Investment Strategies for Fixed Annuities by giv23807

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									 GE Asset Management




Strategic Investment Portfolio
Design for Fixed Annuities
April 19, 2007




 Presented by:
 Art Aaronson, CPA
 Portfolio Manager

 Rick Jackson, CFA, FSA
 Vice President




         This material has been created solely for use in a presentation to institutional clients or consultants and only
         for the purpose of evaluating GE Asset Management (GEAM) and our products. It may not be used for any
         other purpose. The information presented herein is confidential and should not be copied or distributed
         without the prior written consent of GEAM.                                                                                         0




Investment Strategy Design
Using ALM As The Driver To Develop The Plan

                                                         Establish Key Metrics/Objectives
                                                         Interest Rate Risk
                                                         Credit Risk
                                                         Liquidity Risk

                  ALM is an ongoing process which requires continuous monitoring of an entity's
                  exposures and financial results to augment the portfolio management process.


             Financial Objectives                                                                                   Risk Objectives
        • Improve Portfolio Yield                                                                      • Get Paid For Risks In Portfolio
        • Minimize/Maximize                                                                            • Offset/balance natural exposures
          Gains/Losses                                                                                   (ex annuities and whole life)
        • Diversification                                                                              • Economic Value - Optimize on
                                                                                                         ALM/Contingent Surplus/Free
        • Meet
                                                                                                         Surplus. Develop Multiple
          Regulatory/Guideline
                                                                                                         Solutions
          Constraints
                                                                                                                                            1
Elements of Fixed Annuity Profitability
Management

  • Initial Pricing Work

  • Marketing/Sales Strategy

  • Interest Crediting Strategy – New Money, In-Force

  • Expense Management

  • Primary Profit Source is Investment Spread Management

  • Optimal Investment Strategies – New Money, In-Force


                                                                                                  2




An Approach to Optimizing an Existing Portfolio
        Define                                                      Optimization Contributes To
     Performance                                                    Competitive Advantage and
       Metrics                                                             Added Value
      Management                                                        Traditional Benchmarks
     Commitment Of                 New Tools To Apply                      Not Designed To
       Resources                                                          Manage Insurance
                                • Portfolio risk/return profiling
                                                                                Liabilities
   Restructure Existing         • Multi-criteria decision model
   Holdings To Improve                                                     Develop Multiple
   Book Yield/Reduce            • Visualization for multi-               Scenarios On Efficient
   Portfolio Risk Profile         dimensional decisions                 Frontier Curve Between
                                                                           Risk And Return
                                • Scenario-based
                                  optimization


 Portfolio strategies are chosen to meet business objectives and support long-term
 corporate strategies within a risk management context of:
    ‒ Seeking investment opportunities for acceptable returns
    ‒ Appropriately quantifying assumed risk
    ‒ Identifying risk/return tradeoffs


                                                                                                  3
Key Inputs to Optimization Analysis
 Portfolio Data Needed for a Robust Evaluation
 • List of Current Holdings (Broken Out by Security)
 • Stochastic Scenarios for Liabilities and Interest Rates                                                                         Detailed Analytics
 • Liability Information by Line of Business (Aggregate Values
   Only)
 • Projections of Assets Available in the Market Available for
   Purchase, at a Generic Asset-class Level
 • Covariance Matrix of Key-rate Movements

                                                                                                      Optimization Set-up (User Input)
                                                                                                      • Constraints Based on Individual Assets
                                                                                                        - Minimum/maximum Allocation
                                                                                                        - For Sale (if a Current Holding)
       Flexible Driven System To Allow                                                                • Min/Max Constraints for Each Asset
       Managements Constraints To Be                                                                    Type
     Incorporated Into Any New Portfolio
                    Design                                                                            • General Constraints
                                                                                                        -      Credit Quality
                                                                                                        -      Interest Rate Risk
                                                                                                        -      Capital Gains
                                                                                                        -      Effective Convexity and Duration
                                                                                                        -      Partial Durations

                                                                                                      • Optimization Objectives
                                                                                                        - Return Measure (Yield) to Maximize
                                                                                                                                                                          4
                                                                                                        - Return Measure to Minimize




