No subordination: Aviva’s clever matching adjustment repack

Insurer's repack vehicle issued only single senior note

After the submission of matching adjustment (MA) repackaging structures to the UK regulator last year, firms descended into a debate of the 'he-got-more-than-me' type. Rumours spread that certain firms had secured more favourable treatment from the regulator than others.

Those rumours were tricky to substantiate – and, to some extent, remain so. But a review by Risk.net of the company filings for special purpose vehicles set up by various insurers to repackage assets for the MA, sheds some light on what individual firms have done.

The first surprise is how different the structures are. Based on documents filed at Companies House in the UK, Aviva seems to have issued only a single senior note from its repack vehicle. Others have – as expected – relied on tranches of subordinated notes to secure the ratings they wanted on more senior classes.

Aviva says its structure does include an 'equity' tranche that cannot be seen from the public documents, but it seems subordination is less critical in its structure than in others. Instead, Aviva has relied on its stochastic model to demonstrate to the Bank of England's Prudential Regulation Authority that the senior notes merit a good-enough rating.

The insurer says its structure achieves an MA benefit similar to treatment of the assets under the previous UK solvency regime.

Others in the industry will feel jealous, no doubt. But commentators think it unlikely many could follow Aviva's example. Critical to the firm's model is its long-standing experience offering equity-release mortgages and its consequent repository of data on how the loans perform over time.

Meanwhile, the documents shed light on other interesting points, as well – confirming the size of Legal & General's repackaging of non-sterling assets, for example.

Some insurers have relied on liquidity facilities to help manage cashflows in their structures, which is likely to have carried a capital cost. Others – Aviva again – have made do without.

The filings also confirm some things the market was unsure about, such as the range of assets that can be repackaged: equity-release mortgages, callable bonds, foreign currency assets and rental income, so far.

Commentators emphasise how far individual structures must be tailored to the underlying assets. But the absence of clarity over how others in the industry were structuring these repacks was a bugbear of insurers.

Many in the industry would have welcomed clearer guidance from the regulator on what was required. Whether differences between the next wave of structures will be narrower, now that more information is available, remains to be seen.

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