The first step in the investment process is to understand the client's needs as detailed in a comprehensive investment plan. This typically includes cash flow and income needs that are unique to that firm. Cash flow needs are often considered first in narrowing the selection field of potential securities. This could be based upon known cash outflows or it may be part of a more comprehensive ALM plan designed to reduce insurance risk. It is relative to the type and nature of insurer. Regardless, any negative discrepancies between the cash flow of the portfolio and the needs of the insurer are identified.
The market, asset mix, diversification, asset spreads, and the yield curve are analyzed. When no other overriding investment objectives are present, the initial selection of securities is narrowed to structures that are the best fit for the parameters above and listed in Step 1 and in compliance with company, State and NAIC Guidelines. Cash flow structuring can be accomplished with both principal cash flows from maturities and interest payments.
From the list of securities that meet the objectives in Step 2, the following items are analyzed: the credit quality of the security, analyst and rating agency reviews, the total return potential of the security, OAS analysis, option analysis (if any), and company financials.
Securities are selected based upon the concept of optimizing the overall needs and characteristics described in steps 1-3. The impact of each security on the overall portfolio is considered in combination with the potential to reduce risk relative to the company's products. Competition among numerous providers and multiple pricing tools are utilized to assist in providing best execution for our client accounts.
The portfolio is frequently reviewed. Credit analysis and cash flow shifts can result in limited swaps when it is adventageous to the financial position of the insurer. All transactions are analyzed as to their impact on the entire company. This includes a review of the impact to net investment income, capital and surplus, the liabilities, applicable insurance reserves and the risk profile of the portfolio.