 Case Study #1 Optimization Recommendations
                  00
                16.
                  00
                14.
                  00
                12.
Duration          00
                10.
(years)             00
                   8.
                    00
                   6.
                    00
                   4.
                    00
                   2.
                   -
                            6- ont


                                            1-


                                                       2-


                                                                3-


                                                                               5-


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                                                                                                                      20-


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                                                                                                                                                          Tot
                              m


                                              year


                                                         year


                                                                  year


                                                                                 year


                                                                                               year




                                                                                                                                                             al
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                                                                                                                         year


                                                                                                                                      year
                                  h




                                                                          abit
                                                                             i
                                                                         Li l y               i
                                                                                          Baselne               i zed
                                                                                                             Optm i

                                                                                                  f i
                                                                                                Ef ectve    f i
                                                                                                          Ef ectve                                               n
                                                                                                                                                         Change i The
                                              oj ed oj ed el
                                            Pr ect Pr ect Yi d                                                                                   aton
                                                                                                                                             Dur i
                         Standard                                                       M arket Dur i
                                                                                                    aton Dur i of
                                                                                                             aton                                              aton
                                                                                                                                                           Dur i
                                              Book   m ovem ent
                                                     I pr                                                                                      sm ch
                                                                                                                                             M i at
                             aton
                         Devi i                                                            el
                                                                                         Yi d   ofAssets Li ltes
                                                                                                           abiii                                             sm ch
                                                                                                                                                           M i at
                                              el %
                                            Yi d ( )    (bps)                                                                                 (years)
                                                                                                 year
                                                                                                 (    s)   (
                                                                                                           year s)                                          (years)
           Baseline                    82
                                      4.              32
                                                     5.                                    5.
                                                                                            27           41
                                                                                                        5.                        19
                                                                                                                                15.              9.
                                                                                                                                                 ( 79)
               1                       89
                                      4.              62
                                                     5.                   30
                                                                         0.                 42
                                                                                           5.            29
                                                                                                        5.                        19
                                                                                                                                15.              9.
                                                                                                                                                 ( 90)            0.
                                                                                                                                                                  ( 11)
               2                       64
                                      4.              62
                                                     5.                   30
                                                                         0.                 42
                                                                                           5.            71
                                                                                                        5.                        19
                                                                                                                                15.              9.
                                                                                                                                                 ( 48)            0.31
               3                       38
                                      4.              62
                                                     5.                   30
                                                                         0.                 42
                                                                                           5.            16
                                                                                                        6.                        19
                                                                                                                                15.              9.
                                                                                                                                                 ( 03)            0.75
               4                       10
                                      4.              62
                                                     5.                   30
                                                                         0.                 42
                                                                                           5.            63
                                                                                                        6.                        19
                                                                                                                                15.              8.
                                                                                                                                                 ( 56)            1.23
               5                       80
                                      3.              62
                                                     5.                   30
                                                                         0.                 42
                                                                                           5.            14
                                                                                                        7.                        19
                                                                                                                                15.              8.
                                                                                                                                                 ( 05)            1.74
               6                       48
                                      3.              62
                                                     5.                   30
                                                                         0.                 42
                                                                                           5.            69
                                                                                                        7.                        19
                                                                                                                                15.              7.
                                                                                                                                                 ( 50)            2.29
               7                       13
                                      3.              61
                                                     5.                   29
                                                                         0.                 42
                                                                                           5.            29
                                                                                                        8.                        19
                                                                                                                                15.              6.
                                                                                                                                                 ( 90)            2.88
               8                       75
                                      2.              39
                                                     5.                   07
                                                                         0.                 25
                                                                                           5.            82
                                                                                                        8.                        19
                                                                                                                                15.              6.
                                                                                                                                                 ( 37)            3.42
                                                                                                                                                                          5
  Case Study #1 Actual Results ”Proof
  Statement”
             16.
               00                                   Key Rate Duration Profile
  Duration     00
             14.
  (years)      00
             12.
               00
             10.
               00
              8.
               00
              6.
               00
              4.
               00
              2.
               -
                      6- ont


