(September 24, 2013) — US pension funds seeking a bulk annuity purchase should hold bonds, commercial mortgages, and asset-backed securities to secure asset-in-kind buyout deals, according to research from Penbridge Advisors.
Traditionally, US pension risk transfers with insurance companies have been transacted using only cash generated by the plans liquidating their assets.
In the UK however, the use of assets-in-kind—where assets are transferred to the insurer/s as part of the buyout deal—has been prolific.
The scale of the GM and Verizon deals in 2012 led to the need to allow asset-in-kind transactions too, and now other US insurers are becoming comfortable with accepting assets instead of cash.
That need has forced more insurers to consider what assets they would accept in future asset-in-kind transactions, leading Penbridge Advisors to survey insurers to see what their favoured assets are.
All of the insurers the consultancy asked said they would accept treasury bonds, investment-grade corporate bonds, high yield bonds, private placement bonds, commercial mortgages, and asset-backed securities in an assets-in-kind buyout transaction.
Most would also accept real estate, preferred stock, and private equities, the research found. In some cases, hedge funds, unit-linked funds, and derivatives were also acceptable.
However, the report was quick to warn that even if a certain asset class was approved, the specific asset may not be suitable, as insurers need to manage duration as well as credit and exposure limits within the entirety of their investment portfolio.
“Most carriers said that they would in fact need to evaluate specific assets within each asset class for suitability; and they generally agreed that duration, credit quality, issuer credit limits, and their view of the issuer would all be relevant in that regard,” the report said.
“But, should certain assets be unsuitable for the buyout business, several insurers said they would consider using them to support another line of business.”
Valuation
The trickiest aspect of using assets-in-kind is arguably working out an agreed value for the assets. Penbridge Advisors’ report showed a variety of acceptable ways for insurers to agree on price: the insurer sets the valuation alone, a mutual agreement between both parties, or using third-party valuation.
One company even suggested selecting different methods for different asset classes, with those more heavily traded using publicly available pricing sources.
“Clearly, it may be quite a challenge to manage negotiations with several insurers at once on different valuation methods,” the report said.
“On the other hand, if a plan sponsor decides to ‘lay down the law’ in terms of what valuation method must be used, they may lose participation from some insurers in the bidding process.
“Beginning discussions with insurers well in advance will allow time to negotiate terms, to establish an agreeable valuation methodology (including the use of an independent third party where needed), and to enable review of the plan’s asset portfolio by the insurers.”
The full report can be read here.
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