Optimizing equity investment under Solvency 2. Vienna, September 13 th 2016

Transcription

1 Optimizing equity investment under Solvency 2 Vienna, September 13 th 2016

2 Agenda 1. Equities are attractive but expensive under Solvency 2 2. Optimized equity solutions, a strong tool for allocation 3. Amundi solution in a nutshell 4. The underlying equity process 5. The bank guarantee 6. Appendices 2

3 Equities are attractive in a very low yield environment Yields by Asset Class* * Dividend yield Next 12 months for the MSCI EMU and USA Source: Datastream, Amundi Research data as of March

4 A challenging market and regulatory environment for insurers Equity becoming very expensive in terms of SCR 39% 1 for type 1 equity 2 Even with the grandfathering clause, equity will become quickly expensive - Stress applied to grandfathered equity will increase on a regular basis form 2016 to Grandfathering interest disappears in 2/3 years for a very low turnover portfolio Continuous decreasing interest rate environment Institutional investors are pushed to reinvest in risky assets Especially to offer attractive yields to their own clients Particular consideration given to economic risk In an asset and liabilities context, insurance companies pay an increased attention on the volatility of their investments They also have to monitor tail risk In order to benefit from equity risk premium and containing economic and regulatory risk, Insurance companies are searching for optimized equity solutions 1 Without taking into account a dampener effect between -10% and +10%) 2 OECD countries 4

5 Agenda 1. Equities are attractive but expensive under Solvency 2 2. Optimized equity solutions, a strong tool for allocation 3. Amundi solution in a nutshell 4. The underlying equity process 5. The bank guarantee 6. Appendices 5

6 Managing asset allocation analysis under SII Business case (1/4) Asset side Liability side Market SCR Liability SCR Interest Rates Up -16.1% SCR Interest Rates Down 8.0% Liability Modified duration 18 6

7 Managing asset allocation analysis under SII Business case (2/4) Taking into account the regulatory and market analysis Market SCR Asset / Liability SCR Market Down 17.3% SCR Interest Rates Down 6.9% SCR Credit 7.3% SCR Equity 6.0% SCR Foreign Exchange 0.5% SCR Real Estate 0.0% 0,5% 6,0% 6,9% 7,3% 3,4% 17,3% SCR SCR Interest rates Rates SCR Credit SCR Equity SCR SCR Currencies Foreign Exchange Currency SCR Diversification* 3 main allocation changes were identified: 1. Reduce Asset/Liability duration mismatch to reduce Interest Rates SCR 2. Reallocate Credit to Equities and Real Estate to balance sources of return and risks 3. Optimize Equity allocation Source: Amundi * Diversification is the SCR reduction coming the de-correlation of the different market SCR components 7

8 Managing asset allocation analysis under SII Business case (3/4) Asset Class Simulation Current Asset Allocation (%) Cash 0% 0% Total Govt bonds 35% 17% Including Govies (10Y+) 26% 0% Total Credit 48% 72% Total Equities 11% 8% 1- Reduction of the Asset/Liability mismatch 2- Reallocation of credit exposure Including equity solution optimized under SII 5% 0% Total Alternative Invest. 6% 3% Including Real Estate 3% 0% 3- Equity optimization Simulation Current asset allocation Current Yield 1.75% 1.42% 12 month expected return 4.05% 3.95% Normalized LT return 2.47% 1.85% Volatility 4.46% 3.17% Modified duration Max DrawDown -6.52% -5.65% 12 month Sharpe Ratio Normalized LT Sharpe ratio Market SCR 13.79% 17.31% A more efficient asset allocation under S2: An increase of the expected return A higher volatility on the asset side due to the increase of asset duration (ALM management) Significant reduction of Market SCR 8

9 Managing asset allocation analysis under SII Business case (4/4) Impact of the allocation changes on the Market SCR 0,5% 0,6% Foreign Exchange 6,0% 6,9% 5,1% 6,1% SCR SCR Interest rates Rates SCR Credit SCR Equity 7,3% 4,6% SCR Real Estate 3,4% 2,6% 17,3% 13,8% SCR Diversification* Before change After change Source: Amundi * Diversification is the SCR reduction coming the de-correlation of the different market SCR components 9

10 Agenda 1. Equities are attractive but expensive under Solvency 2 2. Optimized equity solutions, a strong tool for allocation 3. Amundi solution in a nutshell 4. The underlying equity process 5. The bank guarantee 6. Appendices 10

11 Strategies/techniques mitigating Equity SCR Overview on available techniques and strategies under the standard model : Strategies / techniques mitigating Equity SCR Strategic participations Equity SCR = 22% Option strategies Explicit guarantee (CPPI) Equity SCR = max 20% Upside Call option strategies based on purchasing call options Equity SCR ~ 10% (1) Put Option hedging strategies based on buying long dated put options Equity SCR ~ 22% (1) 11

