Actuaries on Wall Street

Transcription

1 Actuaries on Wall Street PD-1 CIA Annual Meeting June 28, 2007 Michael Symonds, FSA, MAAA Lehman Brothers Insurance Products Group (212)

2 Introduction The past few years has seen an actuarial employment boom on Wall Street. Investment banks have been hiring unprecedented numbers of actuaries. This presentation will discuss: Roles of actuaries at investment banks Emergence of Insurance Capital Markets Deep Dive: Insurance Securitization Actuaries on Wall Street the survey Discussion points the how? Conclusions the why? (and why not!) Q&A 1

3 Roles of Actuaries at Investment Banks There are a number of traditional areas of finance that might be thought of as appealing to the actuarial skill set Corporate Research Enterprise Risk Management? Insurance Industry Research? Other Quantitative Research? Investment Banking Traditional Corporate Finance/M&A? Structured Finance Sales & Trading Trading? Quantitative Trading Support? 2

4 Roles of Actuaries at Investment Banks However a new area has emerged that is driving the recent actuarial boom Corporate Research Enterprise Risk Management? Insurance Industry Research? Other Quantitative Research? Investment Banking Traditional Corporate Finance/M&A? Insurance Structured Capital Finance Markets Sales & Trading Trading? Quantitative Trading Support? 3

5 Insurance Capital Markets Insurance Capital Markets encompasses aspects of traditional corporate finance, sales & trading as well as structured finance Coverage Capital Markets Products Insurance Products Comprehensive approach to insurance Coordinate capital markets and capital management touch-points In-house professionals allow bank to leverage knowledge of industry-specific considerations in developing tailored solutions Investment and trading strategies Hedging strategies / ALM Asset restructuring Economic capital / capital management strategies Securitization of insurance risk Financial reinsurance Run-off solutions 4

6 Insurance Securitization Market $ Billions $16 $14 $12 $10 Cumulative Life Insurance Securitization (by Issuance Amount) $8 $6 $4 $2 $ YTD Redundant Reserve Embedded Value Mortality Cat Bonds Total 5

7 Securitization Capital Structure Liability Value Capital Structure Extreme Deviation from Economic Reserve Debt Financing Moderate Deviation from Economic Reserve Mezzanine Financing Normal Deviation from Economic Reserve Equity Financing (Economic Capital) Economic Reserve Self-Financing 6

8 Sample Securitization Structure Equity 1 Reinsurance Cash Special Purpose Proceeds Reinsurer ( SPR ) Non- Recourse Notes Downstream Structure Operating Company 2 Investors Proceeds 3 For the benefit of Reserve Credit Trust Transaction Steps 1. The Operating Company enters into a reinsurance contract, ceding a specific book of business to the SPR. 2. The SPR raises statutory capital through the issuance of Non- Recourse Notes to the capital markets. 3. The SPR deposits the proceeds of the capital markets offering into a trust, which is pledged to the Operating Company to secure reinsurance reserve credit. 7

9 Transaction Constituents Structuring a capital markets solution for an insurance company requires finding the common ground between the Issuer, Investors, Rating Agencies and Regulators Actuaries Involved Issuer in-house Third party actuary Pricing, valuation, reinsurance Independent expertiziation Banking advisor in-house Transaction structuring, negotiation, distribution Investor/monoline in-house Investor/monoline third party Rating agency in-house Risk analysis Regulatory in-house/ext 8

10 Survey In order to provide broad feedback an Actuaries on Wall Street survey was conducted A short questionnaire was developed and circulated to a number of actuaries working in various capacities at various Wall Street firms Over 20 responses were received, with representation from 7 different investment banks The overwhelming majority of respondents can be characterized as working within Insurance Capital Markets In past lives 75% worked in the life industry, the balance were from consulting Survey is not scientific! 9

11 Survey Says How long have you worked on Wall Street? 50% 45% 40% 30% 32% 20% 18% 10% 5% 0% 0-2 Years 2-5 Years 5-10 Years Over 10 Years 10

12 Survey Says What drew you to Wall Street? Specific opportunity that was appealing Entrepreneurial nature/accelerated career development Desire to try something new 2.9 Longstanding desire to work on Wall Street 2.2 Desire to more effectively leverage insurance industry background Rank 5 Choices listed in order of importance of based on a composite weighted ranking 11

