13 December 2018
A competitive approach to managing assets is crucial for Bermudan life re/insurers. In part two of this Insurance Asset Risk / Aviva Investors roundtable, participants discuss their approaches to asset management and the challenges around optimisation and accessing suitable investments
Amy Ponnampalam, CEO, Athora Life Re
Chip Gillis, CEO, Athene Life Re Ltd
Sylvia Oliveira, CEO, Wilton Re Bermuda
Josh Braverman, chief investment officer, Somerset Re
Raymond Brooks, CEO, GreyCastle Holdings
Thomas Olunloyo, CEO, Legal & General Reinsurance
Paolo Fiandesio, senior manager, EY Bermuda
Gareth Mee, global investment advisory leader, EY
Alex Wharton, head of insurance relationships, Aviva Investors
Iain Forrester, head of insurance investment strategy, Aviva Investors
Chaired by: Christopher Cundy, managing editor, InsuranceERM
How do you manage your assets?
Amy Ponnampalam: We use Apollo Asset Management in Europe. Apollo is a strategic partner of Athora and assists with the managing of the asset side of our business. We work with Apollo Asset Management to do ALM, asset allocation and ongoing investment management.
Sylvia Oliveira: At Wilton Re, all of our asset managers are third parties. We take advantage of each asset manager's area of specialty. We also use third party expertise to advise us on asset manager selection and due diligence.
Josh Braverman: We do ALM and asset allocation ourselves. Security selection is done by our managers. Our fund strategy is focused on low volatility, alpha and diversification from our fixed income portfolio.
Ray Brooks: We are going to follow Josh's model closer than the other models. The only difference for us is we have a partnership with BlackRock, not an 'assets under management' partnership where they are handling some of the traditional CIO functionality.
Thomas Olunloyo: We are fortunate enough to have an in-house manager that happens to be top-ten globally. We do all our investment strategy, the asset allocation, ALM, locally. Then we will use LGIM in London and Chicago to manage the assets in the portfolio.
Chris Cundy: When you are optimising the asset portfolio, what are the binding constraints?
Ray Brooks: We have to start with matching adjustment (MA) compliance. Even though we do not have to meet MA requirements, to make the machine work we have to be in the vicinity of MA on the actual investment blocks. That is our first threshold.
Thomas Olunloyo: The MA is also where we start. Both the construction of the portfolio and the individual asset selection has to satisfy the rules of the MA.
Sylvia Oliveira: Our optimisation is based around both regulatory and rating agency requirements, and in many cases the BSCR [Bermuda solvency capital requirement] is the binding constraint.
Chris Cundy: One of the main strategies seems to be increasing the proportion of illiquid assets in a portfolio? How far can you go with this?
Amy Ponnampalam: Illiquids are a key part of our investment portfolio, but there are challenges we have to think about, such as when illiquidity potentially bites. Most of these reinsurance transactions would typically be collateralised – so what happens to illiquid assets when an adverse event happens and the cedent needs the assets back?
We need to know if cedents have the capability to manage illiquid assets. Do they have the knowledge, the expertise, the valuation input to hold illiquids on their books?
You hope that will never happen, but cedents and regulators are very interested in that enforcement scenario when collateral has to go back to a cedent.
Ray Brooks: Our asset allocation starts with the MA but we want and need to be in the illiquid space to be competitive. However, Solvency II and the PRA only give us a pretty slim window of assets that we can consider. It's a real challenge. Picking an asset manager who can help us with that process is important.
Satisfying the pension risk transfer opportunity
Sylvia Oliveira: If the PRA [Prudential Regulation Authority] is reluctant to let assets leave the UK, are there even enough assets to address this $1trn of pension blocks? It seems prudent to spread the longevity and asset risks across to other reliable and reputable jurisdictions, which would diversify the risks and reduce costs to policyholders.
Ray Brooks: I am concerned that there are enough illiquid assets in the UK that meet credit and risk requirements.
Alex Wharton: I do think there is a little bit of a myth that there are not enough assets going around. To give you an example, last year we originated £4.5bn of MA-eligible assets. But we actually had about £2bn of good assets that came through our door that we could not invest in, simply because the supply outstripped the demand from our customers. These are assets with good credit risk and good spreads.
Gareth Mee: This year there might be £30bn annuity market in the UK. Most people would agree that 50% seems to be the top end for the proportion of illiquid backing assets. That means we need to manufacture £15bn of private credit assets: I do not think that is available in the UK market.