                                 1-


                                          2-


                                                   3-


                                                                  5-


                                                                                   7-


                                                                                                10-


                                                                                                           20-


                                                                                                                        30-




                                                                                                                                  Tot
                        m


                                   year


                                            year


                                                     year


                                                                    year


                                                                                     year




                                                                                                                                     al
                                                                                                   year


                                                                                                              year


                                                                                                                           year
                            h




                                                    abit
                                                       i
                                                   Li l y                i
                                                                     Baselne                   i zed
                                                                                            Optm i          r
                                                                                                          Curent


                                                                Baseline Scenario Proposal Actual Portfolio Repositioning
      Book Yield                                                     5.32               5.61                            5.56
      Effective Duration of Assets (years)                           5.41               8.29                             7.5
      Effective Duration of Liabilities (years)                    15.19               15.19                          15.19
      Duration Mismatch (years)                                    (9.79)             (6.90)                          (7.69)

      Mismatch Improvement (years)                                         -                                         2.89                      (2.10)
      Book Yield Improvement % Projected                                   -                                         0.29                        0.24


                                                                                                                                                        6




   “Liability Driven” Optimization
   Methodologies
                                Level 3                     Explicit Cash Flow Projections for Callable Bonds / Structured
                                                              Products
                                                            •   Pull From BONDEDGE or INTEX Projection Systems
                       Add detailed                         •   Most Appropriate for Highly Interest-sensitive Asset And Liability Cash
                      callable models                           Flows



Increasing
   detail
                                                                               NY7 Plus 100’s to 1,000’s of Stochastic Rate Scenarios
                                                                               •   Project Corresponding Changes in A/L Valuation
                                Level 2                                        •   Evaluate Impacts on Future Surplus Development
                                                                               •   Position for Economic Gain; Control Surplus Volatility & Worst-case
                                                                                   Loss
              Add interest-rate scenarios
                                                                               •   Most Appropriate for Interest-sensitive Liability Cash Flows




                                                                                             “Sequential Linear Programming”
                                Level 1                                                      • Projected Liability Cash Flows; Historical Rate Trends
                                                                                             • Improve Book Yield; Reduce Standard Deviation
                                                                                             • Most Appropriate for Non-interest Sensitive A/L Cash
       Parametric interest-rate assumptions                                                    Flows


                                                                                                                                                        7
   Case Study #2
   (Level 1/2/3 Evaluations)


   Overview:
   • Sample Insurance Company
           – Writes SPDA/SPIA (weighted towards SPDA)
   • Assets have 6.0 year duration, BBB average rating
   • Blended liabilities have 3.0 year duration


   Objective:
                                                                              Opening the Tool Bag
   • Reduce Interest-Rate Shock Effect on Surplus (by
     Shortening Asset Portfolio Duration)
   • Increase or Maintain Book Yield
   • Improve Portfolio Quality




                                                                                                                     8




Case Study #2 – Level 1
                                                                           f i
                                                                         Ef ectve                     aton
                                                                                                  Dur i
                                     el
                                   Yi d                       f i
                                                            Ef ectve                     aton
                                                                                     Dur i                    % Assets
              St     d      el
                andar Book Yi d                 M arket                     aton
                                                                        Dur i of                    sm ch
                                                                                                 M i at
                                m ovem ent
                                I pr                          aton
                                                           Dur i of                    sm ch
                                                                                     M i at                    Exceed
                  aton
              Devi i     %
                         ( )                   Yi d ( )
                                                 el %                     abiii
                                                                         Li ltes                m ovem ent
                                                                                                I pr
                                   (bps)                       s year
                                                          Asset (    s)               (year s)                 abiii
                                                                                                              Li ltes
                                                                          (years)                  year
                                                                                                   (    s)
Base                32
                  72.        72
                            6.                      5.
                                                     21            6.16         3.06      3.10
       1            69
                  58.       6.
                             86          14
                                        0.           20
                                                    5.             5.50         3.06       2.44         0.
                                                                                                       ( 66)      80%
       2            76
                  55.       6.
                             84          12
                                        0.           19
                                                    5.             5.36         3.06      2.30          0.
                                                                                                        ( 81)      75%
       3            67
                  52.       6.
                             82          10
                                        0.           17
                                                    5.             5.20         3.06      2.14          0.
                                                                                                        ( 96)      70%
       4            41
                  49.       6.
                             78          06
                                        0.           15
                                                    5.             5.04         3.06      1.98          1.
                                                                                                        ( 13)      65%
       5            93
                  45.       6.
                             74          02
                                        0.           14
                                                    5.             4.85         3.06      1.79          1.
                                                                                                        ( 31)      59%
       6            19
                  42.       6.
                             68        0.
                                       ( 04)         12
                                                    5.             4.68         3.06      1.62          1.
                                                                                                        ( 49)      53%
       7            12
                  38.       6.
                             61        0.
                                       ( 11)         07
                                                    5.             4.48         3.06      1.42          1.
                                                                                                        ( 68)      46%
       8            65
                  33.       6.
                             50        0.
                                       ( 21)         02
                                                    5.             4.26         3.06      1.20          1.
                                                                                                        ( 90)      39%
       9            62
                  28.       6.
                             34        0.
                                       ( 38)         94
                                                    4.             4.01         3.06      0.95          2.
                                                                                                        ( 16)      31%




