Canadian Universities Reciprocal Insurance Exchange (CURIE) Investment Policy and Guidelines Revised February 2015 1. Introduction The Canadian Universities Reciprocal Insurance Exchange (CURIE) was formed in 1987 as a property and casualty insurer to provide a mechanism for subscribing universities to share common property and liability related insurance risks. The company is licensed to write property and casualty insurance in all provinces of Canada except Quebec. CURIE s principal business activities are collecting premiums from participating universities, holding and investing the excess of premiums over claims, which includes unpaid claims and reserves, and paying claims. CURIE is exempt from income taxes. CURIE operates in five-year underwriting cycles. At the end of each underwriting cycle, new subscribers are invited to join CURIE and existing subscribers have the option to leave. The following shows CURIE s membership for each underwriting period: CURIE I: 1988 1992, 42 subscribers CURIE II: 1993 1997, 45 subscribers CURIE III: 1998 2002, 50 subscribers CURIE IV: 2003 2007, 56 subscribers CURIE V: 2008 2012, 58 subscribers CURIE VI: 2013 2017, 61 subscribers 2. Investment Objectives The primary investment objectives for the CURIE funds are: 1. protection of principal; 2. production of a reasonable rate of return that is consistent with a low level of volatility and risk; and 3. matching of fixed income maturities to anticipated cash requirements and constructing the overall portfolio to align with the duration of liabilities. 3. Investment Strategy The investments are composed of assets representing unearned premiums, claim liabilities and reserves, and the accumulated excess of income over expenses (surplus). For the purpose of investment allocation, the assets are divided into two funds: a liquidity portion (the Liquidity Fund ) and a liabilities matched portion (the Medium to Long Term Fund ). The allocations are based proportionally on the commitments prescribed by the overall liability structure. The maturity segments for invested assets are described below. Page 1
1. Liquidity Fund: The liquidity fund shall be composed of assets that are required within the current year to meet operating expenses and claims paid during the year. The amount of short term assets required to match short term liabilities varies throughout the operating period as premiums are collected at the outset of each year and used steadily throughout the year. These assets will be held in short term investments. 2. Medium-to-Long-Term Fund: This fund shall be composed of a structured fixed income portion and a balanced fund portion. The structured portion will be held in a portfolio of fixed income securities with average terms to maturity that approximate the average projected payout of net unpaid claims and adjustment expenses. The maturities will correspond to the forecasted claims settlements ranging over the two to eight year horizon. The balanced fund portion of the assets will be invested in a mix of bonds and equities. This portion represents the payouts expected to take place over the longer horizon (nine years and greater) together with the surplus. 4. Liability Structure CURIE annually sets up reserves to cover the expected payout of current or past claims. Its investment strategy takes into account the expected timing of payouts as demonstrated by the following: Liabilities Expected Payout Horizon Target Asset Class - Less than one year 0-1 year Short-term Investments (Liquidity fund) (source: annual premiums) - Greater than one year Medium term payout 2-8 years Structured fixed income Long term payout 9+ years & Surplus Balanced fund (i.e unstructured bonds & equities 5. Asset Mix Distinct asset mixes are established for each of the two portions of the medium to long-term fund, the structured fixed income portion and the balanced portion. The Fund s actuary will identify annually the amounts for distribution to each of the portions. The actuary will also identify the duration components and allocations within the structured fixed income portion. a. Structured Fixed Income Portion The Structured Fixed Income Portion will be invested in fixed income instruments for those expected future cash payouts that have a time horizon of two to eight years. Each year the Exchange s actuary will project the Exchange s expected future cash payouts, categorizing the cash flows in duration ranges which will serve as the duration allocation guidelines for the upcoming year s structured Canadian fixed income investments. Duration allocations should not deviate from the actuary s guidelines unless approved by the Board. Page 2
Asset Class Target Weight Duration Fixed income 100% To be matched with actuary s recommendation based on the liability profile and approved annually by the CURIE Board b. Balanced Portion This portion relates to longer-term elements, subscriber surplus and liabilities where the future cash payouts are expected to be greater than eight years. This portion will be invested in equities and unstructured bonds on a balanced account basis. The balanced portion will be invested with the following targets and guidelines: Asset Class Target Weight Weighting Ranges Fixed Income: Cash 0% 0% - 10% Canadian Bonds FTSE TMX Universe 37.5% 27.5% - 47.5% Mortgage Loans 12.5% 7.5% - 17.5% Total Fixed Income 50% Equities: Canadian Equities 25% 20% - 30% Global Equities* 25% 20% - 30% Total Equities 50% 100% *(a combination of 12.5% in International equities and 12.5% in US equities is considered an acceptable proxy for a 25% weighting in Global equities) c) Rebalancing Policy The rebalancing policy is based on the philosophy that over time a systematic approach to rebalancing will deliver superior risk adjusted returns than an approach which allows the asset mix to drift. In addition, regular rebalancings enable a portfolio to maintain the original risk profile intended in the investment policy. Accordingly, the following rebalancing policy applies to each portion of the medium to long-term fund. 1) Structured Portion The duration of the structured fixed income will be adjusted at least annually to the liability cash flow based durations recommended by the Plan Actuary. In-year adjustments by the Investment Manager are permissible as long as they respect the overall duration profile recommended by the Plan Actuary. Sector constraints outlined in Section 7 of the policy are applicable. 