However, those people that are able to originate them are obviously in a very beneficial position because if there are not £15bn but there are £10bn and you are the ones that get your hands on the first £10bn, you are going to be able to offer better pricing and win more deals. However, I think it will become the limiting factor of being able to transact that trillion or more.
Alex Wharton: We will probably originate somewhere around £5bn this year and the aim by 2020 is to reach £7bn. We have been scaling up the team and operations to be able to do this. We have a substantial presence in Europe and see opportunities that re/insurers could be taking advantage of.
Thomas Olunloyo: What sectors are you primarily originating in and where do you see the next generation of illiquid assets coming from?
Alex Wharton: We split illiquid assets into four key areas: real estate finance, infrastructure debt, private corporate debt and structured finance. What we see as being important is investors taking more of a multi-asset approach and being able to invest across those four strands. Ramp-up periods are always so important to our clients and the more flexibility that you can give to an asset manager, the more it will improve that ramp-up period – and the spread you can get as well.
Chris Cundy: Are you finding it quite easy to introduce new asset classes into your portfolios? What kind of areas have you been looking at recently?
Paolo Fiandesio: In Bermuda, "alternative" is not really defined. It's more like, 'these are the asset classes that are acceptable' and 'these are the ones that are not acceptable'. Everything that does not fall within those buckets can be considered "alternative" subject to restrictions and approval from the BMA [Bermuda Monetary Authority].
For example, the BMA does place a restriction around the proportion of alternatives which can be used to apply the scenario-based approach. However, by providing supporting quantitative analysis of the risks for each asset class considered as "alternative", it is possible to have a dialogue with the BMA to determine how these can be appropriately used in the calculation of technical provision and their appropriate categorisation within the BSCR for capital purposes.
Sylvia Oliveira: For instance, in the BMA's new asset capital charges, there are some lower charges for real estate-type and infrastructure-type assets that are equity based, not fixed income. The amount of non-fixed income assets is restricted to 5% of the overall portfolio for inclusion in the discount rate for the reserve calculation. If you optimise your portfolio according to the Bermuda capital model, there are certainly some classes that will be more advantageous than others.
Chris Cundy: What risks are you really focusing on when managing your portfolios?
Sylvia Oliveira: One of the major risks I worry about is regulatory risk. Bermuda's recent changes to the equity risk charges and the correlation calculation were surprising, in both magnitude and timing. Bermuda is focused on maintaining its Solvency II equivalence, so any future changes to the EU model will likely translate into changes to the Bermuda model as well.
Amy Ponnampalam: Liquidity is definitely a challenge and something we think about a lot. Going back to the point around collateralising reinsurance transactions, we're very lucky in that we operate on a truly economic balance sheet. If you go and then collateralise the liability, which is really not economic at all, then every time credit spreads move there is potentially a collateral movement at that point. That is something a Bermuda reinsurance company needs to think about.
Thomas Olunloyo: I would say that probably is one of the largest issues that we are currently faced with. We have these pools of assets in Europe and North America and elsewhere. Managing your balance sheet across those restrictions is a significant challenge. It is one that we all have to be very mindful of, especially as we look to grow and to take on more business.
Another thing that we are really concerned about is credit risk and how we understand the exposures that we are taking on. We do not try to convince ourselves that moving down the credit curve is acceptable in trying to find more yield. Maintaining discipline around credit selection is critical.
Josh Braverman: There is risk is around the pricing process i.e. before pricing a block of business if you do not put on enough spread you are not going to win the business in the first place. Put too much spread in, and you are taking too much risk.
It is very important to align the investments, or at least the way they are benchmarked, with how the business was priced in the first place. Having a system where you can truly understand the drivers of profitability and the overall transaction, including the decisions made on the asset management side, whether they are from an asset allocation or securities selection perspective, is very important.
Chris Cundy: The Bermuda regime is not very kind to some assets – unrated credit for example. Do you think using an internal model will allow a realistic risk calibration and enable you to put such assets on the balance sheet?
Sylvia Oliveira: That is untested here. No life companies have yet applied for internal model approval.
Paolo Fiandesio: A few have started the process in the past, but the BMA does not want to push firms down the internal models route. They recognise it is quite a high investment on both sides, for the reinsurer but also for the regulator.
Josh Braverman: Internal models do not solve the credit spread issue. In Solvency II, the MA does a far better job of it. Depending on what sort of correlation matrices you have in the internal model, it can recognise the benefit of some diversifying investment strategies. I think in that regard, internal models are pretty interesting.
Part one of this roundtable, which discusses the drivers behind the growth in Bermuda's life re/insurance sector, can be read here