Treasury Practice

Problem SolvedBNY Mellon Asset Management

Published: Jan 2011

A global insurance company implements a new investment strategy to match the company’s excess cash with its future claims.


Following the financial crisis, a global insurance company was looking to develop an investment strategy in order to manage its excess cash in multiple currencies more effectively. Having pulled back from the market during the crisis, the company was holding around £500m in euro, sterling and dollar. The funds were held in cash and long-term bonds.

The company wanted to match the investment of this cash with the company’s liabilities: claims which needed to be paid over a number of years. A high quality solution was required, as Laurie Carroll, Director, BNY Mellon Asset Management explains: “They didn’t want to have any concerns about credit or anything happening to the portfolio. That’s very common – people are a lot more cautious since the crisis.”

One solution under consideration was to invest the cash in a money market fund. However, this approach would not allow the excess funds to be matched to the liabilities. “If you had something you had to pay at the end of a one year period you could leave the cash in a money market fund, but you would be guessing that interest rates were going to go higher or lower,” comments Carroll. A more sophisticated solution was required.


Having previously used BNY Mellon Asset Management’s solutions and services, the insurance company approached the Asset Management division to gauge what types of solutions could help them to achieve their goals. BNY Mellon’s 3-Tier Cash Management Strategy was suggested. This solution segments a corporation’s cash into three tiers by duration in order to meet the company’s cash needs as accurately as possible. The insurance company’s first tier, which represents day-to-day cash flows, was held in money market funds. However, it was felt that the funds required to meet claims in three to five years’ time would benefit from being designated as second/third tier cash, ie longer term cash.

The 3-Tier approach is a bespoke investment solution and BNY Mellon suggested several different portfolio models which could be adopted, ranging from sovereign-only debt to higher credit quality corporate debt. The insurance company was able to pick and choose instruments which corresponded to its risk parameters within the specified time period.

“We sat down with them, looked at the claims and reviewed what type of guidelines they wanted to put in place,” comments Carroll. “We went back and forth a number of times until the client felt we had reached the solution they had in their mind. We have a guideline checklist that goes through all fixed income investments that are available – we walked them through that; talked about the different risk-return scenarios and really looked at matching those liabilities with the return solutions and with things they wanted to accomplish with this money.”

Set up in early 2009, the solution adopted by the insurance company initially invested in sovereign-only debt. The implementation process, including discussing the insurance company’s investment objective, risk tolerance and liquidity requirements and considering the different models, took less than a month. The overall duration of the insurance company’s portfolio is three to four years but it also includes some long tail liabilities with a maturity of 15 years. Despite the longer durations, as the portfolio invests only in sovereign issues it is highly liquid.

The flexibility of the solution meant that the insurance company would be free to reassess the makeup of the portfolio in the future and introduce non-sovereign issues if desired. This flexibility represents one of the key points of differentiation between the 3-Tier approach and money market funds: investors in a money market fund cannot change the investment guidelines of the fund.

“A lot of people do think of cash as only deposits or money market funds,” says Carroll. “But look at what’s happened in the last couple of years – if you have kept all of your money in cash there has been a real opportunity loss. People are afraid to take risks, but their risk is just a fact of the investment horizon. By not doing something, you’re taking the risk that you’re not earning as much as you potentially could. Many companies are doing well and do have cash but they should be looking at what they do with that cash and dividing it up, rather than keeping it all in deposits. We feel that matching and taking a little bit of maturity duration is something that treasurers should review.”

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