optimizing equity investment under solvency 2 · 1. equities are attractive but expensive under...

Optimizing equity investment under Solvency 2

 Vienna, September 13th 2016

Agenda

1. Equities are attractive but expensive under Solvency 2

2. Optimized equity solutions, a strong tool for allocation

3. Amundi solution in a nutshell

4. The underlying equity process

5. The bank guarantee

6. Appendices

2

Equities are attractive in a very low yield environment

Yields by Asset Class*

* Dividend yield Next 12 months for the MSCI EMU and USA

Source: Datastream, Amundi Research data as of March 2016. 3

A challenging market and regulatory environment for insurers

1 Without taking into account a dampener effect between -10% and +10%)

2 OECD countries

39%1 for type 1 equity2

Even with the grandfathering clause, equity

will become quickly expensive

- Stress applied to grandfathered equity will

increase on a regular basis form 2016 to

2023

- Grandfathering interest disappears in 2/3

years for a very low turnover portfolio

Institutional investors are pushed to reinvest in risky assets

Especially to offer attractive yields to their own clients

Equity becoming very expensive in

terms of SCR

Continuous decreasing interest

rate environment

In order to benefit from equity risk premium and containing economic and

regulatory risk, Insurance companies are searching for optimized equity

solutions

Particular consideration given to

economic risk

In an asset and liabilities context, insurance companies pay an increased attention on the volatility of their investments

They also have to monitor tail risk

4

Agenda






6. Appendices

5

Managing asset allocation analysis under SII – Business case (1/4)

Market SCR Liability

SCR Interest Rates Up -16.1%

SCR Interest Rates Down 8.0%

Liability

Modified duration 18

Asset side Liability side

6


Source: Amundi

* Diversification is the SCR reduction coming the de-correlation of the different market

SCR components

Market SCR Asset / Liability

SCR Market Down 17.3%

SCR Interest Rates Down 6.9%

SCR Credit 7.3%

SCR Equity 6.0%

SCR Foreign Exchange 0.5%

SCR Real Estate 0.0%

Taking into account the regulatory and market analysis

3 main allocation changes were identified:

1. Reduce Asset/Liability duration mismatch to reduce Interest Rates SCR

2. Reallocate Credit to Equities and Real Estate to balance sources of return and risks

3. Optimize Equity allocation

6,9%

7,3%

6,0%

0,5%

SCR Interest rates

SCR Credit

SCR Equity

SCR Currencies

SCR Interest Rates

17,3%

3,4%

SCR

Diversification*

SCR Currency

Foreign Exchange

7


Asset Class Simulation 1+2+3 Current Asset

Allocation (%)

Cash 0% 0%

Total € Govt bonds 35% 17%

Including € Govies (10Y+) 26% 0%

Total Credit 48% 72%

Total Equities 11% 8%

Including equity solution

optimized under SII 5% 0%

Total Alternative Invest. 6% 3%

Including Real Estate 3% 0%

Simulation

1+2+3

Current asset

allocation

Current Yield 1.75% 1.42%

12 month expected return 4.05% 3.95%

Normalized LT return 2.47% 1.85%

Volatility 4.46% 3.17%

Modified duration 6.17 4.43

Max DrawDown -6.52% -5.65%

12 month Sharpe Ratio 0.91 1.25

Normalized LT Sharpe ratio 0.55 0.58

Market SCR 13.79% 17.31%

1- Reduction of the Asset/Liability mismatch

2- Reallocation of credit exposure

3- Equity optimization

A more efficient asset allocation under S2:

An increase of the expected return

A higher volatility on the asset side due to the increase of asset duration (ALM management)

Significant reduction of Market SCR

8


Source: Amundi

* Diversification is the SCR reduction coming the de-correlation of the different market

SCR components

Impact of the allocation changes on the Market SCR

6,1%

4,6%

5,1%

0,6%

SCR Interest rates

SCR Credit

SCR Equity

SCR Real Estate

SCR Interest Rates

13,8%

2,6%

SCR

Diversification*

6,9%

7,3%

6,0%

0,5%

17,3%

3,4%

Before change After change

Foreign Exchange

9

Agenda






6. Appendices

10

Strategies/techniques mitigating Equity SCR

Overview on available techniques and strategies under the standard model :

