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How can capital requirements continue to be reduced?

Our Strategic Overlay and Low Volatility on Equity (S.O.L.V.E) has been built and is managed to satisfy twofold objectives: maintaining the relative attractiveness of equity returns over the long term while mitigating the uneven market trajectory of equity markets by reducing volatility and draw-downs ; at the same time, satisfying high financial criteria under prudential and regulatory constraints in accordance with Commission Delegated Regulation UE 2015/35 (“Delegated Act”) supplementing Directive 2009/138/EC (Solvency II)  Article 210 2/.

Our hedging strategy consists in purchasing put options and put spread options in force for one year or more. The hedging portfolio is split in 5 compartments. The first four compartments are the Strategic hedging compartments with 1 or more than 1 year maturity and a Long term hedging, where options have at any time a maturity, always superior to one year in order to manage the SCR volatility in case of a strong magnitude on market movement.

At the same time, the basis risk is closely monitored by the management team and is subject to a monthly report to ensure the hedge can indeed lead to a SCR reduction. On a day to day basis, the management team follows the evolution of both the underlying equity portfolio and the hedging indices. So we are able to detect “qualitatively” if basis risk begins to materialize. 

On a monthly basis the Financial Engineering team establishes SOLVE’s Solvency II Eligibility Assessment. It contains, among other items, an assessment of the basic risk using correlation calculation (which must be superior to 90%), historical behavior comparison (which must be similar) and coverage of the drawdowns.

Our principles taking into account Financial and regulatory criteria are:
-To reach the SCR objective of 22% and lower SCR volatility
-To be efficient in case of important market shock (more than 20% loss)
-To be efficient in case of intermediary market shock (between 10% and 20% loss)
-To optimize hedging costs with an active and money management on options


To what extent can you hedge your market risk budget?

While we believe that equity investments, and even more in actively managed equity investments, does provide for potentially attractive returns in absolute and relative terms over the long term, we also believe that sudden market shocks (whether foreseeable or not) can arise over a very short period of time and that as a consequence obliterate returns which have been accumulated over years or decades.

As such, we believe that there is potential for further value creation by structurally framing financial and regulatory risks inherent to equity investing; notably by limiting market volatility and drawdowns, especially in most unstable market phases or in period of strong consensus.

Protecting against sudden shocks is therefore necessary but involves the search for permanent protections dynamically managed to face the risk of turnaround, be it linked to potentially foreseeable events (such as macroeconomic evolutions often associated to self-amplifying mechanisms such as deterioration of liquidity and financial conditions), to binary events (such as political events), or to unforeseeable events (such as geopolitical tensions or so called black swans).

If the implementation of financial techniques to reduce the impact of potential shocks can be relatively easily implemented (for instance by being a systematic buyer of protection), such “basic” techniques come at a high price notably in periods when volatility is particularly high i.e. during those periods when protection is most needed; reducing the intensity of shocks without hindering the potential of an equities portfolio to participate to markets rebounds and upward movements is a more ambitious goal, but one that is increasingly needed. For example, SOLVE has cushioned 50% of the historical maximum drawdown with 80% of market rise capture since launch.

This convex approach should permit investor to limit efficiently the market risk budget.

To what extent can assets be allocated strategically across an insurer’s business lines?

Historically, most academics and practitioners have supported the theory that equities, in the long run, tend to earn attractive returns. But portfolio theory cautions us that returns should be viewed in conjunction with risk, and equities have also been the dominant source of risk in investor portfolios.

Recent history shows that the timing of an investor’s entry and exit can cause realized returns to vary significantly, even when measured over a five-year window. Significantly longer periods would tend to mitigate this risk to some extent. Another characteristic of equity returns is their “negative skew:” the probability, albeit small, that negative returns (corrections) can be more severe than a normal (or bell-shaped) distribution would predict. Last but not least, large equity market corrections often tend to be accompanied by an increase in volatility.

Therefore, using or looking for more convex management can be a strategic investment opportunity for an insurer as he or she:
-Could reduce risk and capital consumption at constant investment nominal
-Could increase the expected return by maintaining the same level of capital or implied risk.

As a strategic investment, our SOLVE asset management could reduce different types of risk:
-Financial risk with a limitation of volatility and decrease of DrawDowns and an ability to capture the upside potential of equity markets and the alpha of active management
-Accountant risk with reducing probability of occurrence of provision
-Prudential risk with the Reduction of the level and volatility of SCR actions for Solvency 2-based staff


Ahead of the 8th Edition Insurance ALM and Asset Allocation under Solvency II , we spoke with Michaël Nizard
Senior Fund Manager - Asset Allocation at Edmond de Rothschild Asset Management (France)
 about how their ‘SOLVE’ fund continues to position equity at the forefront of Institutional Asset Allocation.

To view the Conference Agenda, click HERE!

About the Conference:

This marcus evans conference will look at today’s best practice when it comes to devising asset management strategies to meet yield targets and obtain capital efficiency under Solvency II rules. Currently, the portfolios of large UK and Central European Insurance firms are positioned to a satisfactory level under the Solvency II rules. The kinds of developments these firms have made have been far harder to accomplish for small-medium firms who may lack both the financial and human resources to keep up. Understanding the optimal portfolio composition for one’s firm under Solvency II is a key step, especially when the low rate environment continues to make it difficult for all firms to meet their yield target. In the search for good yield alternative assets have become increasingly desirable for their ability to give higher returns. However, their dynamics are highly complex and come at the price of higher risk. With this in mind, traditional assets continue to contribute to a significant amount of most portfolios. The increasing complexity demands greater collaboration with external investment experts, which in turn leaves room for better working efficiency.

To view the Conference Agenda, click HERE!!

Copyright © 2018 Marcus Evans. All rights reserved.

About the speaker:

Michaël Nizard joined the asset allocation team in May 2008 as a “Senior Fund Manager - Asset Allocation”. Michaël Nizard graduated from Ecole Supérieure des Sciences Commerciales Appliquées. Micahaël began his career as a trader at the Caisse des Dépôts et Consignations where he worked on fixed income and derivative products. He then moved to Ixis Asset Management for five years to manage global total return portfolios before joining Société Générale Corporate & Investment Banking, where he was joint-head of an Own Account Global Macro Trading desk.

'SOLVE' Fund: Positioning Equity at the Forefront of Institutional Asset Allocation

An interview with Michaël Nizard Senior Fund Manager - Asset Allocation at Edmond de Rothschild Asset Management

Michaël Nizard
Senior Fund Manager - Asset Allocation
Edmond de Rothschild Asset Management (France)

Speakers Include: 
  • AIG Asset Management
  • Allianz
  • ALM Brand
  • Aviva
  • AXA UK
  • DWS
  • Foresters Friendly Society
  • Generali
  • LV
  • Nordea
  • Phoenix Group
  • Prudential Assurance
  • Wesleyan
Previous Attendees Include:
  • BNP Paribas
  • BNY Mellon
  • Commerzbank AG
  • Credit Suisse
  • Danske Bank
  • DZ Bank
  • Eu Commission
  • Euroclear Bank
  • Goldman Sachs
  • HSBC
  • Lloyds Banking Group
  • Mitsubishi UFJ Securities
  • International
  • Nomura
  • Nordea
  • Raiffeisen
  • Santander Global Banking & Markets

For more information, please contact: Constandinos Vinall

Constandinosv@marcusevanscy.com

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