Securitization-SPV + Long term Insurance fund

[Kamal Sardana]

Hi Tutor, Please help me with these 3 doubts:

1. (Ch: Capital Management, Securitisation topic):
I am assuming that we are backing our annuity liabilities with Equity release mortgage but due to uncertain Cashflows, i cant use matching adjustment directly. Then What exactly is this SPV, how SPV leads to fixed cashflows and what is the meaning of "securitised into tranches" and "senior tranches"
Can you explain me this:
"The securitisation option could involve transferring the equity release assets to a Special Purpose Vehicle (SPV) that issues debt to the originating fund. This debt would need to comply with matching adjustment rules, for example, having fixed cashflows. The underlying cashflows of the equity release assets could be securitised into tranches. The senior tranche would have the characteristics of a fixed-interest asset and so could be eligible for the matching adjustment"

2. Chapter: Asset Liability Management (Practice Question 1) - Securitisation of Solar investment for Matching adjustment. , it would be great if you can explain me this SPV securitisation logic for matching adjustment approval in detail: I am not able to understand following sentence

"Because the income generated is not predictable, itis unlikely that assets could be used for matching adjustment. However, company might be able to securitise some of the income using an SPV, in order to create an asset that would meet the regulatory requirements for a matching portfolio"

3. Chapter 9 - Regulation - Topic 5 - Transfer of surplus: Can you explain me what is "Long term Insurance fund" and "Explain me the following sentence"
These regulations may allow any amount disclosed as surplus in its supervisory valuation to be transferred out of the long-term insurance fund, or may specify that a certain level of capital requirement must be covered by surplus within the long-term insurance fund, and hence restrict any transfer.

 

[Em Francis]

Hi Tutor, Please help me with these 3 doubts:

1. (Ch: Capital Management, Securitisation topic):
I am assuming that we are backing our annuity liabilities with Equity release mortgage but due to uncertain Cashflows, i cant use matching adjustment directly. Then What exactly is this SPV, how SPV leads to fixed cashflows and what is the meaning of "securitised into tranches" and "senior tranches"
Can you explain me this:
"The securitisation option could involve transferring the equity release assets to a Special Purpose Vehicle (SPV) that issues debt to the originating fund. This debt would need to comply with matching adjustment rules, for example, having fixed cashflows. The underlying cashflows of the equity release assets could be securitised into tranches. The senior tranche would have the characteristics of a fixed-interest asset and so could be eligible for the matching adjustment"

2. Chapter: Asset Liability Management (Practice Question 1) - Securitisation of Solar investment for Matching adjustment. , it would be great if you can explain me this SPV securitisation logic for matching adjustment approval in detail: I am not able to understand following sentence

"Because the income generated is not predictable, it is unlikely that assets could be used for matching adjustment. However, company might be able to securitise some of the income using an SPV, in order to create an asset that would meet the regulatory requirements for a matching portfolio"

This is explained in the capital management chapter and what 1. is referring to: The SPV would effectively separate the cashflows from the investment into:

• fixed cashflows (which would come from a 'senior tranche' and this is the asset that would meet the regulatory requirements) and
• variable cashflows (from other junior tranches)

3. Chapter 9 - Regulation - Topic 5 - Transfer of surplus: Can you explain me what is "Long term Insurance fund" and "Explain me the following sentence"
These regulations may allow any amount disclosed as surplus in its supervisory valuation to be transferred out of the long-term insurance fund, or may specify that a certain level of capital requirement must be covered by surplus within the long-term insurance fund, and hence restrict any transfer.

The long-term insurance 'business' fund is the fund where the assets backing the long-term insurance business are kept. The assets are there to back the policyholder liabilities and so the Regulator will be concerned with the solvency of this fund.
This is opposed to the shareholder fund which belongs to the shareholder.