Posts Tagged ‘insurance’

There    are    many    types    of    regulatory    constraints. These involve constraints on the asset classes that are permissible and concentration limits on investments. Moreover, in making the asset allcation decision, consideration must be given to any risk-based capital requirements. For depository institutions and insurance companies, the amount of statutory capital required is related to the quality of the assets in which the institution has invested. There are two types of risk- based capital requirements: credit risk-based capital requirements and interest rate-risk based capital requirements. The former relates statutory capital requirements to the credit-risk associated with the assets in the portfolio. The greater the credit risk, the greater the statutory capital required. Interest rate-risk based capital requirements relate the statutory capital to how sensitive the asset or portfolio is to changes in interest rates. The greater the sensitivity, the higher the statutory capital required.

Examples    of    client-imposed    constraints    would be restrictions that specify the types of securities in which a manager may invest and concentration limits on how much or little may be invested in a particular asset class or in a particular issuer. Where the objective is to meet the performance of a particular market or customized benchmark, there may be a restriction as to the degree to which the manager may deviate from some key characteristics of the benchmark.

Once a portfolio strategy is selected, the next step is to select the specific assets to be included in the portfolio. It is in this phase of the investment management process that the investor attempts to construct an efficient portfolio. An efficient portfolio is one that provides the greatest expected return for a given level of risk or, equivalently, the lowest risk for a given expected return.

Critical to the success of Ralph’s efforts to build a value-creation focus into EG was the need to upgrade the role of the CFO. It was clear to Ralph that the link between business strategy and financial strategy was becoming tighter. Corporate strategies, which are designed to create an advantage in the market for corporate control and financial markets, are by definition intertwined with financial considerations. Furthermore, it was going to take a lot of work to make managing value an important element of EG’s strategy and management approaches. Ralph would need a strong executive who would be able to help him push this through.
EG financial officers had been focused on running the treasury operation, producing financial reports, and negotiating the occasional deal. Ralph needed much more, and since his current CFO was due to retire at the end of the year, he felt this was a perfect opportunity to redefine the role. Ralph’s concept was to create a position that would blend corporate strategy and finance responsibilities. The officer would act as a bridge between the strategic/operating focus of the division heads and the financial requirements of the corporation and its investors. Ralph drafted a job description for this position, which in EG’s case would carry the title of executive vice president (EVP) for corporate strategy and finance. The EVP would act as a kind of ‘’super CFO” and take the lead in developing a value-creating corporate strategy for EG, as well as to work with Ralph and the division heads to build a value-management capability throughout the organization.