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  #1  
Old 12-22-2017, 01:24 PM
sKansKi sKansKi is offline
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Default ALM with just a liability projection and a spreadsheet of assets

We are required by our auditor to do some Asset Liability Matching...even though we have arguments against it...so I'm trying to throw this together but don't really know what I'm doing.

Right now I have a liability projection. It shows things like Gross & Net Premium, Net commission, Expenses, Benefits, Change in (Stat) Reserve. My Total gross & net cashflows are always positive. Even after accounting for Change in reserve & corporate tax I am still always profitable.

In a separate spreadsheet, I have a list of the assets we are holding & the projected coupon & maturity payments.

I don't know how to combine the two. What am I trying to match to?

Thank you for your help.

Sincerely,
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  #2  
Old 12-22-2017, 01:28 PM
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What does the auditor think ALM is? You might be able to just get away with showing dollar durations. Effin' auditors!
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Old 12-22-2017, 01:54 PM
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If the auditor called it "matching" they truly don't know what they are doing. I know, that's no help.
Just to be clear, do your cash flow projections assume zero investment income??
If they do assume investment income, that's where you need to tie things together. Take the asset spread sheet and the cash flows there to compare to the assumed investment income. Any shortfall would be made up by selling some assets. In years where there is positive cash flow before investment income, you need to "model" buying more assets.
Good luck!
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Old 12-22-2017, 02:13 PM
sKansKi sKansKi is offline
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Originally Posted by Breadmaker View Post
What does the auditor think ALM is? You might be able to just get away with showing dollar durations. Effin' auditors!
Well, I guess I don't really know, either.

I wish I knew what it meant to show dollar durations.

Effin' auditors!
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Old 12-22-2017, 02:30 PM
sKansKi sKansKi is offline
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Quote:
Originally Posted by JMO View Post
If the auditor called it "matching" they truly don't know what they are doing. I know, that's no help.
well, I'm getting all of this secondhand. I don't know what the auditor's actual words were. I do know that I don't know what I'm doing.
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Originally Posted by JMO View Post
Just to be clear, do your cash flow projections assume zero investment income??
There is no investment income in this projection. It's liabilities only.

I have an Excel file that lists my assets & their coupons & stuff, but it is in no way a part of this liability projection.

Quote:
Originally Posted by JMO View Post
If they do assume investment income, that's where you need to tie things together. Take the asset spread sheet and the cash flows there to compare to the assumed investment income. Any shortfall would be made up by selling some assets. In years where there is positive cash flow before investment income, you need to "model" buying more assets.
Good luck!
My cashflows are always positive...so, isn't that sufficient to show that I don't really need to worry about my assets? ...and so I just keep buying assets the whole time? ...and what sort of return do I assume on those assets I'm holding?

Last edited by sKansKi; 12-22-2017 at 03:29 PM..
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Old 12-22-2017, 02:30 PM
sKansKi sKansKi is offline
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Thanks, both, for helping me out on the Friday before Christmas.
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Old 12-22-2017, 03:20 PM
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Sounds like an effin' auditor is padding the effin' bill with some extra effin' billable hours.

Have the effin' auditor explain his/her effin' self!!!! Tell 'em to have a merry effin' Christmas!!!
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Old 12-22-2017, 03:30 PM
sKansKi sKansKi is offline
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Sounds like a plausible idea.

In the meantime, I need to have something (however rough) by the end of the year & I don't really know what I'm doing.

I think JMO has given me a good idea of what to do...I just need to implement it.
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Old 12-22-2017, 04:38 PM
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Quote:
Originally Posted by sKansKi View Post
Sounds like a plausible idea.

In the meantime, I need to have something (however rough) by the end of the year & I don't really know what I'm doing.

I think JMO has given me a good idea of what to do...I just need to implement it.
JMO's write-up looks mostly like cash-flow "matching", which is one way of interpreting it.

I think there's several ways to "match", which includes asset/liability duration matching as well. The idea here is not just to match asset & liability CF's, but to match the sensitivity of those cash flows to movements in interest rates.

Seriously, though - what is the end game of the auditors asking you to do this? Is there some particular risk that they feel is not currently being addressed with your current analyses? I would think auditors want to explain what they're trying to accomplish (e.g., assess whether blocks of business are sensitive to interest rates/liquidity/spread risk).
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Old 12-22-2017, 09:34 PM
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Quote:
Originally Posted by sKansKi View Post
My cashflows are always positive...so, isn't that sufficient to show that I don't really need to worry about my assets? ...and so I just keep buying assets the whole time? ...and what sort of return do I assume on those assets I'm holding?
If the cashflows coming off the liabilities are positive (i.e. future premiums > future claims & expenses) in all future years, then you're done. You're right, you don't need to bring in the assets backing the reserves. You don't need any assumptions for reinvestment, future returns, future yield curves, etc. The ALM testing is completed. Show that projection from the liability side to the auditors and take off the rest of the year.
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