Gareth Haslip, Global Head of Insurance Strategy & Analytics at J.P. Morgan Asset Management, gives Ronan McCaughey a broad overview of life reinsurers' investment strategies across the UK, Europe, Bermuda and the Cayman Islands
What are the main trends and differences you are seeing in asset allocation strategies for life reinsurance markets across the UK, US and mainland Europe?
There are marked differences in the operational environment in the UK, US and Europe. I would also add Bermuda and Cayman to the list of life reinsurance markets.
UK life reinsurance is dominated by pension risk transfer (PRT) business, which is constrained by the UK cedant's matching adjustment (MA) portfolio requirements. The UK Prudential Regulation Authority (PRA) will require that the reinsurance collateral account is invested in a way that is fully compatible with the MA rules in the event of recapture.
This requirement means that asset allocation is likely to focus on assets with predictable cash flows that closely match the treaty cash flows. The portfolio is expected to be dominated by investment-grade fixed income, potentially using SPIRE notes to hedge overseas fixed income exposures, alongside private assets that are eligible for Matching Adjustment (MA) treatment. SPIRE, or Single Platform Investment Repackaging Entity, is a Luxembourg-based special purpose vehicle (SPV).
By contrast, European life reinsurance tends to be less constrained and likely to involve underlying with-profit liabilities that require an allocation of risk assets to ensure the guarantees can be met, with less focus on cash-flow matching.
Finally, in the US, Bermuda and Cayman Islands, life reinsurance asset strategies will vary considerably depending on the underlying liability type and the domicile of the cedant. For example, life reinsurers undertaking asset-intensive reinsurance with US cedants may be limited by the recently implemented Actuarial Guideline 55 (AG 55) regulations from holding excessive higher-spread fixed-income assets in the collateral account.
Meanwhile, a life reinsurer working with international cedants may hold more illiquid assets to enhance the effective liability discount rate under more flexible regimes like Bermuda and the Cayman Islands.
How are life reinsurers' investment strategies adapting to current and expected market conditions?
To begin with, it's crucial to have a robust strategic and tactical asset allocation framework in place. The Strategic Asset Allocation (SAA) framework uses long-term expected market conditions to set the right long-term investment strategy to fund the liabilities within a defined risk and capital appetite.
The output of the SAA is typically a benchmark, which can be thought of as guardrails within which to run the day-to-day portfolio. As the life reinsurer undertakes transactions, the security-level portfolio to back the transaction liabilities is constructed within a tactical framework under current market conditions, with the objective of reaching a competitive price point for the transaction. Here, the SAA guardrails are essential to avoid the incremental effect of each reinsurance deal shifting the overall profile of the wider asset portfolio.
To what extent is life reinsurance now effectively an asset origination and financing business, rather than a pure risk transfer mechanism?
Life reinsurance is foremost a risk transfer mechanism from the perspective of the ceding insurer. The asset origination strategy of the reinsurer is an important determinant of the reinsurance premium, and a reinsurer that has access to better asset origination is more likely to be able to offer the cedant a more competitive quotation.
Alongside this approach, there is also a trend of alternative asset managers being involved in the ownership structure of reinsurers in a symbiotic relationship, where the asset manager provides greater asset-sourcing certainty for the reinsurer while benefiting commercially from having a clear sight of where its assets will be deployed.
The cedant will have the ability to obtain quotations from a wide range of reinsurers, and any differences in investment strategy, along with the reinsurer's creditworthiness, will directly translate into the price level offered.
What are the benefits of private credit and other alternative assets for life insurers and reinsurers?
Private credit and alternatives can bring a lot of value to life re/insurers, particularly when structured in an investment-grade note format, which is well suited to back long-dated liabilities. For PRT business, life re/insurers are ideally looking for long-dated private credit notes that exhibit strong cash-flow predictability, but the exact requirements vary across different regulatory jurisdictions.
For example, while the UK has very strong regulatory requirements for the matching adjustment, particularly around cash-flow predictability, in other regimes like the US, Bermuda and Cayman, there is greater flexibility.
In Bermuda, for instance, the Scenario-Based Approach (SBA) regulatory framework for life re/insurers permits reinvestment to feature in the investment strategy, which opens the door to a wider range of private credit investments. This ultimately results in better outcomes for cedants who can benefit from more competitive pricing and does not necessarily increase risk since the SBA framework is conservative and sets reserves on a worst-outcome interest rate scenario test.
Private credit has come under the spotlight recently in the context of liquidity for retail investors, along with some credit impairments. Insurers have the distinct advantage that when investing to back illiquid liabilities, they typically have lower immediate liquidity needs in the liability-backing assets. Insurance regulators understand this distinction and the various regulatory frameworks already have capital charges intended to reflect the default risk in private credit.
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