Ⱀ㑇㲹䎘゗㼋ボ㻣18- 1.3DBPensionPlans:Risk【梦轩考 1.3DBPensionPlans:RiskSponsorandfundcommonCorrelationofsponsoroperatingresultswithpensionassetreturnsThelowerthecorrelation,thegreaterrisktolerance,allelseequal.PlanProvisionforearlyprovisionforlumpsumdistributionSuchoptionstendtoreducethedurationofplanliabilities,implyinglowerrisktolerance,allelseequalAgeofworkforce,ActivelivesrelativetoretiredlivesTheyoungertheandthegreatertheproportionofactivelives,thegreaterthedurationofplanliabilitiesandthegreatertherisktolerance.19-19-1.3DBPensionPlans:RiskIncreasedrisktoleranceLargerplansurplus...PVAGreaterfundedstatus...higherLowerfirmdebt...lowerdebt/equityHigherprofitability...higherexpectedYoungeraverageage/greateractiveGoingconcernProvisionsforearlyretirementandlump-sumdistributionsreduceabilitytotakerisk20- 1.3DBPensionPlans:RiskForDBplans,riskrelativetoliabilitiesisAsset/LiabilitymanagementisasubsetoftheoverallriskTypicalriskobjectivesStandarddeviationintermsofthe100%fundedstatusvs.futureFundedstatustoavoidreportingpensionObtainacertainleveloffunding21- 1.4DBPensionPlans:1.WorkforceMix1.4DBPensionPlans:1.WorkforceMix(retiredvs.activeGreaterretiredlives,increasedliquidity2.Sponsorcontributionsvs.benefitHigherprofitabilityreducesliquidity3.PlanEarlyretirementorlumpsumprovisionsincreaseliquidityTimeDeterminedbytwofactors:Whethertheplanisagoingconcern(multi-stage)orisaterminatedplan(singlestage)TheactivelivesportionoftheplanwillindicateatimehorizonwithexpectedtermtoTheretiredlivesportionwillindicateatimehorizonasafunctionoflifeexpectancyforthosecurrentlyreceivingbenefits.22- 1.4DBPensionPlans:LegalandMostcountriesfederallyregulatepensionManagershouldconformtothelocalIntheU.S.,ERISArequiressponsorstoexerciseduediligencewhenmakinginvestmentdecisionsERISA'soverridingstandardisthattheassetsshouldbemanagedfortheplanparticipants,notthesponsorConsultationwithappropriatelegalexpertsisTaxesandUniquePensionplansaretax-exempt,notaxERISArequiresduediligence,butsmallsponsorsmaynothavetheplanresourcesorexpertisetothoroughlyinvestigatealternativeassets(e.g.,derivatives,hedgefunds,etc.)Pensionplansmayimposerequirementsthatprohibitinvestmentintraditionaloralternativeasset23- InstitutionalInvestors–SixtypesofinstitutionalinvestorsintheLevel3PensionLifeinsuranceNon-lifeinsurance24- 2.1FoundationsandFoundationsandendowmentsprovidevital2.1FoundationsandFoundationsandendowmentsprovidevitalsupportformuchofphilanthropicandcharitableFoundationsaretypicallygrant-makinginstitutionsfundedbygiftsandinvestmentassets.(Ford,Rockefeller,andGatesfoundations)Endowments,ontheotherhand,arelong-termfundsgenerallyownedbyoperatingnon-profitinstitutionssuchasuniversitiesandcolleges,museums,hospitals,andotherorganizationsinvolvedincharitableactivities.