Alternative Asset Investment

The ability for an organisation to be successful in the Bulk Annuities market is dependent on its ability to price it’s offerings competitively.  Effective pricing is enabled by having an ability to invest in alternative assets that have cash flow profiles suitable for matching adjustment eligibility whilst delivering higher yields than could be obtained by investing in more traditional assets.  This requirement for an alternative asset capability puts pressure on an organisation’s operating model, requiring origination, risk and operations groups to work closely together to ensure new asset types can be assessed and invested in quickly whilst handling the greater complexity in capturing, recording, valuing and reporting these new assets.

Holley Holland has market practitioner experience that can help clients to develop an effective end-to-end operating model that enables new business take-on whilst ensuring:

  • an effective control environment is maintained;
  • risk is understood and managed effectively; and
  • latest regulations, such as those relating to valuation uncertainty, are complied with

Asset/Liability Management

Asset Liability Management (ALM) is a fundamental element of a life and pensions organisation’s strategy and operations.  The need to match assets purchased to insurance liabilities is made more challenging because of the nature of originating bulks business (spikes in liability exposure rather than steady take-on) combined with the need for investing in alternative assets.

Managing the ALM process efficiently is important both from a risk management and operations perspective to avoid unwanted exposure and increased operational costs.  Organisations often have manually intensive processes, usually involving the use of spreadsheets, for processing and calculating:

  • Cash flow forecasts for investment assets to use in the Valuation Interest Rate (VIR) calculation process for annuity liabilities;
  • Matching of assets to liabilities using cash flow information; and
  • Assets that need to sit in appropriate Matching Adjustment portfolios.

Holley Holland has experience of managing improved delivery of outputs from alternative assets valuation processes for use in ALM calculations.  Combined with our technology capability we are therefore well positioned to help clients streamline their ALM processes with process re-engineering and bespoke technology solutions.

Collateral Management

Bulk annuity deals are usually significant in size and for those classified as “jumbo” deals (>£500m) there is an established market convention for collateralisation to be included in the deal terms.  Given the nature of the arrangements negotiated these collateral requirements are bespoke in nature and require expertise to ensure that terms agreed provide the desired outcome (risk mitigation) and can be adopted by collateral operations teams, including TPAs.

Holley Holland has deep technical expertise in collateral management and helped clients to secure new business by enabling their collateral function to support new arrangements.  Examples of help provided has included:

  • Design, build and implementation of a collateral capability designed specifically for the Insurance market, incorporating non-standard eligibility criteria such as duration and matching of a collateral portfolio to specified targets in terms of credit quality and duration;
  • Advised on the all collateral aspects of a deal which were key to winning a c£1.6bn bulk pension annuity deal and subsequent smaller deals;
  • Implemented complex collateral requirements demanded under c£1bn reinsurance contract, including non-standard account structures and multifaceted solvency event triggers;
  • Advised on new collateral terms and agreements to facilitate Collateral Clearing

Asset & Collateral Optimisation

The latest regulatory developments (Basel III and Dodd-Frank) have led to banks needing to assign more equity capital to cover risks and strengthen their solvency in times of market crisis, such as those seen in 2008. The option for banks to reduce the amount of capital required by adequately mitigating risk through collateralisation has led to greater levels of collateralisation.

These increased levels of collateralisation puts more pressure on organisations to be efficient in how they manage collateral and has led to several service providers offering collateral optimisation facilities. Whilst these services are available to both sell and buy side organisations, the level of complexity combined with the bespoke nature of insurance and bulks related collateral requirements may deter insurance providers from embarking on optimisation programmes.

Holley Holland can help with its deep understanding of collateral processes and operations to enable insurance clients to realise greater value from its pool of investment assets.

How Holley Holland can help

Holley Holland has deep expertise that can help market participants to be successful in the BPA market. Our experience highlights are:

  • Developing and implementing necessary collateral capability to meet current industry standards;
  • Assisting trustees in understanding whether prospective deal partners have the appropriate level of collateral expertise with the necessary controls in place;
  • Assisting insurers in developing alternative asset investment capability, including systems and controls for managing and controlling complex valuation processes and meeting current regulatory standards such as those on valuation uncertainty;
  • Supporting transition activities, including the transfers of in-specie assets and embedding repeatable and scalable business-as-usual processes; and
  • Providing thought leadership to help insurers and trustees to develop new industry standards for managing BPA deals.

Featured Articles

The BPA Collateral Conundrum 

“Does the drive to collateralise more bulk annuity transactions lead to suboptimal outcomes for customers, pension trustees and insurers?”

In our first article examining one of the key challenges faced by participants in the bulk annuities market we discuss the potential unintended consequences of risk mitigation activities. At Holley Holland we have the expertise to help organisations overcome some of the major operational obstacles to enable success in the bulk annuities market. We’d be delighted to hear from you to discuss your issues and to register your interest in our forthcoming Bulks Investment Services survey.

Agile Steps on the 1,000 Mile Journey

“A journey of a thousand miles begins with a single step…but it helps if it’s bold and in the right direction!”

Initial Margin Regulation for the Buy-side

Of the five waves scheduled for Initial Margin (“IM”) segregation, some buy-side institutions will be caught by Wave 3, but most will be captured in Waves 4 & 5 as the threshold notional amount of non-cleared derivatives reduces from EUR 1.5tn in 2018 to EUR 0.75tn in 2019 and EUR 8bn in 2020. In this article, we outline the technical challenges that need to be solved by market participants to enable successful implementation for future Waves.