Strategies / techniques mitigating Equity SCR

Strategic participations

Equity SCR = 22% Option strategies

Upside Call option strategies based on purchasing call options

Equity SCR ~ 10% (1)

Put Option hedging strategies based on buying long dated put options

Equity SCR ~ 22% (1)

Explicit guarantee (CPPI)

Equity SCR = max 20%

11

Combining cautious equity process and optimized protection under Solvency 2

Insurance Eurozone Equities

Expertise

Guarantee Expertise Dynamic rebalancing Strategy

An innovative strategy combining cautious equity investment process - seeking

risk/return optimization - and bank guarantee

Benefit from dividends and

equity return

Dynamic risk management

strategy mitigating markets

drawdown effects and SCR

equity

Amundi formal guarantee (A+

rated)

Amundi AM Multi-expertise Solution:

Amundi Eurozone equity solution with a bank guarantee

12

Main caracteristics of Amundi solution

Performance Engine

(Amundi AM Insurance Eurozone equity process)

Dynamic allocation between the

assets based on a risk budget

approach

Non Risk Assets

(money market & short term rate

instruments)

Guarantee

3

1

2 A solution dedicated to European

insurance companies combining:

An exposure mainly on Eurozone equities1

A formal bank guarantee of 80% of capital to

reduce SCR Equity

- 80% of capital protection on a yearly rolling

basis

- Bank guarantee granted by Amundi (A+ rated by

Fitch Ratings)

- Application of the CPPI methodology by Amundi

AM

13

A leading equity investment solution for insurers (1)

Better Sharpe ratio than the EuroStoxx 50 (thanks to Amundi AM Insurance Equity process) with half of the Capital Charge

In conclusion, by combining financial market and regulatory efficiency, Amundi AM’s equity solution is an effective way to optimize insurer’s equity allocation and capital charge: Increase the expected return of

the asset allocation with the same level of Market SCR

Reduce the Market SCR with the same expected return

(*) guarantee = 80% Max daily NAV over 1 year

(d) daily, (m) monthly, (q) quarterly

Source: Amundi AM, data as of July 2016,

Period: 31/12/2009 - 31/07/2016

Amundi Eurozone

Equity process

Euro Stoxx 50 Index

(NR)

Amundi Eurozone Equity

process + guarantee*

Euro Stoxx 50 Index

(NR) + guarantee*

Total return 50.9% 24.4% 21.0% -1.9%

Annualized return 6.4% 3.4% 2.9% -0.3%

Volatility (m) 14.2% 16.6% 12.1% 12.9%

Max Drawdown (d) -28.7% -33;3% -21.9% -33;2%

Average SCR (q) 37.8% 37.8% 20.0% 20.0%

14

A leading equity investment solution for insurers (2)

Of the 83 tracks of 5 years periods, beginning every Thursday since the launch dof the Eurozone Equity process, the combination with the guarantee would have enabled to cap the SCR at 20%, while offering ab average outperformance of 27 bp vs. The Euro Stoxx 50 and for a weakest average volatility.

Of the 83 tracks , the Eurozone Equity process with guarantee outperformed the Euro Stoxx 50 in 69 % of cases (57/83)

(*) guarantee = 80 % max of the daily NAV over a rolling year

Source: Amundi AM, data as of en of July 2016

83 simulations of 5 years periods, beginning every Thursday, from

31/12/2009 to 28/07/2011

Amundi Eurozone

Equity Process

Euro Stoxx 50

Amundi Eurozone

Equity Process + guarantee*

Euro Stoxx 50 +

garantee

Average annualised performance over 5 years

8.4% 6.2% 6.5% 4.8%

Average annualised volatility for each period

18.3% 21.8% 13.2% 15.7%

0 1

6

9 10

22 22

7

5

1

0

5

10

15

20

25

-2,0% -1,5% -1,0% -0,5% 0,0% 0,5% 1,0% 1,5% 2,0% 2,5%

Fre

qu

en

cy

Outperformance

15

Agenda






6. Appendices

16

Proven track record

Source: Amundi AM, GIPS as of 31/07/2016. Given for illustrative purposes only, may

change without prior notice.