12 Combining cautious equity process and optimized protection under Solvency 2 An innovative strategy combining cautious equity investment process - seeking risk/return optimization - and bank guarantee Guarantee Expertise Dynamic rebalancing Strategy Insurance Eurozone Equities Expertise Amundi AM Multi-expertise Solution: Amundi Eurozone equity solution with a bank guarantee Benefit from dividends and equity return Dynamic risk management strategy mitigating markets drawdown effects and SCR equity Amundi formal guarantee (A+ rated) 12

13 Main caracteristics of Amundi solution A solution dedicated to European insurance companies combining: An exposure mainly on Eurozone equities 1 Guarantee A formal bank guarantee of 80% of capital to reduce SCR Equity - 80% of capital protection on a yearly rolling basis - Bank guarantee granted by Amundi (A+ rated by Fitch Ratings) - Application of the CPPI methodology by Amundi AM Performance Engine (Amundi AM Insurance Eurozone equity process) Dynamic allocation between the assets based on a risk budget approach Non Risk Assets (money market & short term rate instruments) 13

14 A leading equity investment solution for insurers (1) Better Sharpe ratio than the EuroStoxx 50 (thanks to Amundi AM Insurance Equity process) with half of the Capital Charge In conclusion, by combining financial market and regulatory efficiency, Amundi AM s equity solution is an effective way to optimize insurer s equity allocation and capital charge: Period: 31/12/ /07/2016 Amundi Eurozone Equity process Euro Stoxx 50 Index (NR) Amundi Eurozone Equity process + guarantee* Euro Stoxx 50 Index (NR) + guarantee* Total return 50.9% 24.4% 21.0% -1.9% Annualized return 6.4% 3.4% 2.9% -0.3% Volatility (m) 14.2% 16.6% 12.1% 12.9% Max Drawdown (d) -28.7% -33;3% -21.9% -33;2% Average SCR (q) 37.8% 37.8% 20.0% 20.0% Increase the expected return of the asset allocation with the same level of Market SCR Reduce the Market SCR with the same expected return (*) guarantee = 80% Max daily NAV over 1 year (d) daily, (m) monthly, (q) quarterly Source: Amundi AM, data as of July 2016, 14

15 Frequency A leading equity investment solution for insurers (2) 83 simulations of 5 years periods, beginning every Thursday, from 31/12/2009 to 28/07/2011 Average annualised performance over 5 years Average annualised volatility for each period Amundi Eurozone Equity Process Euro Stoxx 50 Amundi Eurozone Equity Process + guarantee* Euro Stoxx 50 + garantee 8.4% 6.2% 6.5% 4.8% 18.3% 21.8% 13.2% 15.7% Of the 83 tracks of 5 years periods, beginning every Thursday since the launch dof the Eurozone Equity process, the combination with the guarantee would have enabled to cap the SCR at 20%, while offering ab average outperformance of 27 bp vs. The Euro Stoxx 50 and for a weakest average volatility ,0% -1,5% -1,0% -0,5% 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% Outperformance Of the 83 tracks, the Eurozone Equity process with guarantee outperformed the Euro Stoxx 50 in 69 % of cases (57/83) (*) guarantee = 80 % max of the daily NAV over a rolling year Source: Amundi AM, data as of en of July

16 Agenda 1. Equities are attractive but expensive under Solvency 2 2. Optimized equity solutions, a strong tool for allocation 3. Amundi solution in a nutshell 4. The underlying equity process 5. The bank guarantee 6. Appendices 16

17 Proven track record An investment process combining: A better return than the underlying equity market: 50.9% vs 24.4% since inception A portfolio profile less volatile, more defensive (beta =0.83) and more resilient in large market drops (max drawdown) Since inception (31/12/ /07/2016) GIPS Composite Euro Zone Equity Market (EuroStoxx 50 NR) Cumulated return 50.9% 24.4% Annualized return 6.4% 3.4% Annualized volatility* 14,1% 16.5% Risk adjusted return Equity market beta 0.83 Max Drawdown (on a monthly basis) % % Time to recovery (in months) Source: Amundi AM, GIPS as of 31/07/2016. Given for illustrative purposes only, may change without prior notice. *Annualized volatility on a monthly basis. 17

18 Consistent track record A track record reflecting both an active management and the insurance investment style (the volatility of GIPS composite is systematically below that of the market) 31/07/2016 GIPS Composite Euro Zone Equity Market Annualized return Annualized volatility Annualized return Annualized volatility 1 year years years years years years Since Inception The average holding period per stock is close to 2.5 years Source: Amundi AM, GIPS as of July 31 st

