AXIS Module - Reinvestment
The AXIS Reinvestment Module can be used at the higher level once total asset and liability cashflows are combined to calculate the net cashflow available for reinvestment. A Reinvestment Strategy can be defined which uses accumulated positive and negative net cashflows on a monthly, quarterly or annual basis to model the purchase of new assets at market prices, the sale of existing assets at market prices, borrowing, or combinations thereof.
The amount available for Reinvestment can be invested in the following ways:
- Asset maturities, sales, salvage values, prepayments, or income cashflows can be allocated separately from the aggregate portfolio
- Specified fixed dollar amounts to purchase notional assets (commitments) or to sell existing assets
- Initial Matching Strategy
- Cashflow Matching (either matching both positive and negative cashflows, or negative cashflows only), or
- Duration Matching
- Initial Negative Method
- Borrow up to a specified limit
- Sell assets
- Borrow up to a specified limit, and then sell assets
- Allocation Method - allocates investable cashflows using either:
- Cashflow Allocation, or
- Target Allocation, or
- Blended Allocation (combination of Cashflow Allocation and Target Allocation)
- Rebalancing of the dollar durations of the asset portfolio by means of interest rate swap(s), or
- Rebalancing of the asset portfolio duration by selling assets with the shortest (or longest) duration and purchasing an equivalent amount of assets with longer (or shorter) duration
Along with the above, there is an option in AXIS whereby the Maximum Allocation to specified asset classes for the aggregate portfolio can be specified.
Negative cashflows, from operations or portfolio rebalancing, can be handled in one of 3 ways:
- Borrow at a rate tied to the economic scenario or at a fixed rate.
- Purchase negative notional securities, which simulates the sale of an actual inforce asset in terms of yield impact.
- Sell actual inforce assets with realized gain or loss.
Reinvestment assets used in a reinvestment strategy are modeled similarly to inforce assets. They include:
- Bonds with Sinking Fund
- Real Return Bonds
- Real Estate
- Collateralized Mortgage Obligation (CMO)
- Interest Rate Caps/Floors
Reinvestment assets purchased by a Cashflow Matching or a Duration Matching strategy can also be dynamically created and modeled by AXIS “on-the-fly”. These strategies use generic matching asset types such as zero coupon bonds, annual coupon bonds, semi-annual coupon bonds, mortgages, or interest rate swaps.
Finally, it is possible within a single model to split up the aggregate asset portfolio into various segments backing different portions of the liabilities, each of which are tracked through Liability Categories. Each Liability Category and associated asset segment can have its own unique Reinvestment Strategy.