*Annualized volatility on a monthly basis.

 An investment process combining:

A better return than the underlying equity

market: 50.9% vs 24.4% since inception

A portfolio profile less volatile, more

defensive (beta =0.83) and more resilient

in large market drops (max drawdown)

Since inception (31/12/2009 - 31/07/2016) GIPS Composite Euro Zone Equity Market

(EuroStoxx 50 NR)

Cumulated return 50.9% 24.4%

Annualized return 6.4% 3.4%

Annualized volatility* 14,1% 16.5%

Risk adjusted return 0.44 0.19

Equity market beta 0.83

Max Drawdown (on a monthly basis) -23.3 % -25.9 %

Time to recovery (in months) 20 20

17

Consistent track record

Source: Amundi AM, GIPS as of July 31st 2016.

A track record reflecting both an active management and the “insurance” investment style (the volatility

of GIPS composite is systematically below that of the market)

The average holding period per stock is close to 2.5 years

31/07/2016 GIPS Composite Euro Zone Equity Market

Annualized return Annualized volatility Annualized return Annualized volatility

1 year -8.42 14.21 -14.46 20.33

2 years 5.69 14.31 0.68 17.63

3 years 9.15 12.76 5.45 15.70

4 years 12.08 12.02 9.50 14.80

5 years 7.69 14.12 5.44 16.66

6 years 7.32 14.15 4.63 16.48

Since Inception 6.45 14.20 -14.46 20.33

18

Investment philosophy and process: Quality & Visibility

Investment themes and industry selection: looking for long term trends1

– Amundi AM macro-economic and asset class inputs

– Fundamental analysis, searching for long term trends industry by industry

Company selection: capturing the most attractive risk/return trade-off2

– Selection of companies with attractive total return (dividend and stock increase potential) and moderate

downside risk

– Supported by fundamental analysis to assess business model risk: good management, sound balance sheet

and solid growth prospects (input from our 17 Buy-Side Analysts covering 350 companies3)

Portfolio construction: a conviction based approach

– A benchmark-free construction excluding sectors/stocks encapsulating a strong intrinsic risk (even if there is an

appealing short term upside potential)

– Our portfolio is well diversified, based on top-down convictions and maximizes the risk adjusted return of the

equity market (Sharpe ratio)2

1. Past market trends are not reliable indicators of future ones. 2.The Fund does not offer any

performance or full capital guarantee.

3. Source: Amundi AM, data as of December 2015, given for indicative purposes only, may

change without prior notice.

19

Amundi AM’s macro scenario

Strategic views: Identification of long term

investment themes and sector trends

Tactical views: Regular review of each theme

and sector allocation according to the changes

operated within our macro scenario

A top down approach

ECONOMISTS AND

STRATEGISTS TEAM (11 people)

Stocks are selected based on fundamental

analysis (business model, quality of the

management, financial solidity)

Supported by a valuation provided by our Buy-

Side analysts team

Regular review of the investment case

EQUITY ANALYSTS

TEAM (17 analysts)

Bottom up approach = 30%

Top down approach = 70%

Our top down approach allows us to identify long term investment themes and forge sectorial views

We select 50/60 stocks through a fundamental approach that fits our themes (bottom up)

Past market trends are not reliable indicators of future ones. For further details regarding the investment policy,

please refer to the Prospectus and the KIID of the Fund.

Source: Amundi AM, data as of December 2015, given for indicative purposes only, may change without prior

notice.

