We propose risk / return efficient allocations under economic ALM and regulatory considerations. Typically, following investment objectives can be pursued:
Increased return potential at unchanged risk and SCR level
- Reduction of risk and SCR at increased return potential
- SCR reduction at unchanged risk and return level
- We support various regulations for optimisation purposes including Solvency II, Swiss Solvency Test and CRR.
Key to our approach is to consider economic risks of assets and liabilities first and including regulatory constraints in a second stage. By this we ensure sound allocations from an economic ALM perspective. Our models include market risk including interest rate sensitivities of liabilities, insurance risk and a SCR minimisation framework as shown below:
Index replication at minimal SCR can be achieved by minimising SCR for given investment universe and constraints on risk and allocations (e.g. sectors, currencies, asset classes). Within the fixed income universe it is particularly obvious, that securities risk and return characteristics are not fully reflected by capital charges (e.g. Solvency II SCR). If from two bonds with identical risk and return characteristics one bond has a lower capital charge, this bond is better suitable to fulfill the objective of risk / return / SCR optimisation. Together with constraints on e.g. durations, duration buckets, ratings, position and issuer exposure SCR optimised strategies can be defined that suit investors’ complex needs.
Convertible Bond Portfolio Optimisation
Convertible bonds unify fixed income and equity like characteristics. From a Solvency II perspective, convertible bonds’ convexity (change of equity sensitivity at changing underlying equity price) strongly reduces SCR. More importantly, for Solvency II SCR calculation the convexity is measured within a +/- 39% or +/- 49% range and not in the vicinity (as it is typically done in the financial industry). Deep in the money convertible bonds are particularly interesting from a Solvency II capital efficiency perspective. We have a long lasting experience in convertible bond portfolio management and related optimised solutions.