(Harvard,YaleandPrincetonuniversities)25- 2.22.2FoundationSourceofAnnualSpendingIndependentgrantmakingorganizationestablishedtoaidsocial,educational,charitable,orreligiousfamily,orgroupofDonor,membersofdonor’sfamily,orAtleast5%of12monthaverageassetvalue,plusassociatedwithAlegallyindependentgrantmakingorganizationwithclosetiestotheProvidingfromaprofitBoardoftrustees,usuallycontrolledbythesponsoringSameas26-26-2.2FoundationSourceAnnualOrganizationthatusesitsresourcestoconductresearchorprovideadirectservice(e.g.,museum,zoo,publicLargelythesameastboardofMustspendatleast85%ofinterestanddividendeforitsownoperation.Somearealsosubjecttoannualspendingrequirementequalto3.33%ofassets.Apubliclysupportedorganizationthatmakesgrantsforsocial,education,charitable,orreligiouspurposes.AtypeofpublicBoardNospending27-27-2.3Foundations:Thereturnobjectivedependson2.3Foundations:Thereturnobjectivedependsonthetimehorizonstatedforthefoundation.Ifthefoundationwascreatedtoprovideperpetualsupport,thepreservationofrealpurchasingpowerisagoal.AminimumreturnequaltotherequiredpayoutplusexpectedinflationfundMorefluid,creativeandaggressivethanpensionfundsbecausetheynocontractuallydefinedAsset-onlyapproachtoassetThemaindriveristhelongtimeDuetolowspendingrequirements,theyusuallyhaveabove-average28- 2.4Foundations:AnticipatedandunanticipatedneedsforcashinexcessofcontributionsOtherthanthe5%minimum,foundationscanchooseanyspendingratetheydesireMostfoundationsmaintainareserveof10%to20%ofannualspendingtocompensatefordownyearsinfinancialmarketsTimeEstablishedormanagedwiththeintentoflastingintoperpetuity,usuallyverylongExceptionisthosethatarerequiredtospenddowntheirTaxes—Nontaxable,UBIT—Unrelated e(donatedbusiness).istaxed erate.(e.g.,museumgift e(Div&Int)lessexpensesistaxedatReducedto1%ifspendingequaltoorexceeds29- 2.4Foundations:LegalandMoststateshaveadoptedUMIFA(UniformManagementofInstitutionalFundsAct)PrudentInvestorRulegenerallySkill,care,prudence,diligence,defraycosts,diversify,delegateInvestmentsshouldbeconsideredinadiversifiedportfolioCanvarybyUniqueCircumstances:issuerstolookConcentratedholdingsofalargesinglestockthattheyareprohibitedbydonorfromsellingUnrelated e—donatedSociallyresponsibleAdequateneltoperformdue30- InstitutionalInvestors–SixtypesofinstitutionalinvestorsInstitutionalInvestors–SixtypesofinstitutionalinvestorsintheLevel3PensionLifeinsuranceNon-lifeinsurance31- 3.1Endowments:ReturnObjective—SpendingSimplespendingwhere:S=thespecifiedspendingRolling3-yearaveragespendingDampenvolatilitythatcanimpacttheendowment’sportfoliovalueandsponsor’soperatingSpending(spendingrate)marketvaluet1marketvaluet2marketvaluet3 GeometricspendingThisspendingruleaddressesoneofthecriticismsoftherollingaveragespendingruleinthatextraordinarychangesinportfoliovaluemaycausedramaticshiftsinspending.1)where:R=smoothingrate(0.6~0.8),I=rateofinflation,S=spending32- 3.1Endowments:ReturnEndowment:ReturnEndowmentsaredesignedtopermanentlyfundandprovidesupportforuniversities,colleges,hospitals,MaintainperpetualpurchasingpowerisCreativetensionexistsbetweentheneedfor eagainstpreservationofpurchasingpower3S's=significant,stableandsustainablecashflowtosupportTotalreturnapproachisappropriate(spendfrom eandThelong-termspendingratemustbelessthantheexpectedrealrateofProblem:spendingrate>5%canleadto-erosionofMinimizingspendingvolatilityusingaspendingruleisalso33- 