20

31/12/2009 – 31/07/2016 Insurance Equity

Portfolio Euro Stoxx 50 Attribution Analysis

Sector Average

weight

Total

Return

Contrib. to

Return Average

weight

Total

Return

Contrib. to

Return

Sector

allocation

Effect

Selection

Effect Total

Total 100.0 52.0 52.0 100.0 24.4 24.4 14.9 12.7 27.6

Consumer Discretionary 14.7 109.1 13.9 9.4 93.2 7.3 3.3 0.8 4.2

Consumer Staples 9.3 131.4 10.0 10.0 126.2 10.4 -1.0 0.1 -0.9

Energy 8.2 32.4 3.0 8.9 14.7 2.3 0.7 -0.1 0.6

Financials 14.5 -4.8 -3.5 26.2 -16.2 -8.2 6.7 2.2 8.9

Health Care 18.2 104.9 17.4 9.2 81.8 7.7 1.2 4.9 6.1

Industrials 16.2 98.8 11.7 11.0 61.9 5.6 1.4 4.5 6.0

Information Technology 3.6 40.3 1.2 4.8 44.2 2.5 -1.0 -0.0 -1.0

Materials 6.1 49.8 2.7 6.4 34.7 2.4 -0.2 0.9 0.7

Telecommunication Services 6.1 -3.0 -2.5 6.8 7.3 -1.2 0.0 -0.4 -0.4

Utilities 3.2 2.9 -2.0 7.2 -27.3 -4.5 3.7 -0.2 3.5

Amundi AM insurance equity process: performance analysis*

The performance attribution analysis demonstrates

The value added of our investment process: +27.6% since inception

The relevance of our top down approach: +14.9% came from sector allocation

*Based on front office data (positions and price) excluding cash position. That explains the difference between the

performance of the GIPS composite and the performance attribution.

Past market trends are not reliable indicators of future ones. Information given for indicative purposes only, may change

without prior notice.

21

Agenda






6. Appendices

22

Bank Guarantee: what pay off?

 Guarantee managed by Amundi AM through a dynamic CPPI process

No purely algorithmic CPPI:

– A dynamic process based on a Variable Loss Parameter approach

– An approach which is less costly than the traditional CIB Approach*

1 year rolling guarantee: 80% of the Max NAV over the previous year

– Each NAV established on a day D (NAVD) is guaranteed to be at least equal to 80% of the Max NAV reached

over the preceding year

– The investor is thus guaranteed that for the 1-year period following date D, any future NAV will be at least equal

to 80% of NAVD

– At the end of this 1-year period following date D, the level of the guarantee can decrease:

This would occur if all the NAV between NAVD+1 and NAVD+366 are < NAVD

This potential decrease of the guarantee level, also called « reset » is linked to this rolling feature of the guarantee

* See Appendix for more details.

The Fund does not offer a performance or full capital guarantee. For further details, please refer to the

Prospectus and the KIID of the Fund.

Even in case of sudden, material and lasting Equity market downturns,

thanks to the decrease of the guarantee level, the product will be re-

exposed to Equity at the latest 1 year after.

23

Key points - Bank guarantee

In economic terms, a bank guarantee is an efficient way to

– Define explicitly the risk budget of an equity portfolio through a maximum capital loss

– Set and reset the guarantee level in line with our objectives as well as the insurance company’s requirements

– Manage the downside risk coming from the equity market

In regulatory terms, a Max yearly NAV guarantee allows to

– Reduce the equity stress under Solvency II to the guarantee level

– Set the maximum capital charge*

Bank guarantee does not imply regulatory constraint impacts on the underlying equity process

The guarantor uses market (vs regulatory) inputs to calibrate its risk model. Then, the guarantor's

risk model evolves with market changes and takes into account diversification (e.g. : correlation

between OCDE countries) and economic specificities (e.g. : Euro Stoxx 50 vs defensive process) that

the Standard model doesn’t recognize.

*To be fully recognized under Solvency II a guarantee must apply for at least a 12 months period, otherwise the

effect of the guarantee is reduced pro rata temporis.

The Fund does not offer a performance or full capital guarantee. For further details, please refer to the

Prospectus and the KIID of the Fund.

