Bidding for insurance assets by private equity firms is getting increasingly competitive, according to a recent McKinsey study, prompting many to search for faster and more effective ways to value and reposition these portfolios. Spreadsheets and rough approximations are no longer good enough. The digital transformation enabled by modern cloud technologies, databases, and analytics is significantly enhancing the ability of private equity firms to increase their assets under management and create value for their shareholders. Leading organizations are taking advantage of Beacon Platform’s powerful tools to optimize their valuations prior to bidding, reposition the new assets, and more effectively manage the overall portfolio risks.
As the volume and pace of acquisition activity increases, potential buyers need to move quickly to come up with a competitive bid. Relying on spreadsheets for this task increases the risk of calculating a misleading valuation and potential return, due to inconsistent portfolio data or oversimplified models, especially when the portfolio includes instruments that are harder to value, like private market and alternative assets. Beacon Platform enables financial engineers to quickly ingest the information they need for effective valuations, including market and position data, instrument and contract details, and detailed cash flow models. They can then run standard or proprietary pricing models against this more accurate data set, with enterprise-scale change controls to ensure repeatability. The result is faster valuations that take the firm’s expertise into account to better inform a competitive bid.
Repositioning the Portfolio
Shifting the acquired block of typically fixed-income assets to higher-yielding investments requires access to a broader range of financial instruments. Beacon’s data management capabilities and customizable definitions make it easy for private equity firms to evaluate a variety of investment options and see the effects on both the acquired assets and their overall portfolio. Governance controls and time-travel functionality make it possible to re-run reports as of any date to review how changes in data or models could influence the results.
Higher-yield investments carry the potential for increased risk and volatility. Beacon’s flexible risk framework and elastic cloud capabilities allow firms to define and run custom scenarios of interest rates, credit spreads and other factors to assess potential impact on liquidity, credit, and other risks. Beacon’s end-to-end investment platform gives teams full control to build and refine models, centralize and manage their data, and rapidly evaluate changing market conditions, boosting productivity and generating better returns.
Creating Value with Technology
Acquiring and repositioning the assets of life and annuity insurance portfolios has a demonstrable effect on yield. According to a recent report from the National Association of Insurance Commissioners (NAIC), “net portfolio yield increased 33 basis points (bps) on average in the first year of acquisition”. This reach for yield by private equity firms, which has been going on for almost a decade, represents less than 10% of the $7.5 trillion in U.S. insurance industry assets as of December 2020. Even with a 20% increase in acquisition activity in the last year, there is still plenty of opportunity. Beacon Platform gives private equity firms the tools and technologies they need to create higher value from insurance and other acquired assets. Beacon’s clients can use the platform to find and price the best assets to acquire, quickly reposition for optimal yields, and manage the portfolio to balance risk and return over time, all with detailed controls for consistency and repeatability across the organization.