19 Investment philosophy and process: Quality & Visibility Investment themes and industry selection: looking for long term trends 1 Amundi AM macro-economic and asset class inputs Fundamental analysis, searching for long term trends industry by industry Company selection: capturing the most attractive risk/return trade-off 2 Selection of companies with attractive total return (dividend and stock increase potential) and moderate downside risk Supported by fundamental analysis to assess business model risk: good management, sound balance sheet and solid growth prospects (input from our 17 Buy-Side Analysts covering 350 companies 3 ) Portfolio construction: a conviction based approach A benchmark-free construction excluding sectors/stocks encapsulating a strong intrinsic risk (even if there is an appealing short term upside potential) Our portfolio is well diversified, based on top-down convictions and maximizes the risk adjusted return of the equity market (Sharpe ratio) 2 1. Past market trends are not reliable indicators of future ones. 2.The Fund does not offer any performance or full capital guarantee. 3. Source: Amundi AM, data as of December 2015, given for indicative purposes only, may change without prior notice. 19

20 A top down approach Top down approach = 70% Amundi AM s macro scenario Strategic views: Identification of long term investment themes and sector trends Tactical views: Regular review of each theme and sector allocation according to the changes operated within our macro scenario ECONOMISTS AND STRATEGISTS TEAM (11 people) EQUITY ANALYSTS TEAM (17 analysts) Stocks are selected based on fundamental analysis (business model, quality of the management, financial solidity) Supported by a valuation provided by our Buy- Side analysts team Regular review of the investment case Bottom up approach = 30% Our top down approach allows us to identify long term investment themes and forge sectorial views We select 50/60 stocks through a fundamental approach that fits our themes (bottom up) Past market trends are not reliable indicators of future ones. For further details regarding the investment policy, please refer to the Prospectus and the KIID of the Fund. Source: Amundi AM, data as of December 2015, given for indicative purposes only, may change without prior notice. 20

21 Amundi AM insurance equity process: performance analysis* 31/12/ /07/2016 Insurance Equity Portfolio Euro Stoxx 50 Attribution Analysis Sector Average weight Total Return Contrib. to Return Average weight Total Return Contrib. to Return Sector allocation Effect Selection Effect Total Total Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities The performance attribution analysis demonstrates The value added of our investment process: +27.6% since inception The relevance of our top down approach: +14.9% came from sector allocation *Based on front office data (positions and price) excluding cash position. That explains the difference between the performance of the GIPS composite and the performance attribution. Past market trends are not reliable indicators of future ones. Information given for indicative purposes only, may change without prior notice. 21

22 Agenda 1. Equities are attractive but expensive under Solvency 2 2. Optimized equity solutions, a strong tool for allocation 3. Amundi solution in a nutshell 4. The underlying equity process 5. The bank guarantee 6. Appendices 22

23 Bank Guarantee: what pay off? Guarantee managed by Amundi AM through a dynamic CPPI process No purely algorithmic CPPI: A dynamic process based on a Variable Loss Parameter approach An approach which is less costly than the traditional CIB Approach* 1 year rolling guarantee: 80% of the Max NAV over the previous year Each NAV established on a day D (NAVD) is guaranteed to be at least equal to 80% of the Max NAV reached over the preceding year The investor is thus guaranteed that for the 1-year period following date D, any future NAV will be at least equal to 80% of NAVD At the end of this 1-year period following date D, the level of the guarantee can decrease: This would occur if all the NAV between NAVD+1 and NAVD+366 are < NAVD This potential decrease of the guarantee level, also called «reset» is linked to this rolling feature of the guarantee Even in case of sudden, material and lasting Equity market downturns, thanks to the decrease of the guarantee level, the product will be reexposed to Equity at the latest 1 year after. * See Appendix for more details. The Fund does not offer a performance or full capital guarantee. For further details, please refer to the Prospectus and the KIID of the Fund. 23

24 Key points - Bank guarantee In economic terms, a bank guarantee is an efficient way to Define explicitly the risk budget of an equity portfolio through a maximum capital loss Set and reset the guarantee level in line with our objectives as well as the insurance company s requirements Manage the downside risk coming from the equity market In regulatory terms, a Max yearly NAV guarantee allows to Reduce the equity stress under Solvency II to the guarantee level Set the maximum capital charge* Bank guarantee does not imply regulatory constraint impacts on the underlying equity process The guarantor uses market (vs regulatory) inputs to calibrate its risk model. Then, the guarantor's risk model evolves with market changes and takes into account diversification (e.g. : correlation between OCDE countries) and economic specificities (e.g. : Euro Stoxx 50 vs defensive process) that the Standard model doesn t recognize. Bank guarantee is a flexible and efficient tool to manage market risk and regulatory capital charge *To be fully recognized under Solvency II a guarantee must apply for at least a 12 months period, otherwise the effect of the guarantee is reduced pro rata temporis. The Fund does not offer a performance or full capital guarantee. For further details, please refer to the Prospectus and the KIID of the Fund. 24