Bank guarantee is a flexible and efficient tool to manage

market risk and regulatory capital charge

24

Bank guarantee: regulatory requirements and impact on SCR

Regulatory requirements under Solvency II

– The guarantor must have a credit quality equivalent to “Investment Grade”

– The guarantee must be legally effective

Amundi group would be the guarantor

– Amundi Group is authorized to issue financial guarantees

– Amundi Group is rated A+ by Fitch Ratings

The guarantee generates some SCR “counterparty risk”

– Additional default SCR is small, whatever the dampener’s level due to guarantor's rating

Source: Amundi AM, data as of December 2015. Given for illustrative purposes only, may change without prior notice.

Level of guarantee No guarantee 80% 85% 90%

SCR Equity (dampener = 0) 39% 20% 15% 10%

SCR default 0.00% 1.15% 1.45% 1.75%

Equity SCR + default SCR taking into account

a correlation of 25%

39.0% 20.3% 15.4% 10.6%

25

Eurozone equities pocket

Eurozone Equity

Investments Team dedicated to Insurance

process

Bank guarantee: how does it work on a daily basis?

Portfolio governance

– The Hybrid Structured Fund Management Team is the lead portfolio

manager. As so, it is responsible for the over portfolio management

and the bank guarantee monitoring and management. It is also in

charge of managing money market instruments.

– The Eurozone Equity Investments Team dedicated to Insurance

process is responsible for the equity investment management.

Guarantee management

– On a daily basis, the Hybrid Structured Fund Management

computes the maximum equity exposure of the portfolio to comply

with the level of the guarantee. If required, it sends instructions to

the Investment Team dedicated to Insurance process to adjust the

equity exposure.

– The Investment Team dedicated to Insurance implements the

Hybrid Structured Fund Management’s instructions by increasing or

decreasing equity investments without changing the structure of

equity portfolio.

Defined by Hybrid Structured

Fund Management

Money market pocket

Hybrid Structured Fund Management

Lead Portfolio Manager:

Hybrid Structured Fund Management

Information given for indicative purposes only, may be changed without prior notice. For further details, please refer to the Prospectus and the KIID of the Fund.

26

A stringent and disciplined guarantee management process

Objectives

– Compute, on a daily basis, the maximum equity exposure (capped at 100%) compliant with the

guarantee level

– Implement adequate equity exposure

Control of the

portfolio valuation

(equity and money

market Instruments)

Compute the internal

risk parameter of the

entire equity portfolio

Reassess the risk

budget

(Gap between NAV and

guaranteed floor)

Rebalancing (if needed) between equity and

money market instruments to ensure that

portfolio risk parameter < risk budget

Reassess internal risk parameters

and correlations based on internal

models

Control that the equity exposure is

compliant with the guarantee level

Daily Monthly

Maintain internal models regarding internal risk

parameter and correlation calculations

Valuation

Agent

Amundi Guarantee management Amundi AM Risk department

Daily

Daily

Daily

Information given for indicative purposes only, may be changed without prior notice. For further details, please refer to the Prospectus and the KIID of the Fund.

27

Agenda






6. Appendices

28

Process back test

Source: Amundi AM, data from 31/12/2009 to 31/07/2016.

Past market trends are no reliable indicator of future ones.

29

Process back test without guarantee reset

Source: Amundi AM, data from 31/12/2009 to 31/07/2016.

Past market trends are no reliable indicator of future ones.

30

Comparison with option based strategies

Period: 31/12/2009 - 31/03/2016

Amundi Eurozone

Equity process

Euro Stoxx 50 Index (NR)

Amundi Eurozone Equity process +

guarantee

Euro Stoxx 50 Index (NR) + guarantee

Euro Stoxx 50 Index (NR) + put option

Total return 47,1% 22,2% 30,2% -3,1% 4,7%

Annualized return 6,4% 3,3% 4,3% -0,5% 0,7%

Volatility 14,4% 16,8% 13,3% 14,4% 12,0%

Max Drawdown (daily) -28,7% -33,3% -23,1% -35,7% -22,9%

Average SCR (quaterly) 38,0% 38,0% 20,0% 20,0% 18,4%

(*) guarantee = 80% Max NAV of 4 last quarter

(d) daily, (m) monthly, (q) quarterly

Source: Amundi AM, data as of March 2016, given for illustrative purposes only, may change

without prior notice. The Fund does not offer a performance or full capital guarantee.