  Level 1 methodology -- appropriate for non-interest sensitive cash flows -- proves
  inadequate in an interest sensitive A/L context:
           - Need liability cash flows generated under multiple interest rate scenarios
           - Economic value perspective can add valuable insight beyond book yield and surplus
             volatility perspective
                                                                                                                     9
Case Study #2 – Level 2
                                   YearTw o     YearFive YearTen
           Curve               i
                           Baselne Sur us
                                      pl           pl
                                                Sur us        pl
                                                           Sur us
           Up 5%               392          407       (190)     1,
                                                               ( 823)
           Dow n 5%            392          778        732       723
           Up 3%               392         (450)      (450)      450)
                                                                 (
           Dow n 3%            392          723        723       723
           Up 5% /Dow n 5%     392           38      1,
                                                    ( 788)       652
                     Up
           Dow n 5% / 5%       392          783        724       652
           Up 3%               392          519        237       449)
                                                                 (
           Up 1%               392          406        406       406
           Up 2%               392           38         38         38

      Risk/Return Improvements of Proposed Repositioning

                                                                      Reduced risk in
                                                                                              Evaluate
                                                                     Standard Deviation    Average Surplus
                                             Improved Book            of returns from       Development
                                              Yield 14 basis            72.32 to 58.69
                      Reduced A/L           Points from 6.72%
                     Mismatch from               to 6.86%
Improved Credit     3.10 (yrs) to 2.44         (projected)
     Quality               (yrs)
  From BBB to
       A
                                                                                           Level Two
                                                                                          Optimization
                             Level One Optimization
                                                                                                             10




Level 3 Methodology

Begin with Level 2 Asset                                      Fold in Detailed Callable Valuations
Valuation Estimates                                           • Obtain BondEdge CF’s per scenario...
  • Identify callables                                        • Discount at market yield...
  • Liability valuations unchanged                            • Determine % of original value...




                                   Update the scenario valuation table
                                                       Level 3 relative valuation table
                                         If optimizer purchases $1 of this, what is it worth in each
                                                                  scenario?
                                                                   Scenario 1 Scenario 2 Scenario 3
                                                               Asset 1     70%     115%   98%
                                                    Asset 2 (revised)      64%      93%   81%
                                                               Asset 3     64%     135%   91%

                                                              Liability    83%     107%   102%




                                                        Re-run Optimizations                                 11
Added Surplus Volatility Perspective of Level 3
Methodology
                    LEVEL ONE AND LEVEL TW O                                        LEVEL THREE
                                           el
                                         Yi d    f i
                                               Efectve                                         el
                                                                                             Yi d   f i
                                                                                                  Efectve
                    Standard    Book    m ove Dur i
                                       I pr       aton              Standard         Book   m ove Dur i
                                                                                           I pr      aton
                        aton
                    Devi i     Yi d ( ) m ent ofAsset
                                el %                 s              Devi i
                                                                        aton       Yi d ( ) m ent ofAsset
                                                                                    el %                 s
                                         (bps)  year
                                                (   s)                                       (
                                                                                             bps)  year
                                                                                                   (   s)