13 Survey Says How did you transition to Wall Street? (Participants asked to select all which apply) Responded to posting seeking actuary Professional relationship contributed Responded to non-actuarial position Transitioned via MBA Personal relationship contributed 48% 28% 16% 4% 4% 12

14 Survey Says How important are your actuarial credentials to clients, management and colleagues? 100% 80% 60% 40% 20% 0% 92% Somewhat Important Very Important 86% Somewhat Important Very Important 73% Somewhat Important Very Important Clients Management Colleagues 13

15 Survey Says How valued are actuarial credentials on Wall Street? How technical is your role? Highly Valued 18% Not Valued 9% Highly Technical 32% Not Technical 9% Somewhat Valued 73% Somewhat Technical 59% 14

16 Survey Says Which of the following best prepared you for your current role? Technical/finance/accounting skills learned in insurance industry job Technical/finance/accounting skills learned since moving to Wall Street Math/statistics/actuarial skills learned in college Business/accounting/corporate finance skills learned in college Materials learned through writing actuarial exams Rank 5 Choices listed in order of importance of based on a composite weighted ranking 15

17 Survey Says What is the likelihood you will one day work again directly in the insurance industry? Highly Likely 5% Somewhat Likely 45% Not Likely 50% 16

18 Survey Says How satisfied are you with your move to Wall Street? Satisfied 5% Highly Satisfied 95% No participant expressed dissatisfaction with move to Wall Street! 17

19 Discussion Points The survey provided valuable feedback in a number of areas. But how does this relate to the topic How to become an investment [banking] actuary? Survey says: 1. Industry experience 2. Relationships 3. Exams? Experience is #1, but what kind of experience? Quantitative finance / ALM? Financial reporting / corporate? Product development / valuation / risk management? Reinsurance / M&A? 18

20 Conclusions And why become an investment [banking] actuary? Wall Street viewed as a great place to work High intensity, innovative, entrepreneurial environment Talent and creativity are highly valued Insurance Capital Markets is one of the hottest areas Transition, for an actuary, is possible like never before BUT WAIT... 50% of respondents felt it was likely they would return to the industry!? Extremely volatile Intensity comes with a price Grass is always greener on the other side! 19

21 Q&A 20

22 This material has been prepared by the Insurance Products Group and is not a product of Lehman Brothers Research Department. It is for informational purposes only. Lehman Brothers makes no representation that the information contained in this document is accurate or complete. Opinions expressed herein are subject to change without notice. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the issuance of this document. Under no circumstances should this document be used or considered as an offer to sell or a solicitation of an offer to buy any financial instrument mentioned in it. The products mentioned in this document may not be eligible for sale in some states or countries, or suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors. Clients are advised to make an independent review regarding the economic benefits and risks of purchasing or selling the financial instruments mentioned in this document and reach their own conclusions regarding the legal, tax, accounting and other aspects of any transaction in the financial instrument in relation to their particular circumstances. Lehman Brothers enters into transactions on an arm's length basis and does not act as advisor or fiduciary to its counter parties except where a law, rule or written agreement expressly provides otherwise. Lehman Brothers and/or its affiliated companies may make a market or deal as principal in the financial instruments mentioned in this document or in related securities, options or other derivative instruments based on them. In addition, Lehman Brothers, its affiliated companies, shareholders, directors, officers and/or employees, may from time to time have long or short positions in the financial instruments, including loans, securities or in options, futures or other derivative instruments based on them. One or more directors, officers and/or employees of Lehman Brothers or its affiliated companies may be a director of the borrower or issuer mentioned in this document. Lehman Brothers or its predecessors and/or its affiliated companies may have acted as agent or arranger with respect to the loans of the borrowers mentioned in this report, and may have managed or co-managed a public offering of or acted as initial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this document within the last three years, or may, from time to time perform investment banking, lending or other services for, or solicit investment banking or other business from any company mentioned in this document. No part of this document may be reproduced in any manner without the written permission of Lehman Brothers Lehman Brothers Inc. All rights reserved. Member of SIPC.