Managing pension fund investments in a post Solvency II world. Deputy CEO, DNB Livsforsikring ASA - Anders Skjævestad

Transcription

1 Managing pension fund investments in a post Solvency II world Deputy CEO, DNB Livsforsikring ASA - Anders Skjævestad

2 DNB Livsforsikring ASA Part of the DNB Group Total assets NOK 255,2 bn ( 34 bn)* Fund structure: DB NOK 216 bn ( 28 bn)* DC NOK 23 bn ( 3 bn)* Life insurance 1 million retail customers agreements with companies, municipalities and public enterprises Pension savings Group pensions Individual pensions 2 *as of Q3 2011

3 Some background information Norwegian pension liability split* 13,50 % 42,90 % 43,60 % Defined contribution Defined benefit Paid up policies Right to transfer at any time Significant part of buffers lost in 2008 and *ex. public sector. Source: fno.no

4 The Norwegian profit model Owner result 3 Probability distribution 1 2 Expected return above nominal guarantee Customer buffers Customer buffer lost, owner covers losses Nominal guarantee Most likely return (median) Return on customer portfolio 4

5 Is it possible to survive Solvency II under this business model? The answer is yes! Rating Duration Stress credit risk SCR credit risk Yield Weight Average return Government bonds 15 0 % 0 % 2,2 % 50 % Covered bonds 15 0,7 % 10,5 % 4,6 % 50 % Current minimum capital requirement 4 % Average SCR credit risk 3,4 % 5,3 % 5

6 In addition Competitive return Pension economics Acceptable return on owners equity Lapse risk 6

7 The strategic starting point Operational asset management Active management of our mandates within asset classes Tactical asset management Allocating between asset classes, regions and sectors based on market view and risk management Strategic asset management Long-term strategy and arrangement of portfolio 7

8 Tactical deviation from strategic asset allocation How to determine guidelines for tactical deviations from strategic asset allocation? Strategic asset allocation Economic scenarios Interest level Market volatility Recorded customer buffer Tactical guidelines Increase/reduce stocks Increase/reduce money market Increase/reduce MTM bonds Increase/reduce HTF bonds Increase/reduce real estate Increase/reduce customer buffer Increase/reduce price of product Increase/reduce profit sharing Balanced goal achievement? Expectations of result Compulsory savings Capital efficiency Return on customer Lapse risk Competitiveness Value At Risk Share of group risk Capitalization 8

9 Risk Buckets Customer promises (competitive prices + attractive products) SCR = 4,5 Risk Buckets SCR = 30 Gov - Dur 15 HTM Interest rate risk Equity risk Equity AAA - Dur 15 HTM Credit risk Real estate risk Alternatives Fixed income Money market Real estate Profit generation (Return on asset management + Expected result/scr) 9

10 The Solvency II asset mix Strongly favors low risk and long duration Increase share of hold to maturity Closes duration gap Reduces capital requirement Stabilizes return on investments CPPI and customer segmentation 10

11 CPPI Constant proportion portfolio insurance To ensure a fixed minimum return Varies cash allocation between low risk assets and performance assets Continuously re-balancing Internal model 11

12 Tapsfunksjon Partial internal model for market risk Market risk: Dominating risk 80 percent according to QIS5 Model at aggregated level Asset class properties Portfolio properties Management actions CPPI 0,5% Future bonus Better modeling of the risk reducing effects of future bonuses 12

13 The Solvency II calculation Financial position today Management actions Economic scenarios Financial position in 12 months 13

14 Management actions Dynamic allocation to equities as a function of available buffer capital Dynamic allocation to interest risk (increase HTM bonds) Dynamic allocation between credit and government bonds 14

15 Allocation Return Dynamic allocation (random scenario) 1,4 1,2 1 0,8 0,6 0,4 0,2 Norway World Emerging Property Months Property HTM bonds at book value MTM government bonds, duration > 1 MTM corporate bonds, duration > 1 Money market, duration Months Global equities Norwegian equities 15

16 Buffer capital Equity exposure Allocation to equities as a function of available buffer capital % 9 % 8 % 4 7 % 6 % 3 5 % 4 % 2 3 % 1 2 % 1 % Months 0 % Buffer capital Equity exposure 16

17 Concluding remarks The Norwegian life and pension regulation is challenging under Solvency II Increased allocation to low risk assets Increased allocation to HTM Save your solvency capital to your most valuable customers CPPI 17

18 Thank you!