The (Value in) Force Awakens
Value in Force monetization via the capital markets is the tool insurers and pension funds need in the current volatile economic environment - providing capital at a much lower cost, increased liquidity and value enhancement, operational stability, and access to a broader market while providing investors with non-correlated investments with significant diversification benefits and potential for excess profitsOctober 28, 2020
In the insurance industry, most commonly in the life and long term savings (“LTS”) sector, Value-in-Force (VIF) refers to the cash flow expected in the future from a defined “in-force” book of business over a defined period of time. VIF securitization monetizes the future cash flow of a specific portfolio, transferring the embedded value to the capital markets via securities, in return for a lump sum paid at inception, making it an efficient and strategic fundraising tool with additional risk management properties by enhancing value that already exists.
Under the Solvency II regime, VIF securitization can be a very efficient method to raise capital and a cost-effective substitute to standard bond or hybrid debt issuance, especially when pairing it with accurate embedded value assessment and capital market capacity. It significantly lowers the cost of capital, with additional "side effects" such as considerable de-risking properties, an increase in shareholder returns, asset diversification and more.
What benefits do insurers and LTS asset managers get from monetizing their portfolio Value in Force?
- Liquidity Enhancement & Business Growth: Rapid business growth strategies increase marketing and commission expenses, hampering full growth potential due to limited liquidity. VIF securitization helps life insurers and asset managers overcome this liquidity hurdle and adopt a strategic, proactive approach to liquidity and capital management.
- Financing for M&A: With falling profits due to the current low-to-negative interest rate environment, together with increasing competition and high regulatory burden has made M&A essential for growth utilizing economies of scale. Unfortunately, fundraising for M&A can be very costly. VIF securitization allows insurers to raise capital at a much lower cost, providing leverage for the buyer as well.
- Risk Management and Solvency Relief: As the repayment of VIF securitization is linked to profits emerging over time, these transactions provide significant de-risking and hedging, transferring market, lapse, and mortality risks to investors. This provides insurers with stability and protection from risk-driven variability, affecting profits and a lower SCR for a monetized portfolio.
- Tapping Into a Wider Market: VIF securitization offers the opportunity to tap into a larger market outside of traditional reinsurance and access additional investor groups. This is especially important in today’s hard reinsurance market and can improve long term return on capital and counterparty risks.
What are the investors’ benefits?
Insurers and asset managers aren’t the only ones to benefit from VIF securitization. VIF calculations are regulatory defined and thus based on relatively conservative assumptions, therefore investors can enjoy a high potential return over time under reasonable market assumptions.
In addition, although there is correlation between capital market returns and VIF cash flows, it is relatively weak and mitigated by the high influence of other variables such as wages, change in management fees and legislative and regulatory changes. Investing in VIF assets allows investors to diversify their portfolio and expose themselves to unique financial instruments which reflect creative thinking and high ability of asset management.
Vesttoo’s one-stop-shop VIF solution
Vesttoo’s one-stop-shop Value-in-Force (VIF) solution provides LTS asset managers and insurers with a proactive strategic approach to raising capital and generating liquidity by monetizing future profits expected from a specific life and pension savings or insurance portfolio, while mitigating market, lapse and mortality risks via the capital markets. Furthermore, Vesttoo’s accounting treatment solution, under certain group structures, enhances financial flexibility and deleveraging.
These risks are assessed and modelled by Vesttoo’s accurate AI-based stochastic modeling algorithms and customized sensitivity analysis. VIF deals are structured by Vesttoo in simple financial structures, streamlining the process for all parties. Risks are efficiently and seamlessly transferred to capital market investors who can monitor the portfolio online for full transparency.
Vesttoo has developed advanced technologies for data-driven risk management, transferring actuarial risk to financial risk through the capital markets. Vesttoo specializes in risk modeling and alternative risk transfer for the Life and P&C insurance markets, providing insurers with a low-cost strategic risk management solution for immediate capital relief, value enhancement and liability hedging.