David Worsfold
Caution continues to grip the majority of insurers, according to the results of the anonymous polls taken at the most recent Insurance Investment Exchange seminar on 20 September 2016.
‘Assets, liabilities and making money? Managing risks, returns and capital today’ was the theme of the seminar and the focus seems to be increasingly on capital efficiency. One of the most notable changes of emphasis across the three Insurance Investment Exchange seminars this year has been the growing importance of finding capital efficient strategies and assets. In the quarterly polls taken at the three events this year, it has steadily risen in importance and this time has overhauled finding alternative sources of return and/or yield as the greatest challenge perceived by insurers.
Source: Insurance Investment Exchange, September 2016
The shifts in sentiment in these polls might just be because the audiences are slightly different each time but the discussion during the panel sessions gave clear hints that there is a genuine reappraisal of investment strategies at senior management and board level. Chasing yield in an increasingly volatile political, economic and financial environment has not produced the results many hoped for. The response seems to be a sort of retrenchment: invest for the long-term and make capital work more efficiently.
This concern also came through when the audience was asked ‘Where do insurers need most help today?’. The importance of accessing new asset classes and strategies has diminished, while structuring assets to meet capital and cashflow requirements has risen to be clearly the area where insurers believe they need the most help. This too seems to reveal a more intense focus on ensuring that the capital already on the balance sheet is nurtured and used as efficiently as possible.
Source: Insurance Investment Exchange, September 2016
The declining enthusiasm for accessing new classes suggests a new realism about the promises of something better if only investors were to look around some previously little explored corner. Few now believe there is an undiscovered bountiful asset class around the corner or a crock of gold sitting at the end of any investment strategy, no matter how promising it might appear.
Many are still willing to look at emerging markets, high yield and alternative asset classes but not to the extent that they risk jeopardizing capital efficiency. There are simply no margins for error in the low return world with ever tougher regulators looking over a board’s shoulders. The risks involved can undermine the capital position of a firm if improperly handled, so eyes are turning elsewhere.
If there is one consistent trend that stands out across this year’s seminars, it is the expectation that illiquid credit, such as private debt and infrastructure, will see the greatest increases in asset allocations over the next two years.
Source: Insurance Investment Exchange, September 2016
This appears to be at the expense of core fixed income which has dropped out of the picture entirely. That doesn’t mean it isn’t still a key feature of most portfolios, just that nobody sees themselves increasing allocations there, hardly surprising with the continued downward pressure on interest rates and yields almost everywhere except the USA.
Interestingly, at the turn of the year, there was still some nervousness around infrastructure as a class, partly because of the long arguments with the European Insurance and Occupational Pensions Authority (EIOPA) about how to weight infrastructure investment in the Solvency II regime. With most of the arguments around that now narrowed down to a handful of technicalities, maybe insurance investors’ confidence in the class has grown. It is certainly looming larger on the radar screen.
This focus of capital efficiency looks set to be a recurring theme as it is now right at the top of the list of what investment managers want to hear about at future Insurance Investment Exchange events. Back in March, just 13% wanted to hear more on that topic, now it is over a third.
Source: Insurance Investment Exchange, September 2016
Also moving up people’s agendas are emerging macro and regulatory trends. With the debates around how the UK will forge a new relationship with the European Union now starting to take shape coupled with the growing worry about the ability of policymakers to find a way back to normal, this will most likely grab even more attention, especially if accompanied by wider political and economic uncertainty.