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French (Canada) - Middle Eastern Insurance Company
- 2023
- Multi-asset, Shariah-compliant
- USD 3 billion
- Refinement of the SAA
- Strategic Asset Allocation
Our specialist says:
This insurer is capitalising on the high interest rate environment to support its increased risk taking. Within sukuk, the allocations will be towards a mix of sovereign, quasi-sovereign and corporate debt, all high-rated credit. This will lead to a higher risk weighting of credit in the portfolio, but detailed modelling of downside risk, both on a forward-looking and historic basis, ensured that the team is comfortable with the changes to the SAA.
Client-Specific Concerns
The client, a Middle Eastern insurance company, sought to refine its Shariah-compliant strategic asset allocation (SAA). The SAA is positioned conservatively, and the investment team is mandated to maintain a tail risk buffer. The project set out to quantify the current buffer, and thereby scope out the potential for additional risk taking. Beyond long-term strategic risk/return dynamics, the team requested a detailed analysis of short-term risk behaviour of the newly devised SAA. Furthermore, the SAA must comply with various constraints, such as minimum liquidity, minimum local exposure, maximum non-local currency exposure and local regulatory (solvency) asset admissibility criteria.
Outcome
- Forward-looking capital market assumptions: The client expressed a desire to incorporate their views into the capital market assumptions. Throughout the engagement, the assumptions were tailored to the client’s situation, such as altering cash assumptions to be reflective of the team allocating to longer-term fixed rate deposits.
- Optimisation analysis: Beyond risk/return dynamics, the optimisation considered insurance-specific parameters such as asset class admissibility criteria and investment constraints. Examples include maxima of local and international equity, alternative funds, financial institution exposure and non-local currency exposure.
- Prudently adding risk: The refined SAA reallocated from cash to sukuk (bonds) and private debt, taking advantage of the high interest rates and the potential for duration to diversify in adverse markets environments. Detailed analysis showed that the new SAA remained within predetermined downside risk buffers: the main buffer is defined as a function of Annual 5% Value-at-Risk of the SAA, the assets under management and expected trading results of the insurance business.
- Detailed historic analysis: In addition to forward-looking analysis, the project assessed historic performance to learn more about its long-term risk/return profile and the potential for short-term weakness that the SAA could produce. The updated SAA has offered meaningful returns since its remodelling, which considered, volatility and maximum drawdown.
