PI Partnership – Aon
Synthetic credit
Investment strategies at insurance companies are designed to be ‘safe havens’. As such, they hold many of their assets in government bonds and investment grade credit. Holding an element of credit can help assets move in line with the price-lock offered by an insurer – the most efficient, and cheapest, way to build this exposure is through synthetic credit. This provides exposure to credit that is more flexible and quicker to adjust to match a specific insurer’s pricing basis than physical credit. Synthetic credit also has held its value better than investment grade corporate bonds in peri- ods of significant market turmoil such as the global finan- cial crisis and the onset of the Covid-19 pandemic in March 2020. Synthetic credit also incurs lower transaction costs in the process.
It is never too early to start planning for buyout – a key part of which will be making strategic investment decisions to align portfolios to this objective. Aon’s risk settlement and endgame investment experts can bring clarity and confi- dence to investors as they navigate these decisions to better position themselves with insurers in the future.
CASE STUDY: PREPARING TO REDUCE TRANSACTION COSTS
Aon has vast experience of successfully preparing scheme assets for buyout. One recent example of our success was leading a long-standing client to achieve its target much sooner than anticipated. Originally anticipating an insur- ance transaction in about 2025, our investment team structured the portfolio accordingly, with outperformance accelerating the scheme to full funding on a solvency basis by 2020.
Mindful of the impending transaction, and because of excellent asset preparation, within one day of the trustee selecting the insurer, the assets were able to be moved to precisely match the specific insurers’ price-lock. This translated into significant savings for the client, with mar- ket movements at the time meaning that if it had taken one week rather than one day to match the selected insurer’s pricing, the mismatch would have added £1.2m to the cost of the transaction (c.£400m transaction). In addi- tion, if this had happened in the most volatile week of 2021, it would have added more than £4m to the cost.
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July–August 2022 portfolio institutional roundtable: Endgame investing
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