2) Balanced Portion The balanced portion of the fund will be rebalanced, meaning the actual asset allocation shall be adjusted to the target weighting, when the actual asset allocations exceed the weighting ranges outlined in the asset mix ranges in 5(b). At least annually the actual asset allocation shall be adjusted to the target weightings unless the Investment Manager advises against this. The Investment Manager will be permitted to rebalance to weightings that are different than the target weightings, as long as they fall within the permissible weighting ranges. Page 3
6. Permitted Instruments Permitted instruments are: 1. Short Term Investments: Cash on hand and demand deposits Canada treasury bills & short term paper issued by provinces and government agencies Bankers acceptances and commercial paper 2. Fixed Income: Guaranteed investment certificates Term deposits Bonds and debentures 3. Publicly-traded Equities All assets shall be held in deposits or marketable securities in accordance with the Insurance Act of Ontario. The use of pooled funds is permitted subject to prior approval of the specific pooled fund by the Board. Fixed income instruments shall be denominated in Canadian dollars. Exceptions may be allowed by petition to the Board and written permission from CURIE to the Investment Manager. 7. Sector and Duration Constraints For the fixed income classes, the following exposure constraints shall apply: Short term Investments Minimum Maximum Government (Canada, Agencies) 40% 100% Banks and commercial paper - 60% Bonds Government (Canada, Agencies, Provinces, Municipalities) 30% 100% Corporate - 50% Single Corporate Issuer - 10% Canadian Bonds The duration constraint for the bonds component of the balanced fund portion shall be the Universe Bonds index duration +/- 2 years. 8. Credit Constraints On a security level, the following minimum quality standards shall apply: Type of holding Short term securities Bond issues Minimum Credit Rating R-1 (Low) or equivalent A- or equivalent Credit ratings are those as assessed and regularly reviewed and/or revised by at least two recognized debt rating agencies, including DBRS, Standard & Poor s and Moody s. Credit rating minima apply as at purchase date of security. Page 4
If the credit rating for a fixed income instrument held in the portfolio is downgraded by a debt rating agency and resulted in part of the portfolio falling below the limits above, the portfolio manager is in the first ten days to communicate a plan that will result in the security s liquidation within a three-month period. If a downgrade results in a split rating (variation among rating agencies in rating an issue), the security may be held under the condition of monitoring by the portfolio manager and ongoing communication with CURIE. 9. Performance Evaluation The following comparative benchmarks shall be used to evaluate the performance of the Investment Manager: Asset Class Short Term Investments Structured Bonds Active Bonds Canadian Equity Global Equity Mortgage Loans Total Return Index 30-day Canada Treasury Bills Index Custom benchmark FTSE TMX Canada Universe Bond Index (formerly DEX Universe) S&P/TSX Composite Index MSCI World Index* 60% FTSE TMX Canada Short Term Bond Index, 40% FTSE TMX Canada Mid Term Cond Index plus 0.5% per annum (*a combination of 12.5% of the MSCI EAFE Index and 12.5% of the S&P 500 Index is considered an acceptable proxy to the MSCI World Index if that is the manager s approach). For the structured bonds, the appropriate benchmark for comparing performance shall be composed of Government of Canada bonds with maturities and weights that best match the structure. The Investment Manager is to propose and manage the custom benchmark with the approval of the CURIE Board. 10. Responsibilities Investment Reporting The administration of CURIE shall provide the CURIE Board with periodic reports to include the allocation of assets, rate of return by segment, rate of return for the appropriate comparative benchmark for each segment, investment holdings, and updates on the providers of investment services and investment management. The administration will, on an annual basis, request the Reciprocal s Actuary to provide an analysis and recommendations concerning the overall allocation of funds between the liquidity and medium to longterm components of CURIE s investments, as well as the distribution of duration components of the structured fixed income portion of the medium to long-term fund. The administration will provide the Board with recommendations on these matters. The administration will implement recommendations upon approval by the Board. Compliance Review The Investment Manager shall provide the Board with a compliance monitoring report on a quarterly basis. Review and Approval The CURIE Board shall review this policy on an annual basis and, as part of the review, take into account possible implications related to the minimum capital test calculation. Regulatory This policy and its related procedures upon request shall be made available to the Financial Services Commission of Ontario. Page 5