Investment Policy Statement: Lusitânia Workman's compensation Portfolio

This master’s Final Work is an Investment Policy Statement aimed to govern a liabilities portfolio, namely liabilities attributed to worker´s compensation insurance, medical expenses insurance, and income protection insurance. These three types of liabilities are blended into a single liability portfolio. Lusitania Seguros is a subsidiary of Montepio Geral- Associação Mutualista, the largest portuguese mutual association, which initiated activity in 1986. As the goal is to cover their future liabilities, it is imperative that the portfolio yields sufficient returns. As such, an expected annual return of at the least 2,5% above the risk-free rate is one of the attainable goals, as well as maximum expected volatility of 7,5%, per year. Due to the portfolio´s goal of covering liabilities, it is thus imperative that enough cash is yielded each year from the portfolio´s assets. As such, the investment philosophy relies on a portfolio immunization strategy, englobing both cash flow matching and duration matching, to mitigate potential credit and interest rates risks. Because of this, the asset allocation strategy should be based on predictable cash flows, which means building a portfolio mainly composed of fixed income securities, and also including real estate and a fair percentage of cash. This ensures better accuracy when matching both cash flows and durations from the asset portfolio and the obligations portfolio. The asset portfolio focuses mostly on government and supranational bonds, but also includes some corporate and covered bonds, to mitigate potential defaults, while maintaining reasonable returns prospects. Also, the majority of the securities are ETFs, as investing in them provides considerable diversification at low costs, while trying to increase returns (optimization portfolio). More specifically, 65% of the portfolio is composed of fixed income and real estate indices, and 35% is related to the immunization portfolio, which is only constituted by individual securities, in order to perform cash flow matching. In terms ofrisk management and analysis, value at risk and expected shortfall are computed for 99% and 99,9% confidence levels, using both the historical method and a Monte Carlo simulation