               i
          Baselne         32
                        72.          72
                                    6.           -       6.
                                                          16                 32
                                                                           72.         72
                                                                                      6.         -         16
                                                                                                          6.
              1           69
                        58.          86
                                    6.        686        5.
                                                          50                 36
                                                                           57.        6.
                                                                                       89     689          50
                                                                                                          5.
              2           76
                        55.          84
                                    6.        684        5.
                                                          36                 98
                                                                           55.        6.
                                                                                       87     687          43
                                                                                                          5.
              3           67
                        52.          82
                                    6.        682        5.
                                                          20                 62
                                                                           49.        6.
                                                                                       85     685          15
                                                                                                          5.
              4           41
                        49.          78
                                    6.        678        5.
                                                          04                 24
                                                                           45.        6.
                                                                                       81     681          95
                                                                                                          4.
              5           93
                        45.         6.
                                     74       674         85
                                                         4.                 43.3       77
                                                                                      6.      677          85
                                                                                                          4.
              6           19
                        42.         6.
                                     68       668         68
                                                         4.                 38.7       71
                                                                                      6.      671          61
                                                                                                          4.
              7           12
                        38.          61
                                    6.        661        4.
                                                          48                 32
                                                                           33.        6.
                                                                                       63     663          33
                                                                                                          4.
              8           65
                        33.          50
                                    6.        650        4.
                                                          26                 16
                                                                           27.        6.
                                                                                       51     651          00
                                                                                                          4.
              9           62
                        28.          34
                                    6.        634        4.
                                                          01                 62
                                                                           20.        6.
                                                                                       30     630          64
                                                                                                          3.

     Results for maximizing Book Yield & minimizing VaR (i.e. minimizing the worst
    surplus value out of the nine scenarios):
        • Projected Yield is approximately the same whether one uses Level 1 / 2 or Level 3,
          across the 9 efficient-frontier portfolios that each technique produces
        • However, Level 3 finds allocations which reduce VaR $24-30MM over Level 2 (at the
          same projected yield), for a 5% reduction in risk level
        • Level 2 and Level 3 also sell different amounts of the callable bonds leading to
          substantially different rebalancing recommendations
                                                                                                                    12




Portfolio Structure
                                            Baseline Portfolio
                                             r ur
                                           Stuct ed
                                            Products
                                                                       nm
                                                                  Gover ent
                                               8%
                                                                     19%




                                                      por es
                                                   Cor at
                                                      73%




                    Level 2                                                             Level 3

             nstum
        Cash I r ents                                                    nst um
                                                                    Cash I r ents
                                 r ur
                               St uct ed                                                        r ur
                                                                                              St uct ed
              6%                                                          6%
                                Product                                                        Product
    oatng
   Fl i                           23%                                                            27%
  Cor at
     por es                                                      oatng
                                                                Fl i
     1%                              oatng
                                    Fl i Rat   e               Cor at
                                                                  por es                              oatng
                                                                                                     Fl i Rat   e
                                       r ur
                                     Stuct ed                     1%                                    r ur
                                                                                                      Stuct ed
                                      Products                                                         Products
                                         1%                                                               1%
                                  Gover ent
                                       nm                                                                 nm
                                                                                                     Gover ent
      por es
   Cor at                            19%                                                                17%
                                                                      por es
                                                                   Cor at
      51%
                                                                      48%

                                                                                                                    13
Level 3 Refines Optimization Results

                                                                Projected
                                                    el     sus
                                              Book yi d ver Level3 Std
                                                          aton
                                                      devi i
                 Book yi d ( )

                                  80
                                 6.
                       el %


                                                                                                                                      Several bps
                                  60
                                 6.                                                                          Level3                   difference in
                                 6.
                                  40                                                                         Level2                 projected return,
                                 6.
                                  20                                                                                                     $3-5MM
                                                                                                                                    difference in risk
                                       $250
                                               $260
                                                      $270
                                                             $280
                                                                    $290
                                                                           $300
                                                                                  $310
                                                                                           $320
                                                                                                  $330
                                                                                                          $340
                                                                                                                 $350
                                                                                                                          $360
                                               Level3 st          at on     us
                                                        andard devi i ofsurpl
                                                              $M
                                                             ( M)



