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CIO Perspect ives on Investment Process

CIO Perspect ives on Investment Process. Michael McCord NLC Mutual April 1, 2009. Key Drivers. As a still relatively young and small enterprise, one mission critical action that we took was finding an appropriate consulting fit for the role of de-facto Chief Investment Officer. Key Drivers.

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CIO Perspect ives on Investment Process

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  1. CIO Perspectives on Investment Process Michael McCord NLC Mutual April 1, 2009

  2. Key Drivers • As a still relatively young and small enterprise, one mission critical action that we took was finding an appropriate consulting fit for the role of de-facto Chief Investment Officer

  3. Key Drivers • Rather than taking a look at the alpha consulting houses that provide investment consulting services, we sought an industry-specific consultant that maintained a core concentration in insurance assets

  4. Key Drivers • We were also biased in the belief that the larger consulting practices were more weighted towards pension rather insurance assets

  5. Reporting Quantitative/Qualitative Policy Development Risk/Reward Manager Selection Ongoing Policy Review Performance objectivity Research No conflicts No pay to play Core Competencies Sought

  6. The New Investment Paradigm SAA Selected as Investment Consultant

  7. First Step • Once settled in, SAA took a comprehensive look at the company’s investment policy and processes in concert with their understanding of the company’s risk appetite.

  8. SWOT Analysis • Investment policy review • Asset allocation • Limit BCAR & RBC vulnerability • Reduce equity exposure • Identify peer group • Custom benchmark • Monitor for total return & yield

  9. Policy Recommendation • Best practices review of investment policy • Relate asset classes, duration & other risk to asset allocation

  10. Strategic Asset Allocation • Limit BCAR & RBC vulnerability to assets • Maintain strategic reliance on DFA

  11. Peer Group Analysis • Must be done with an investment income focus

  12. Investment Benchmarking • Should be tied to company goals & objectives • Risk adjusted yield benchmark in order to better align with investment manager

  13. Performance Measurement • Performance should be measured against both total return and yield oriented benchmarks

  14. Manager Selection Process • The alliance with SAA provided NLC Mutual with access to their database of seasoned insurance fixed-income managers with performance metrics over time • Critical in the selection of a new manager

  15. Process Summary • SAA solicits 16 firms • RFP response strong as 15 submit proposals • SAA constructs decision matrix to illustrate findings & recommend 3 finalists • SAA notifies finalists & arranges meetings

  16. Key Elements Tracked • Weighted performance • Tools & resources • Personal attention • Insurance expertise • Cultural/strategic fit • Investment process • Compliance • Communication

  17. Manager Sensitivity • Cost of reinsurance • Event risk • Competitive pressures • Pricing & reserves • Surplus constraints • Accounting changes • Regulatory compliance • NRSRO issues • Access to capital

  18. AAM Selected • Following a very rigorous process, AAM was selected by the company, believing the firm to be the best available fit at that time as now • All made possible by the prior selection of the investment consultant

  19. Importance to NLC Mutual • Investment objectives • Insurance experience • Trusted & strategic partner • Investment expertise • No surprises

  20. Portfolio Pre-shift

  21. Portfolio Post-shift

  22. Income Differential

  23. Current Issues • Impairment Considerations • OTTI – If George Carlin were still here he would add this horrific term to his list of words you can’t say on TV… • Auditor inconsistency • New Fed guidance • GAAP vs. STAT filers • Manager Conviction • Quantitative vs. Qualitative • Manager Inertia (the “sell” conundrum) • Liquidity Revisited • Asset/Liability Cash Flow Testing • Impact of mismatch • Fixed Income / Equity Rebalancing • Time Horizon Considerations

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