The vast amount of compliance around private markets has almost prevented a re/insurance firm from investing in the asset class, said Grigory Spivak, Asset Strategy & ALM, Global Funded Solutions, Pacific Life Re, when he was asked about the company’s diversification efforts.
Spivak’s comments came from the Insurance investor Live event in autumn 2023 where he sat on a panel discussing “Portfolio construction and exploring asset price opportunities: Diversification in the asset mix, new access and exit to private markets, and future of ALM”, with representative from Forester’s Friendly Society, Phoenix Group, Aviva, and Advent Capital Group.
The discussion is now published in the Insurance Asset Management Europe report.
Spivak discussed asset diversification, whether it be working with regulators in different jurisdictions or more bread and butter issues such as establishing good relationships with investees.
He also discussed the different role of ESG when comparing the US and the EU/UK, and why it might be the case – especially regarding the tension surrounding ESG in the US.
Grigory Spivak: Pacific Life started the reinsurance business by writing the first UK bulk annuities transactions a couple of years ago. Given the lumpiness of the deals and the duration of UK-deferred annuities, the best asset class for us at the time was the UK public corporate bonds. We would convert our sterling liabilities into dollars and back resulting in dollar liabilities in US corporate bonds and this was the best asset class. That being said, we are very experienced in the US private credit space so the next natural step would be to diversify into private credit assets. We face the issue that the Prudential Regulation Authority (PRA) freely makes UK life insurance companies almost cheat the assets that a reinsurer posts to them as collateral to earn assets in the event of a default.
"We would have to work with the regulators given the review on how to get around this because in principle these assets are very attractive to us."
Although we are not subject to matching adjustment rules ourselves being Bermuda-based or in the US we are almost subject to the matching adjustment constraints from our counterparties. The amount of compliance we have to go through on our private asset side almost prevented us from investing in private assets until now.
We would have to work with the regulators given the review they have done on how to get around this because in principle these assets are very attractive to us but, in practice, it is quite hard to put them into our portfolios.
That being said, we are looking at niche assets where we are partnering with asset management companies belonging to the same group of companies as the cedent or with the cedent themselves. For instance, we could fund equity release mortgages or mortgages alongside our cedent company. Both sides would be comfortable with the underwriting and creating which gives comfort to the PRA that the cedent only gets the assets as collateral, which then they are comfortable with themselves.
Grigory: As a US-centric company with most of the investments going on in the US by our US team, we have a very different take on ESG than our European cedents.
"Some US life insurance companies have licence to sell in multiple states and the requirements from the states can contradict each other."
What we are finding is that they need to demonstrate to their boards so the PRA that the collateral we are providing them is broadly in line with their investment views. ESG is one of the areas where we differ most; some of our cedents take a broad approach and others are more detailed in terms of what we do on the ESG side.
In the US, ESG is in a very different place from where it is in Europe. To start, there is not a single US ESG but there are fifty different ESGs by states. Some of the US life insurance companies have licence to sell life insurances in multiple states and can find themselves in a difficult place where the requirements from the different states can directly contradict each other. It is much more political and diverse than it is in Europe.