                                              The Extra Value is in the Risk-reduction Possible
                                                    Using Bondedge to Value Callables
                                                   Resulting in Higher Yields/lower Risk
                                                                                                                                                              14




Value Added Thru Enhanced Analysis
…

                                                         Book yi d ver VaR
                                                               el     sus                                               Comparing with Level 1
                            00
                           7.
                                                                                                                        • Standard deviation tracks
                            80
                           6.
                                                                                                                          directionally with VaR (i.e. they
                                                                                                                          decline together as the
 Book yi d ( )




                            60
                           6.
                                                                                                                          optimizer tries to reduce risk)
       el %




                           6.
                            40                                                                    LEVEL 3
                                                                                                  LEVEL 2               • However, the allocations which
                           6.
                            20                                                                    LEVEL 1                 Level 1 comes up with are
                                                                                                                          generally $30MM+ higher in
                           6.
                            00                                                                                            VaR than those of Level 3 (at
                                                                                                                          the same yield), for about
                           5.
                            80                                                                                            10%+ higher risk
                              $190                $240              $290            $340                 $390
                                                               LEVEL 3 VaR ( M )
                                                                           $M                                           • Level 2 does significantly better
                                                                                                                          than Level 1




                                   Decision To Utilize Level 3 Over Level 2 Is Dependent Upon Interest
                                                     Rate Sensitivity Of Asset Portfolio
                                                                                                                                                              15
In the Pipeline . . .

Currently Under Development:
   • Recognition of Principal-based Reserving
   • Stochastic Rates / Worst-case Scenario Protection
   • Credit Optimization
   • Optimizing Swaps & Derivatives


   “Best Practices” Q & A




                                                                                                                                                     16




 Art Aaronson, CPA, Portfolio Manager
 Art Aaronson is an Insurance Portfolio Manager with GE Asset Management. He joined the company in 2002 and is based in Stamford,
 Connecticut. Prior to joining GE Asset Management, Art spent 11 years as the Vice-President of Investments for Princeton Insurance
 Company (a subsidiary of Medical Liability Mutual Insurance Company) overseeing the $1 billion investment portfolio and serving as the
 investment analyst on the parent’s $5 billion dollar portfolio. Art was the Chief Financial Officer for Propac Underwriters, a national insurance
 management firm, and spent several years in public accounting with Pannell Kerr Forster. A Certified Public Accountant, Art has a BS degree
 from Clarkson University.

 Rick Jackson, CFA, FSA, Vice President – Senior Relationship Manager
 Rick is a Vice President of GE Asset Management based in Stamford, Connecticut. He is currently the relationship manager for Genworth,
 AWS and PMG insurance companies. Previously, he was the relationship manager for Employers Reinsurance Corporation, GE Mortgage
 Insurance Corporation, and the Long Term Care operations of GE Insurance. His responsibilities include coordination of investment strategy
 and asset allocation as a primary contact between his clients and GEAM. Rick has thirty years of insurance experience, with the last twelve
 years in insurance asset management. Before joining GE in 2002, Rick spent nine years with Scudder Insurance Asset Management, which
 recently merged into Deutsche Asset Management. Prior work included eight years at Allmerica Financial as UL/VUL actuarial product
 manager and ten years with National Life of Vermont in pricing and corporate actuarial roles. Rick holds a bachelor’s degree in American
 Literature from Middlebury College and is a holder of the Chartered Financial Analyst designation and a Fellow of the Society of Actuaries.




                                                                                                                                                     17
     scl   e
    Di osur Notes

   PROFITS is a GE Asset Management (“GEAM”) proprietary investment tool which assists in developing potential investment portfolios based on specific client
requirements. PROFITS suggests multiple portfolios which lie along an efficient investment frontier and which are based on a variety of inputs. Many of these inp
are provided by a client and all incorporate GEAM’s assumptions regarding future events. The efficient frontier (“EF”) utilized by PROFITS is comprised of certain
fixed income asset classes which would typically be appropriate for core insurance investors and such frontier does not therefore include the universe of assets
which could be included within a more theoretical efficient frontier. PROFITS output is dependent upon hypothetical analysis of historic returns, volatility and man
other factors. Past performance is not always an accurate predictor of the future and reliance on historical data is inherently limited.

