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Wealth and Investment Management Constructing an Investment Portfolio for a Captive Insurance Company Colleen McHugh Corporate Investment Adviser, Vice President, Barclays Wealth & Investment Management Title page example
2 3 PROFILE CAPTIVE LIFE CYCLE INVESTMENT CONSIDERATIONS FOR A CAPTIVE INSURANCE COMPANY CONSTRUCTING THE PORTFOLIO CONTENTS 1 4 2
CAPTIVE INSURANCE COMPANY PROFILE 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. Profile of a Captive Insurance Company is quite unlike other corporations Investing for Captive Insurers is different from other institutional and private client’s investors 3
CAPTIVE LIFE CYCLE 4 Captives progress through investment stages depending upon where they are in their life cycle Stage 4Stage 3Stage 2Stage 1 Risk/Reward Liquid Securities, High Quality Fixed Income Cash Deposits and Money Market Riskier Assets: Addition of Equities and possibly Alternatives Preservation of Capital: Focus on Asset-Liability matching through Fixed Income Formation Development Maturity Run-off
Investment considerations for a Captive Insurance Company 5
Due to Captive Insurers unique profile, some investment considerations are: What line of insurance is being underwritten Liability profile of Captive insurer (maximum duration) Collateral requirements and any fronting restrictions Regulatory Requirements: permissible assets differ among jurisdictions Investment guidelines different/consistent with parent? Macroeconomic environment 6 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. This is key to identifying potential strategies and their weight in terms of risk and expected return.
How to construct the portfolio? 7
SEGMENTATION OF CASH RESERVES 8 Captives acutely aware of future claims are balancing the requirement of minimising risk whilst trying to pick up yield. 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 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 Core Funds Used to backstop operating funds Liquid Convertible to operating funds at short notice Strategic Funds Longer dated securities Maximising yield whilst minimising volatility Strategic Funds Longer dated securities Maximising yield whilst minimising volatility Projected Investment Returns Investment Time Horizon Captive Insurers Life Cycle Allows Captives the flexibility to deploy different Investment Strategies depending upon their stage of development.
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 Example of Portfolio Construction for a Captive in the Development Stage 9 Core Funds Used to backstop operating funds Liquid Convertible to operating funds at short notice Core Funds Used to backstop operating funds Liquid Convertible to operating funds at short notice Corporate Credit Universe >10,000 Bonds 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 10
RECAP KEY POINTS 11. 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.
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 upon any opinion or statement contained in this document without seeking further advice tailored for your own circumstances. This document is confidential and is intended solely for the addressee(s). If you are not an addressee, or have received this document in error, please notify the sender immediately, delete it from your system and do not copy, disclose or otherwise act upon any part of this e-mail or its attachments. It may not be reproduced or disclosed (in whole or in part) to any other person without our prior written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions. We or our affiliates may have acted upon or have made use of material in this document prior to its publication. You should seek advice concerning any impact this investment may have on your personal tax position from your own tax adviser. You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain your own independent tax and legal advice tailored to your individual circumstances. Barclays Wealth and Investment Management operates through Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is registered in England and authorised and regulated by the Financial Services Authority. Registered number is 1026167 and its registered office is 1 Churchill Place, London E14 5HP. Barclays Bank PLC, Guernsey Branch is licensed by the Guernsey Financial Services Commission under the Banking Supervision (Bailiwick of Guernsey) Law 1994, as amended, and the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended, Barclays Bank PLC, Guernsey Branch has its principal place of business at Le Marchant House, St Peter Port, Guernsey, GY1 3BE. 12
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