3.2Endowments:RiskMostendowmentshavehighrisk3.2Endowments:RiskMostendowmentshavehighrisktoleranceduetotheirlongtimeLowerabilitytotolerateriskHigherspendingHeavyrelianceupondonations,10%ormoreitsabilitytotolerateisGreaterbudgetNospendingruleinSmallersizeof34- 3.3Endowments:LiquidityandTimeLowliquiditySpendingneedsvs.giftsandLargecashoutlaysmaysometimesbeneededforcapital–newTimehorizonisverylongterm(typicallyCanbemultistageifamajoroutlayis35- 3.3Endowments:TaxesandLegalandDividendsonnon-U.S.securitieswithholdingUnrelated emaybeMoststateshaveadoptedUMIFA—delegation,care,prudence,maintaincorpusandrespectdonorrestrictions.Prudentinvestorrulesapply.501(c)(3)IRSregulationsstatethat eshouldbenefitagroupnotLittleernmentUniqueDuetotheirdiversity,endowmentfundshavemanyuniqueInvestmentinalternativeinvestmentsrequiresignificantresourcesandSocialissues(e.g.,defensepoliciesandracialbiases)aretypicallytakenintoconsiderationwhendecidinguponindividualinvestments36- InstitutionalInvestors–SixtypesofinstitutionalinvestorsInstitutionalInvestors–SixtypesofinstitutionalinvestorsintheLevel3PensionLifeinsuranceNon-lifeinsurance37- 4.1LifeInsuranceLifeInsuranceWholelifeinsurancepoliciesprovidealeveldeathbenefitforthe“whole”ofinsured’slife.thepolicyprovidesdeathbenefitandcashvaluecomponentswherethedeathbenefitportionremainsconstantbutthecashvalueportionincreaseswiththecreditedrate(i.e.,theinterestratecreditedtothepolicyholder).Termlifeinsurancepoliciesprovidealeveldeathbenefitforastated“term”ofthepolicyholder’slife.Mosttermlifepolicieshavenocashvalue,buttheirpremiumsaremuchlowerthanwholelifepolicies.Universallife(㶓㚽㻶)policiesarecomposedofalifeinsurancepolicypayingadjustabledeathbenefitandanattachedsavingsaccountofferingcompetitivecurrentmarketreturns. eonthesavingscomponentaccumulatestaxVariablelife(⢅⡄Ⳳ㬺㻶)productslinkthedeathbenefitandthecashcomponentstoreturnsgeneratedbyabroadrangeofinvestmentvehiclesbythe38- 4.2LifeInsuranceCompanies:ReturnMinimumreturn:RatesetbyactuariesbasedonmortalityratestomeetfundaccumulationratesEnhancedmargin:Spreadmanagement(abovecreditedrates)usedtobemorecompetitiveizeinterestearnedovercreditedSurplus(PVassets-PVliabilities):Focusongrowth;useequityinvestmentsinrealestate,venturecapital,taxableaccount39- 4.3LifeInsuranceCompanies:RiskPublicpolicyviews4.3LifeInsuranceCompanies:RiskPublicpolicyviewsinsurancecompanyinvestmentportfoliosasquasitrustAssociationofInsurancecommissioners(NAIC)directslifeinsurancecompaniestomaintainanassetvaluationreserve(AVR)asacushionagainstsubstantiallossesofportfoliovalueorinvestment Valuationconcerns:Marketvolatilitycanleadtosurpluswritedown,whichwouldlowerrisktolerance(ability)andcreateacapitaladequacyproblemCashflowvolatility:Loss,delayorvolatilityofcollecting ecreatessignificantTimelyreinvestmentofcashflowisessentialtoincreasethesurplusReinvestmentrisk:reinvesting eataratelowerthanthecouponorpurchaseIfinterestratesfall,profitabilityfalls;thisriskismanagedusingPrevalentwithannuityCreditriskisamajorconcernandismanagedthroughdiligentcreditysisportfolio40- 4.4LifeInsuranceCompanies:ThreeprimaryDisintermediation:asinterestratesincreaseduetoinflation,policyholdersborrowagainsttheirpoliciesorsurrenderpoliciesleavingLifeInsuranceCompanieswithsignificantoutflowsConsequently,liabilitydurationsshorten,andliquidity