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Matching Adjustment assets reach £335bn, as the search for quality Illiquid Credit expertise continues...

The search for Illiquidity Premium by long duration investors continues unabated, with latest PRA figures suggesting a steady but sustained upward movement in the volume and diversity of assets for which Matching Adjustment (the upward adjustment in the risk-free rate, from which pension liabilities may be discounted) is applied.

The difficulty for UK life insurers involves the sheer scarcity of illiquid credit assets which might qualify for treatment under the rulebook - with stringent ratings, cashflow and qualitative risk assessments applied to assets under consideration. Consequently, life companies have expanded their field of vision to include an ever wider and often more esoteric body of assets which they look to add to their portfolios: Offshore wind and other renewable energy projects, rail and aircraft leasing portfolios, Export Credit Agency loans and a wide variety of corporate lending, to which investment banks have applied innovative repackaging structures as they look to mitigate underlying risks and meet insurers' complex investment criteria. It's a race which has been sustained by the competitiveness of the UK bulk annuities market - in which pricing against future asset cashflows is key - and a recent increase in activity involving the reinsurance of these assets has added a further dimension. 

Speaking at the recent UK Bulk Annuities Conference, the PRA's Charlotte Gerken reminded participants that the widening categories of specialised lending involved means that participants in the market need to ensure that they have appropriate resources in place to assess, screen and manage illiquid assets. From a recruiter's perspective, this means an inevitable expansion in the types of dedicated asset expertise involved in hiring plans.  It sometimes seems a long time ago since these searches involved a generic 'illiquid credit' remit. Insurance Asset Management's Adam Cadle takes up the story... 

The risk management among UK life insurers of illiquid assets is of “particular concern” to the PRA, with latest figures showing MA portfolios have increased since the start of 2018 by 30%, to around £335bn. At the 18th Conference on Bulk Annuities, PRA executive director for insurance Charlotte Gerken said: “The range of assets that firms hold in their MA portfolios suggests to us that Solvency II is not of itself a barrier to firms investing in a wide range of asset classes. We see everything from covered bonds to infrastructure; and social housing to restructured Equity Release Mortgages (ERMs) backing annuity liabilities. And whilst the majority of exposures are what might be deemed traditional annuity assets, such as gilts and corporate bonds, less liquid exposures as a proportion of the MA portfolios are large and increasing.


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