Wealth and Investment Management
Constructing an Investment Portfolio for a
Captive Insurance Company
Colleen McHugh
Corporate Investment Adviser, Vice President, Barclays Wealth & Investment Management
CONTENTS
1
PROFILE
2
CAPTIVE LIFE CYCLE
3
INVESTMENT CONSIDERATIONS FOR A CAPTIVE INSURANCE
COMPANY
4
2
CONSTRUCTING THE PORTFOLIO
CAPTIVE INSURANCE COMPANY PROFILE
Profile of a Captive Insurance Company is quite unlike other
corporations
The primary purpose of a captive is to act as an insurance vehicle to
meet the claims responsibilities of their parent. The risk is taken on the
liability side via the underwriting process; therefore the assets must be
invested in safe liquid investments in order that they are available to
meet any future claims.
Investing for Captive Insurers is different from other institutional
and private client’s investors
3
CAPTIVE LIFE CYCLE
Captives progress
through
investment stages
depending upon
where they are in
their life cycle
Risk/Reward
Formation
Maturity
Run-off
Riskier Assets:
Addition of
Equities and
possibly
Alternatives
Preservation
of Capital:
Focus on
Asset-Liability
matching
through Fixed
Income
Liquid
Securities,
High Quality
Fixed
Income
Cash
Deposits
and
Money
Market
Stage 1
4
Development
Stage 2
Stage 3
Stage 4
Investment considerations for a Captive Insurance Company
5
Due to Captive Insurers unique profile, some investment considerations are:
The Investment manager
needs to work closely
with the investment
board of the captive to
ensure a complete
understanding of the
captives investment
guidelines and
objectives.
What line of
insurance is being
underwritten
Macroeconomic
environment
Liability profile of
Captive insurer
(maximum duration)
Investment guidelines
different/consistent
with parent?
Collateral
requirements and any
fronting restrictions
Regulatory
Requirements:
permissible assets
differ among
jurisdictions
This is key to identifying
potential strategies and
their weight in terms of
risk and expected return.
6
How to construct the portfolio?
7
SEGMENTATION OF CASH RESERVES
Captives acutely
aware of future
claims are
balancing the
requirement of
minimising risk
whilst trying to pick
up yield.
Captive Insurers Life Cycle Allows Captives the flexibility to deploy different Investment
Strategies depending upon their stage of development.
Projected
Investment
Returns
Strategic Funds
• Longer dated
securities
• Maximising yield
whilst minimising
volatility
How do you this?
Segmentation of
your cash reserves
allows each
separate
classification to be
managed to a
different strategy.
Operating Funds
• Used to cover
claims
• Highly liquid
• Available
Immediately
Core Funds
• Used to
backstop
operating funds
• Liquid
• Convertible to
operating funds at
short notice
Investment Time Horizon
8
Example of Portfolio Construction for a Captive in the Development Stage
Development Stage of Life Cycle:
•
•
•
•
More predictable liability analysis
Asset growth, with some surplus and unencumbered funds
Still conservative, but a better appetite for risk
Willing to invest in high quality fixed income
Corporate
Credit Universe
>10,000 Bonds
9
Core Funds
• Used to backstop
operating funds
• Liquid
• Convertible to
operating funds at short
notice
Liquidity filters
Issues
>50m $/£/€
Credit Quality
Investment
Grade
Analyst/FM
functional
approach
Fund Manager
Portfolio
100-150
issuers
Example of an investment portfolio for a captive insurer at the development
stage of their life cycle
Live case FTSE 100 client
Weighted Average Portfolio Analytics
M aturity Buckets
Yield to Call / M aturity
1.99%
0-3 Years
33.1%
S&P Credit Rating
AAA
43.9%
Aaa
32.3%
Yield to Worst
1.89%
3-5 Years
24.0%
AA
39.6%
Aa
52.8%
Coupon
3.04%
5-8 Years
23.1%
A
3.3%
A
9.9%
M odified Duration
4.35
8-10 Years
16.5%
BBB
0.0%
Baa
0.0%
Spread Duration
4.33
10+ Years
3.3%
BB
0.0%
Ba
0.0%
Years to Call / M aturity
4.93
B
0.0%
B
0.0%
Price
105.27
Other / NR
13.2%
Other / NR
5.0%
Spread (bps)
45
S&P Rating
A+
M oody's Rating
Aa3
40.0%
M oody's Credit Rating
50.0%
60.0%
40.0%
50.0%
30.0%
40.0%
30.0%
30.0%
20.0%
20.0%
20.0%
10.0%
10.0%
10.0%
0.0%
0.0%
Natural Currency Exposure
0.0%
AAA
0-3 Years
3-5 Years
AA
A
BBB
BB
B
5-8 Years 8-10 Years 10+ Years
Country
Ot her /
NR
Sector
Aaa
Aa
A
Baa
Ba
B
Ot her /
NR
Bond Type
USD
0.0%
Netherlands
14.9%
Banks
51.2%
Fixed Coupon
96.7%
EUR
0.0%
United Kingdom
13.2%
Government
29.0%
Variable Coupon
0.0%
GBP
100.0%
Supranational
11.6%
Consumer, Non-cyclical
6.6%
Floating Rate
0.0%
JPY
0.0%
United States
9.9%
Insurance
3.3%
Zero Coupon
0.0%
CHF
0.0%
Germany
9.9%
Other Financial
3.3%
Index Linked
3.3%
CAD
0.0%
Australia
9.9%
Industrial
3.3%
Other
0.0%
Other
0.0%
Other
30.6%
Other
3.3%
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
40.0%
30.0%
20.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
USD
10
60.0%
EUR
GBP
JPY
CHF
CAD
Ot her
10.0%
0.0%
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Fixed Variable Float ing
Zero
Coupon Coupon
Rat e
Coupon
Index
Linked
Ot her
RECAP KEY POINTS
.
Captives are different to other corporate entities
- Their life cycle impacts their investment requirements and
dictates their investment strategy
- Their investment considerations differ too e.g
collateral requirements and any fronting restrictions
Investment strategy is ever evolving and requires the
services of an investment manager who understands
the captives journey and can provide appropriate and
flexible solutions throughout this journey.
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DISCLAIMER
This communication is designed for captive insurance professionals and should not be relied upon by any other persons.
This document has been issued and approved by Barclays Bank PLC. Although information in this document has been obtained from sources believed to
be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a
prospectus, offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any
other instrument, which may be discussed in it. All estimates and opinions included in this document constitute our judgement as of the date of the
document and may be subject to change without notice. This document is not a personal recommendation and you should consider whether you can rely
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authorised and regulated by the Financial Services Authority. Registered number is 1026167 and its registered office is 1 Churchill Place, London E14
5HP.
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Barclays Bank PLC, Guernsey Branch has its principal place of business at Le Marchant House, St Peter Port, Guernsey, GY1 3BE.
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