INVESTMENT INCOME PROJECTION - COMPIRICUS...IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW...
Transcript of INVESTMENT INCOME PROJECTION - COMPIRICUS...IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW...
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
INVESTMENT INCOME PROJECTION & FORECASTING
Session 703
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Presenters
Kay Malloy, Hanover Insurance Group, Inc.
Kay Malloy is a CPA at Hanover Insurance, where she does financial
reporting of Investments, as well as investment forecasting in her spare time.
The NII forecast is subject to vast scrutiny from upper management as they
constantly look for more yield in today's environment. Kay will be sharing
Hanover's "home grown" forecasting process which has proven to be fairly
accurate. She is also very interested in hearing others' forecasting
experiences.
Jorg Pappert, COMPIRICUS Inc.
is the President of COMPIRICUS Inc. He has a more than 20 year experience
in designing, developing and implementing asset & risk management as well
as investment accounting systems for the insurance industry.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
AGENDA
Conceptual Fundamentals
Market expectations and projection
Investment scenarios and forecasts for various asset classes
Reporting
Field Report of Investment Forecasting in Practice
Necessity of an investment forecast
Components of the investment forecast
Challenges
Potential System Support
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
CONCEPTUAL FUNDAMENTALS
Two important Questions to answer:
What is my risk today?
What will my income statement look like at the end of the
year?
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
CONCEPTUAL FUNDAMENTALS
INVESTMENT FORECAST AND PLANNING IS AN ASPECT
OF AN OVERALL INVESTMENT CONTROLLING APPROACH
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MARKET EXPECTATIONS AND PROJECTION
FACTORS IN THE INVESTMENT FORECAST PROCESS
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INVESTMENT SCENARIOS
Scenario Based Planning is an excellent way of controlling
risk
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
INVESTMENT SCENARIOS
Market Data Assumptions
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
1
2
3
4
5
6
78
910
0,0000%
0,2000%
0,4000%
0,6000%
0,8000%
1,0000%
1,2000%
1,4000%
1,6000%
1,8000%
2,0000%
INVESTMENT SCENARIOS
With only little parameter input a projection about future
interest rates has to be generated
Tenor April, 9 2015 Dec. 31, 2015
Muni Yield
1 yr 0.2900% 0.300%
2 yrs 0.5500% 0.500%
3 yrs 0.7867% 0.700%
4 yrs 1.0233% 0.900%
5 yrs 1.2600% 1.100%
6 yrs 1.4040% 1.220%
7 yrs 1.5480% 1.340%
8 yrs 1.6920% 1.460%
9 yrs 1.8360% 1.580%
10 yrs 1.9800% 1.700%
Input Parameter
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
INVESTMENT SCENARIOS
Rule-based Portfolio Projection (Simplification)
Data Area Insurance
Technique
Investment
related cash
Investment
Sales
Available
Capital
Portfolio
Management
Current
Portfolio
External Input Generated by
holdings and
conditions
From
different
investment
systems
Automated
Calculation
Directly loaded
from investment
management
system
Projection
External Input
with historical
distribution
Automatically
calculated under
reinvestment
assumption and
investment
scenario
Free planning
under
scenario and
on different
aggregation
level
Automated
Calculation
Management of
available capital
for future
investment
scenario
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
PROCESS OF THE PLANNING & PROJECTION PROCEDURE
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FIELD REPORT OF INVESTMENT FORECASTING IN PRACTICE
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Necessity of an Investment Forecast
Investment income may be the bottom line!
Important part of Company budget
Required for quarterly analyst guidance
2014: Co A Co B Co C Co D
Net Investment Income $ 1,394 $ 549 $446 $138
Net Income $ 2,861 $ 721 $830 $197
NII / NI 49% 76% 54% 70%
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast
1 - Cash Flows
2 - Investment Assets / Average Assets
3 - Net Investment Income
4 - Analysis
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast CASHFLOWS - Sources
Investments Cashflows
Investment Systems: Maturities and
paydowns, interest and dividends
FP&A: Insurance operations, with
monthly seasonality, reinsurance
premiums, etc
Tax Department: tax payments
Capital Group: M&A, stock or debt
repurchases, debt issuance,
shareholder dividends
Investment managers:
reinvestment rates, calls, investment
strategies, required cash balances
Treasury & Other: Other significant
inflows or outflows
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast CASHFLOWS
Build monthly activity:
• Beginning cash balance
• Cash in from investments
• Cash in/out from insurance operations, capital activity
Assess activity:
• Need to sell bonds to support insurance ops?
• Have excess to invest? What do you invest in?
• This month’s activity impacts the remainder of the year…
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast INVESTMENT ASSETS
Investment Assets, Average Assets
• Start with actual assets
• Build monthly change in assets using cashflow data:
purchases or sales of bonds, equities, mortgages, etc.
• Calculate average assets so you can watch your yields, monitor
fluctuations
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast INVESTMENT INCOME - Sources
Net Investment
Income
Investment Systems: Current portfolio yield – coupon,
dividends, amortization(?)
Calculation: Add income related to purchases and
changes in asset mix from cashflow model
Calculation: Reduce income for
maturities, calls and sales from cashflow
model
Investment managers:
assumptions for defaults, consent
fees, special dividends,
partnerships
Business Partners: Investment expenses
Other: Foreign currency rates
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast INVESTMENT INCOME & YIELDS
Build monthly income
Current portfolio
+ Income from new assets purchased
+ Income from projected consent fees
- Lost income from sales, calls
- Lost income from defaults
Calculate forecasted earned yields using NII and average
assets
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast ANALYSIS
THIS IS THE HARD PART!
• Why is this forecast different from the prior forecast?
• Why is next year different from this year?
We calculate variances caused by:
• Higher/lower cash flows
• Higher/lower yields
• Higher/lower currency exchange rates
• Different asset mix
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Components of an Investment Forecast ANALYSIS
To help address variables, we develop sensitivity analysis
for new money rates and foreign currency
Trends:
• Maturities, calls and sales are depleting NII at a greater rate than the
rate at which we can reinvest
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Challenges
Systems
Accuracy of yields, cashflows, etc.
Analysis
Reporting
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POTENTIAL SYSTEM SUPPORT
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POTENTIAL SYSTEM SUPPORT
Potential System Support
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POTENTIAL SYSTEM SUPPORT
MAJOR TARGETS FOR IMPLEMENTING THE PROJECTION
TOOL (1/2)
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POTENTIAL SYSTEM SUPPORT
MAJOR TARGETS FOR IMPLEMENTING THE PROJECTION
TOOL (2/2)
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POTENTIAL SYSTEM SUPPORT
Typical System Architecture (1/2)
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POTENTIAL SYSTEM SUPPORT
Typical System Architecture (2/2)
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Contact: Kay Malloy Jorg Pappert
Hanover Insurance Group, Inc. COMPIRICUS Inc.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
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