I'm in the collateral business, AMA

NESCAC's picture
Rank: Neanderthal | 2,784

Had always thought about doing one of these, and finally got around to doing it. A little background on me:

-Target/Semi-Target School (Top 5 LAC)
-Humanities major (Philosophy)

I spent my junior year interning on a buy-side trading desk. The last week of the internship, we were told that none of us were getting offers. Honestly, it was pretty tough trying to recruit after that..if you don't get a return offer you are sort of seen as "damaged goods". Additionally, most slots fill up with their summer interns so that made it pretty tough as well. I definitely felt at a disadvantage because I majored in philosophy compared to all the economics majors coming from my school. I cast a wide net: trading, research, IBD, risk, etc...I just wanted a job. I ended up landing an offer after graduation for a large asset manager as a portfolio analyst, which I ended up turning down to join the boutique I am about to leave.

What I do now: Everyone needs collateral, and a lot of this is handled by "back office" people making sure that the balance sheet is OK. We structure collateral for financial institutions, but our main market is insurers and reinsurers. The collateral serves a specific purpose, to finance excess reserve requirements. What does this mean? Well, suppose Insurance Co. A issues life insurance policies--Insurance Co. A needs to hold collateral against all policies that they issue. The actuary does his math and calculates that they need to hold X, in the biz this is called the "economic reserve". But wait, it's cool those guys think they only need to hold X, but now they've gotta use specific models (PBR) outlined by a larger governing body to calculate another level of reserve..so add Y to the X. X + Y is known as the "VM-20" reserve (in life insurance). But wait..there's more: there's a modified version of VM-20 that they've gotta calculate, so add Z to this. X + Y + Z = AG 48 reserve. (Note: this is super over-simplified and the law is a little more complicated than this...but I tried to make it a 100 level description)

Companies generally fund the economic reserve (X) through assets that they own. And the VM-20/AG48 (X/Y) reserves are funded on a contingent basis, via letters of credit, etc. We structure deals to fund reserve requirements.

I'm not a lawyer, nor do I plan on law school, but I have always been fascinated by the law and regulation, which is why I took this job. Going to GS TMT --> BX --> HBS has never really been a "dream" of mine. Life is too non-linear to get caught up in that; not dissing people who want to do that or anything, but the most well-worn path isn't always the best for you.

Feel free to ask away. I'll answer what I can.

United States - Northeast

Comments (9)

Sep 9, 2015

thanks for doing this, just added to the frontpage

WSO's COO (Chief Operating Orangutan) | My Linkedin

Sep 9, 2015

Great post and very informative. What's the next step?

Sep 9, 2015

I'm leaving for IBD (on the west coast--New England winter sucked).

Sep 10, 2015

I'm leaving for IBD (on the west coast--New England winter sucked).

Collateral to IBD sounds like a unique move. Was IBD your goal after taking the collateral position since you missed the standard IBD recruiting timeline?

I know you said your plan wasn't the standard well-worn path to HBS, but do you still plan on business school after a stint in IBD?

Sep 10, 2015

IBD was a thought, since I went to a target school where a lot of people I knew were doing it. However, everyone on my team (which btw--being on a team only helped to show that I had great time management and was a hard worker. Literally no connections helped me) that wanted the WSO jobs people talk about went the consulting route.

One of the main reasons I'm leaving is that I know this market is huge and our company is in an amazing position to do well, but I don't see myself as part of the future of the company. I believe in the leadership, and the company overall, but I think ultimately I realized that it wasn't a mid to long-term fit for me, and the longer I stayed the more I was pigeonholing myself into this space. I learned more than I could've imagined in my time though--and my interviewers for the lateral positions saw that although I may not have had the hard technical toolkit, I had an knowledge of the law and other "soft" skills that trump anyone at a similar stage in their career. They told me I could easily pick up the hard finance later.

As far as business school goes, I do plan on going back--unsure when though. It's more of a personal thing for me rather than a career reset; as a first generation college student, my family values education a lot.

Sep 9, 2015

I work in life actuarial and am familiar with the reserves etc but I'm not clear on exactly what your company does. When my company does a reinsurance/reserve financing deal I don't think we use a middle man. We retain a law firm and do the deal directly with the reinsurer or bank or whoever is "giving us collateral" (we would call it "financing our reserves"). I could be wrong, I'm not on that exact team but I sit right next to them.

You do a good job of capturing the mess that is life insurance regulation.

Sep 10, 2015

You're right, what you described is generally the case. In short, we're an advisory shop that structures collateral for excess reserve financing in the life insurance space. People don't want to use cash (for obvi reasons), a reinsurer might charge a lot for a wrap over 20 yr period or something, so think of deals we do as sort of structuring revolving collateral facilities. Since it's the excess reserve (which is deemed redundant), imagine being able to take that cushion of 200 mm to the market and asking banks "who wants to take "tail-risk" (questionable use of the term, but illustrates the point) on life insurance" instead of going straight to a reinsurer? Sort of like cat-bonds...if that helps

Sep 12, 2015

Would you recommend your LAC for IB or any LAC at all?

Sep 12, 2015