esmoreUtilizemultiplescenarioforecastingofinterestrateexposuretomanageliquidityneedsAsset-liabilitymismatch:Asinterestratesincrease,disintermediationoccurs,andthecompanymayhavetoliquidateorconvertlongdurationassetstocash,sometimesataloss,tomeetliquidityneedsMismatcharisessinceliabilitydurationschangemoreslowlythanassetManagingdurationand es41- 4.4LifeInsuranceCompanies:Assetmarketabilityrisk:Traditionally,insurancecompanieshaveinvestedinlessliquidassetssuchas:Privateplacementdebt,commercialmortgageloans,equityrealandventureLiquidity ingincreasinglyimportantwhichhasledconstrainedcommitmentstotheseasset42- 4.5LifeInsuranceCompanies:TimeLifeInsuranceCompanies:4.5LifeInsuranceCompanies:TimeLifeInsuranceCompanies:TimeTraditionally,lifeinsuranceportfoliosconcentratedonholdingperiodsof20–40years.Thetimehorizonforlifeinsurancecompanieshas eprogressivelyshorterasthedurationofliabilitieshasdecreasedduetoincreasedinterestratevolatilityandcompetitivemarketfactorsIndividualsegmentsoftheoverallportfoliowillhavetheirowntimehorizons.Ingeneralterms,timehorizonshavesimply eshorter43- 4.6LifeInsuranceCompanies:TwosegmentsofthePolicyholder'sshare(notCorporateshare,namelyfundstransferredtosurplus(taxed),whichaccruestoshareholder'softhecompany44- 4.7LifeInsuranceCompanies:Legal&LegalandThreemainareasofEligibleinvestments:TherearequalitystandardsandlimitsplacedonassetclassesEquitieslimitedtoNon-USinvestmentsarealsolimitedtosomeextentasa%admittedBondsinterestcoverageratiomustmeetminimumstandardsorminimumcreditratingPrudentInvestorRule:AllowsinsurancefirmsincreasedflexibilityininvestmentchoicesandoptionsValuationMethods:UniformvaluationofsecuritiesismandatedbytheNAICthroughtheuseoftheSecurityValuationBookUniqueConcentrationofproductofferings,companysize,andlevelofsurplusaresomeofthemostcommonfactorsimpactingtheuniquenessoflifeinsurancecompanies.45- InstitutionalInvestors–SixtypesofinstitutionalinvestorsInstitutionalInvestors–SixtypesofinstitutionalinvestorsintheLevel3PensionLifeinsuranceNon-lifeinsurance46- 5.NonlifeInsuranceAsset/LiabilityLiabilitiesofacasualtycompanydifferfromthoseofalifeinsurancecompanyinthattheclaimsreporting,processing,andpaymentprocesscantakeyearstocomplete.Thisisreferredtoasthe“long-tail”natureofcasualtyliabilities.Theliabilitystructureismainlyafunctionoftheproductmixthatacompanysells.LiabilitydurationstendtoberelativelyTheunderwritingcycletendstofollowgeneralbusinessTheliquidityneedsofanonlifecompanyaregenerallydictatedbyunderwritingTheunderwritingcyclecorrespondstoa3-to5-yearcycleinwhichunderwritinglossesarenegligibleattheoutsetand eprogressivelyworse,turningintosignificantlossesattheendofthecycle.47- 5.1NonlifeInsuranceCompanies:ReturnNonlifefirmsfacegreateruncertaintythanlifeinsuranceduetothepossibilityofhigherclaimsfrequency.However,theyarenotasinterestratesensitivesincetheirpoliciesdonottypicallypayperiodicreturns.Theprimaryizethereturnon