25 Bank guarantee: regulatory requirements and impact on SCR Regulatory requirements under Solvency II The guarantor must have a credit quality equivalent to Investment Grade The guarantee must be legally effective Amundi group would be the guarantor Amundi Group is authorized to issue financial guarantees Amundi Group is rated A+ by Fitch Ratings The guarantee generates some SCR counterparty risk Additional default SCR is small, whatever the dampener s level due to guarantor's rating Level of guarantee No guarantee 80% 85% 90% SCR Equity (dampener = 0) 39% 20% 15% 10% SCR default 0.00% 1.15% 1.45% 1.75% Equity SCR + default SCR taking into account a correlation of 25% 39.0% 20.3% 15.4% 10.6% Source: Amundi AM, data as of December Given for illustrative purposes only, may change without prior notice. 25

26 Bank guarantee: how does it work on a daily basis? Portfolio governance The Hybrid Structured Fund Management Team is the lead portfolio manager. As so, it is responsible for the over portfolio management and the bank guarantee monitoring and management. It is also in charge of managing money market instruments. The Eurozone Equity Investments Team dedicated to Insurance process is responsible for the equity investment management. Lead Portfolio Manager: Hybrid Structured Fund Management Money market pocket Hybrid Structured Fund Management Guarantee management On a daily basis, the Hybrid Structured Fund Management computes the maximum equity exposure of the portfolio to comply with the level of the guarantee. If required, it sends instructions to the Investment Team dedicated to Insurance process to adjust the equity exposure. The Investment Team dedicated to Insurance implements the Hybrid Structured Fund Management s instructions by increasing or decreasing equity investments without changing the structure of equity portfolio. Information given for indicative purposes only, may be changed without prior notice. For further details, please refer to the Prospectus and the KIID of the Fund. Eurozone equities pocket Eurozone Equity Investments Team dedicated to Insurance process Defined by Hybrid Structured Fund Management 26

27 A stringent and disciplined guarantee management process Objectives Compute, on a daily basis, the maximum equity exposure (capped at 100%) compliant with the guarantee level Implement adequate equity exposure Amundi Guarantee management Amundi AM Risk department Valuation Agent Control of the portfolio valuation (equity and money market Instruments) Maintain internal models regarding internal risk parameter and correlation calculations Daily Daily Monthly Daily Reassess the risk budget (Gap between NAV and guaranteed floor) Compute the internal risk parameter of the entire equity portfolio Reassess internal risk parameters and correlations based on internal models Daily Rebalancing (if needed) between equity and money market instruments to ensure that portfolio risk parameter < risk budget Control that the equity exposure is compliant with the guarantee level Information given for indicative purposes only, may be changed without prior notice. For further details, please refer to the Prospectus and the KIID of the Fund. 27

28 Agenda 1. Equities are attractive but expensive under Solvency 2 2. Optimized equity solutions, a strong tool for allocation 3. Amundi solution in a nutshell 4. The underlying equity process 5. The bank guarantee 6. Appendices 28

29 Process back test Source: Amundi AM, data from 31/12/2009 to 31/07/2016. Past market trends are no reliable indicator of future ones. 29

30 Process back test without guarantee reset Source: Amundi AM, data from 31/12/2009 to 31/07/2016. Past market trends are no reliable indicator of future ones. 30

31 Comparison with option based strategies Period: 31/12/ /03/2016 Amundi Eurozone Equity process Euro Stoxx 50 Index (NR) Amundi Eurozone Equity process + guarantee Euro Stoxx 50 Index (NR) + guarantee Euro Stoxx 50 Index (NR) + put option Total return 47,1% 22,2% 30,2% -3,1% 4,7% Annualized return 6,4% 3,3% 4,3% -0,5% 0,7% Volatility 14,4% 16,8% 13,3% 14,4% 12,0% Max Drawdown (daily) -28,7% -33,3% -23,1% -35,7% -22,9% Average SCR (quaterly) 38,0% 38,0% 20,0% 20,0% 18,4% (*) guarantee = 80% Max NAV of 4 last quarter (d) daily, (m) monthly, (q) quarterly Source: Amundi AM, data as of March 2016, given for illustrative purposes only, may change without prior notice. The Fund does not offer a performance or full capital guarantee. 31

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