31

Disclaimer

 This material is not deemed to be communicated to, or used by, any person, qualified investor or not, from any country or jurisdiction which laws or regulations would prohibit such

communication or use.

 This material is communicated solely for information purposes and neither constitutes an offer to buy, an investment advice nor a solicitation to sell a product. This material is

neither a contract nor a commitment of any sort.

 This material is solely for the attention of “Professional” investors as defined in Directive 2004/39/EC dated 21 April 2004 on markets in financial instruments or as the case may be

in each local regulations and, as far as the offering in Switzerland is concerned, for the attention of “Qualified Investors” as defined in Swiss applicable laws and regulations.

 Moreover, this material is for the attention of institutional, professional, qualified or sophisticated investors, under the applicable law and regulations.

 This material is not to be distributed to the general public, private customers or retail investors in any jurisdiction whatsoever nor to “US Persons”.

 The value of, and any income from, an investment in the product(s) can decrease as well as increase. Past performance is not a guarantee or a reliable indicator for current or

future performance and returns. The performance data do not take account of the commissions and costs incurred on the issue and redemption of units.

 The value of an investment is subject to market fluctuations, and may therefore go down as well as up. It is therefore possible that investors will not get back the amount they

originally invested.

 Any projections, valuations and statistical analyses provided herein are provided to assist the recipient in the evaluation of the matters described herein. Such projections,

valuations and analyses may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results; accordingly

such projections, valuations and statistical analyses should not be viewed as facts and should not be relied upon as an accurate prediction of future events. There is no guarantee

that any targeted performance will be achieved.

 The provided information is not guaranteed to be accurate, exhaustive or relevant: although it has been prepared based on sources that Amundi Asset Management considers to

be reliable it may be changed without notice. Information remains inevitably incomplete, based on data established at a specific time and may change.

 All potential investors should determine prior to any investment decision the suitability of any investment as regards the enforceable regulations as well as the tax consequences of

such an investment and should inspect regulatory documents in force for each product.

All potential investors should seek the advice of their legal and/or tax counsel or their financial advisor prior to any investment decision in order to determine the suitability of any

investment before making any commitment or investment, in order to determine whether the investment is suitable for them, and should not only consider this material alone to

make investment decisions.

 Amundi Asset Management accepts no liability whatsoever, whether direct or indirect, that may arise from the use of information contained on this page. Amundi Asset

Management can in no way be held responsible for any decision or investment made on the basis of this information.

 The information contained in this material shall not be copied, reproduced, modified, translated or distributed without the prior written approval of Amundi Asset Management, to

any third person or entity in any country or jurisdiction which would subject Amundi Asset Management or any of its products, to any registration requirements within these

jurisdictions or where it might be considered as unlawful.

 All trademarks and logos used for illustrative purposes in this document are the property of their respective owners.

 This material has not been reviewed by any financial regulator.

 The Funds are not sponsored, approved, sold or marketed by the index providers. The index providers make no declaration as to the suitability of an investment. More information

about the index is available from the provider's website. The funds are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its

affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI index (collectively, the “MSCI parties”). The

MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain

purposes by Amundi None of the MSCI parties makes any representation or warranty, express or implied, to the issuer or owners of this fund or any other person or entity

regarding the advisability of investing in funds generally or in this fund particularly or the ability of any MSCI index to track corresponding stock market performance. A complete

description of the MSCI indexes is available on request from MSCI. MSCI indexes are registered trademark of MSCI which are used to identify indexes it calculates and publishes.

MSCI guarantees neither the value of the index at any given time nor the results or performance of products indexed against this index.

 The information contained in this document is deemed accurate as at August 2016.

32

Siège social :

90, boulevard Pasteur - 75015 Paris – France

Adresse postale :

90, boulevard Pasteur - CS 21 564 - 75730 Paris Cedex 15 - France

Tél. : +33 (0)1 76 33 30 30 – www.amundi.com

Société Anonyme au capital de 596 262 615 euros - 437 574 452 RCS Paris

optimizing equity investment under solvency 2 · 1. equities are attractive but expensive under...

Documents