The search for new asset classes has gathered momentum across the insurance industry, as the feeling strengthens that the investment paradigm – static for so long – is now shifting. It has been stuck for a decade in a world of quantitative easing, once unthinkably low interest rates and crushingly low yields on the fixed income assets that sit at the heart of every insurer’s portfolio. That long static world is ending and insurers are looking towards new horizons, as they seek to support stronger returns by injecting greater diversity into their asset mix.
“There is a significant shift underway towards a more dynamic assessment of risk, return and capital. The focus has clearly shifted from maximizing capital to maximizing returns on capital”, said Bob Swarup, co-founder of the Insurance Investment Exchange, as he opened its latest half-day seminar. Entitled Waiting for Godot: Enhancing returns on capital, it gave insurance company CIOs an opportunity to explore the assets that could produce those enhanced returns.
The keynote presentation by Erik Vynckier, Chief Investment Officer (Europe) for Eli Global, explored in detail some of the options insurers are considering as they move into alternative fixed income.
The drive across the European Union for “simple, transparent and standardised” rules for securitisations has changed the landscape, not just for securitised assets, but for a range of similar assets. This allows them to sit more comfortably in insurers’ portfolios, argued Vynckier. However, he warned that each asset class had to be approached on its own merits so that the risks as well as the potential returns were properly understood, especially if insurers were involved in origination, as could be the case with mortgage financing.
He looked at the options for leveraged loans which have experienced a strong recovery since the crash, although the market is currently more developed in the United States than in Europe. Insurers moving into leveraged loans need to ensure they manage the risks and stress test the potential for default, as well as having a clear view of the security behind the debt: “You have to understand how to enforce security before you step into a market. This can be different in each country”.
Mortgage financing and trade financing are other alternative fixed income options attracting the attention of insurers. The mortgage side has been driven by the drop in bank funding which has sparked a growth in origination by insurers: “I see a lot more happening in this space as more insurers use them”, said Vynckier.
Similarly, trade financing is filling gaps left by banks feeling hamstrung by Basel III. Although these typically come with short financing cycles of 60 to 90 days, it is important to have a long-term presence in the market to get the benefits, especially as the administration can be burdensome.
The first panel session saw Vynckier joined by Arnaud Mounier from AllianceBernstein and Nicolas Hayon from Mirova, an affiliate of Natixis Investment Managers. They took up the theme of how insurers could expand their opportunities for enhanced returns by thinking outside the box.
Mounier said many asset classes were still volatile and had to be approached with caution but agreed there was value to be found, especially in loan financing. There it was crucial to look for value in the balance sheets of the firms providing the debt. He also noted internal models might need adjusting to allow diversification towards short-term loans.
Insurers seeking enhanced returns were increasingly looking towards illiquid assets such as infrastructure, said Hayon. He said there were opportunities with smaller projects, although there was a need for specialist expertise to help with origination. The choice had to be made as to whether to fully own an asset or invest alongside an industrial partner.
The second panel session that bookended the seminar ranged widely across the risks and opportunities that insurers had to grapple with in the pursuit of capital efficiency, especially in the light of the current enthusiasm for carefully structured solutions and multi-asset strategies.
This brought some words of caution from Sophie Coleman, head of investment risk at Lloyd’s. She said that while many multi-asset strategies were very conservative, allowing underwriters to delegate away some responsibility for allocation decisions, they had to be aware of how this played out across their portfolios. In particular, she said internal models needed to be stress-tested to make sure clear boundaries between asset classes are established.
Iain Forrester of Aviva Investors echoed these sentiments. He said insurers needed to demonstrate they can contain multiple and often complex asset strategies on their balance sheets and must continue to focus on capital efficiency. He also urged insurers to look beyond insurance regulatory regimes and explore whether the more restrictive banking regimes created opportunities for them with alternative assets.
Structured investment opportunities definitely involved risks, said Chris Price from AXA Investment Managers, but they could offer better returns. The challenge was to understand the risks and what could happen if they go wrong.
This was taken up by Norman Peard from nPx-nQx, who focused on the complexity risks, asking if people always understood what they were investing in. Managing the complexity of complex and multi-asset strategies alongside the capital requirements imposed by regulators required top class governance supported by the right skills and scrutiny.
Participants at the seminar also attended four breakout sessions, drilling down in more detail on specific topics.
The Conundrum of China for insurance portfolios was covered by AllianceBernstein. Multi-asset solutions for insurerswas the topic of the breakout led by Axa investment Managers. Mirova explored Capital efficient investment in renewables and Aviva Investors looked at Innovation and opportunities in structured finance.
Please click here for the analysis of the audience voting on the key issues facing insurance CIOs. This is always a popular feature of the Insurance Investment Exchange seminars.
The next seminar takes place on Wednesday 27 November at Skinners’ Hall. Further details of topics and speakers will be available soon. You can register your interest now by emailing .