MANAGEMENT OF RISKS

Market, corporate, liquidity and credit risks are managed in a consolidated form at PREVI. Management takes place through the Market Risk Committees, Assets and Liabilities Management (ALM) and Corporate Management, which define the strategies of management in this matter and involve several areas of PREVI.

Regarding Investments Policy, macro-allocation considers the risks of each segment of investment in accordance with the level of risk adapted for the Social Security Plan maturity. In this sense, the ALM - Assets and Liabilities Management - was the main tool in financial simulations of the Plan aiming for an optimal allocation of the assets.

Among the main actions developed in the risk management environment in 2006, the most relevant are:

Corporate risk

Describes the uncertainty as to the economic value of assets due to the variables that can affect the value of the interested companies. Corporate risk models related to 13 companies and 17 real estate undertakings were updated, and models were developed for 3 more companies. In this work, variables are described that can affect company value. It is a decision-making support tool.

Credit Risk

The processes of evaluation and selection of financial institutions were certified by the research institute of University of São Paulo (USP). PREVI uses its own methodology to define limits of exposition to risks of financial institutions, but also considers the practices used by the main risk rating agencies, which reduces the probability of losses.

Market Risk

PREVI enlarged market risk control mechanisms for a great part of its assets. Several reports and information were institutionalized to managers on market risk, mainly of fixed income and variable income (segments that represent more than 80 % of the volume of assets).

ALM

Assets and Liabilities Management -preparation of Investments Policy for the 2007-2012 period relied more effectively on this tool. Analyses of several scenarios allow several simulations of investments macro-allocation.

Liquidity Risk

Once Plan of Benefits 1 is in maturity phase, greater attention was given to the control of liquidity risk. The adoption of a Minimum Cash Account and a Liquidity Mattress fulfills the resource need for payment of benefits and administrative expenses in the next months. To monitor the liquidity need, PREVI uses a Full Liquidity Indicator. This indicator represents the list of all the values that enter PREVI cash account (Input Flow) versus the output amount (Output Flow). The objective of this indicator is to provide the Investments Policy with negotiable strategies in order to maintain the liquidity risk at acceptable levels.