 As PROFITS does incorporate assumptions regarding future events, GEAM makes no representation or warranty regarding the future performance of any portf
managed by GEAM.

  The term “Optimization” used throughout the PROFITS presentation is intended solely to reflect the multiple portfolios which lie along the EF and no guarantee
provided (nor should any guarantee be inferred) regarding the risk or return or other investment characteristics which would be experienced by any GEAM manag
portfolio.

  As PROFITS incorporates dynamic and variable data as of a certain point in time, its reliability may be further compromised by any future events or changes to
such inputs. Any and all successive “runnings” of PROFITS would be solely at the mutual determination of the client and GEAM.

  Nothing presented herein is intended to constitute investment advice, nor sales material and no investment decision should be made based on any information
provided herein. Information provided reflects GEAM’s views as of a particular time. Such views are subject to change at any point without notice.

  While GEAM uses reasonable efforts to obtain information from reliable sources, GEAM makes no representations or warranties as to the accuracy, reliability o
completeness of any third party produced information presented herein.

   Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No
reliance should be placed on any such statements or forecasts when making any investment decision.

  Investments cited may not represent current or future holdings and nothing presented should be construed as a recommendation to purchase or sell a particula
investment or follow any investment technique or strategy.

  The information provided is confidential and shall not be copied or distributed.




                                                                                                                                                            18
Investment Strategies for Fixed Annuities
Michael DeWeirdt
Head of Capital Markets and Trading – Milliman
312-499-5668
michael.deweirdt@milliman.com




   Investment Strategies for Fixed
   Annuities - Optimizing Returns


   •   Duration risk
   •   Convexity risk
   •   Credit risk
   •   Structure risk
   •   Liquidity risk




                                                 1
Implications of Duration and
Convexity Risk Choices
                                            Alternate Investment Strategies



     100




      50




        0




      -50




      -100




      -150
             0   1%                                                                                 Duration and Convexity Risk
                      2%
                           3%      4%                                                             Duration Risk
                                           5%
                                                    6%                                           Duration and Convexity Matched
                                                            7%                                                                    NPV
                                5Y Swap Rate                         8%
                                                                              9%
                                                                                      10%


                           Duration and Convexity Matched   Duration Risk   Duration and Convexity Risk




Managing The Tails
• Reposition assets as market moves
  – Assumes that you have the information, time and liquidity to
    reposition as needed and that tax and accounting consequences
    are not problematic
• Use interest rate options to manage the tails
  – Static or semi-static “buy and forget” solution
• Use swaps or interest rate futures to dynamically
  manage the tail
  – Also critically dependent on information availability for risk
    profile, but recommendations can be implemented very rapidly




                                                                                                                                        2
Representative Option Hedge
                                             PV of Fixed Annuity Business In Different Rate Environments
                                                          With and Without Swaption Hedge
                                          (Based on Asset, Liability and Term Structure Assumptions At 12/31/06 and Parallel Shocks,
                                                                 PV of After Tax Earnings and Residual Value)


                                                                                     $252
                      275
                                                               $203                                 $197

                                              $154                                    $240
                      175             $134                     $191                                                   $129
                                                                                                    $160
                                               $141
                                       $120
                      75
   NPV ($ millions)




                                                                                                                                        $3

                      (25)                                                                                           $4
                             2.00%




                                                      3.00%




                                                                      4.00%




                                                                                        5.00%




                                                                                                           6.00%




                                                                                                                             7.00%




                                                                                                                                             8.00%
                  (125)              10Y Treasury Rate



                  (225)
                                                                                     4.71%
                                                                                                                                       ($239)

                  (325)



                                                                          Unhedged     Hedged      Recent 10Y CMT




Considerations in Option
Portfolio Composition
• Typically payer swaptions for value hedge,
  CMS caps for cash-flow hedge
• Ladder maturities 1 – 7 years
• Strike choice ranges from 30 – 60 delta
  – Lower delta provides more leverage and is more
    aligned with philosophy of tail risk protection
  – Dealer price adjustments may make relatively low
    delta less attractive




                                                                                                                                                     3
Alternate Strategies Include
Investment Portfolio
Selections/Repositioning……




                               4

								
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