eportfolioforpurposesmeeting(i.e.,immunizing)UsereturnsfromtheequityportionoftheirportfoliotogrowtheUsethesurplusportfoliotoprovidefundsforunexpected,largeliabilityNonlifeinsurancecompaniesholdagreaterpercentageofequity-investmentsintheirportfoliosthanlifeinsurancecompaniesLargestockandbondholdingsaredesignedtoprovidehighlevelsof e,andcapitalappreciationtobuildthesurplusbase.48- 5.1NonlifeInsuranceCompanies:ReturnThemainfactors5.1NonlifeInsuranceCompanies:ReturnThemainfactorsimpactingnonlifeinsurancecompanyreturnCompetitivepricingpolicy.Today,mostnonlifecompaniesrecognizethat ecanbeusedtoreducepremiumsand,hence,makethefirmmorecompetitive.Competitionisamajorinfluenceinsettingpremiums.Profitability.Investment eandtotalreturnoftheinvestmentportfolioarenowprimarydeterminantsofprofitability.Investmentreturnusuallyservestosmooththeearningsvolatilityofthetypicalunderwritingcycle.Growthofsurplus.Commonstocks,convertiblesandalternativeinvestmentsarethefavoredinvestmentsforsurplusgrowth.Bondportfoliosareusuallymaintainedtofundinsurancereserverequirements,whereascommonstocksareusedtoprovidegrowthtothesurplus.After-taxreturns.Nonlifeinsurancecompaniesaretaxableentities.AfterreturnsareextremelyimportanttononlifeTotalreturn.Activebondportfoliomanagementstrategieshavebeenadoptedbymanylargenonlifecompaniesinanattempttoizetotalreturn.Afocusonyieldhasbeenshiftedto eandcapitalgaingeneration.49- 5.2NonlifeInsuranceCompanies:RiskRiskDuetotherelativelyhighuncertaintyassociatedwithclaims,risktoleranceofnonlifeinsurancecompaniesmustbetemperedbytheirliquidityCasualtycompaniesgenerallyhavelimitedriskSincemostnonlifecompaniesofferreplacementcostcoverage,inflationriskisalsoabigconcern.TwoimportantThecashflowcharacteristicsofnonlifecompaniesareoftenerraticThecommonstock-to-surplusratioaveragesbetweenone-halfto50- 5.3NonlifeInsuranceCompanies:Liquidity:relativelyHighliquidityrequirementsareoftenmetthroughholdingaportfolioofshort-termsecurities,highlymarketableU.S.ernmentdebt,andbymaintainingabalancedorladderedmaturityscheduleofinvestableassets.Timehorizon:shortertimehorizonsthanlifeinsuranceStrangely,theaveragematurityofanonlifecompany’sbondportfolioislongerthanthatofalifecompanybecauseofthepredominanceoflong-termtax-exemptbondsheldtoizeafter-taxreturns.Equitiesareheldtogrowanonlifecompany’ssurplusportfolio.theequitiesheldtendtohavegrowthcharacteristicsand,onaverage,areheldforlongtimeperiods.Taxconsiderations.Nonlifeinsurancecompaniesaretaxableentities.Taxissuesarecomplex,sofrequentdiscussionwithappropriatetaxcounselare51- 5.3NonlifeInsuranceCompanies:Regulatoryandlegal5.3NonlifeInsuranceCompanies:RegulatoryandlegalAnassetvaluationreserve(AVR)isnotrequired,butrisk-basedcapital(RBC)requirementshavebeenestablished.Uniquecircumstances:thecurrentfinancialstatusofnonlifeinsurancecompanies,coupledwithmanaginginvestmentriskandliquidityrequirements52- InstitutionalInvestors–SixtypesofinstitutionalinvestorsintheLevel3PensionLifeinsuranceNon-lifeinsurance53- 6.BankSecurityBanksarerequiredtoclassifythesesecuritiesintothreedistinctcategories:holdmaturity,availableforsale,andDuration,Credit e,andThemannerinwhichfundsareallocatedtothethreeclassificationswilldeterminetheoveralldurationofthesecuritiesportfolio.Inthisway,managerscanadjustt