Steady course through global cross-winds

The busy autumn events season for the Insurance Investment Exchange kicked off with a double-header on 10 September at Skinners’ Hall.

The morning was devoted to the regular quarterly seminar, focussing on the theme “Enhancing returns on capital and mitigating portfolio risk”, while the afternoon event – The Pulse – focussed on three asset classes that offered “Alternative Strategies in the late cycle”.

The morning seminar was opened by the chair Paul Abberley, CEO of Charles Stanley, who said that within the overarching theme there were two strands to the presentations and panel sessions. The first was “Where are we in the credit cycle? Can we expect a continuing erosion of yields or will the recover?”. The second was the place of private assets in insurers’ investment strategies: “Are they still sideline or satellite or have they become an integral part of portfolios?”, he asked.

It fell to Dan James from the Amherst Place Consulting Group to answer the first question in the keynote presentation in which he analysed the credit cycle in detail. The conclusions he drew from this were relatively reassuring.

He believed that global conditions were still good for credit and that there was still plenty of value to be found if you searched hard enough and moved at the right time. He highlighted BB rated assets, many of which were still improving: “The value comes from finding the rising stars before they get upgraded”.

He pointed to the historically low default rates as a reason for insurers to feel that credit was not fundamentally challenged despite the obvious headwinds such as trade wars, Brexit and weakening growth, especially in China.

James was joined for the first panel session by Shawn Keegan from AllianceBernstein and Gerard Fitzpatrick of Russell Investments.

Keegan acknowledged that the global slowdown is “becoming consensus thinking”. He felt the market was having to adjust for a downturn just as concerns around ESG (environmental, social and governance) and the role of active ownership were coming to the fore as customers now wanted to know more about how firms invested their money. His challenge to activist shareholders was simple: “Do they have a plan that is credible?”

Fitzpatrick picked up the ESG point: “At the margin it is now having an impact. The regulators, customers and employees want to know”. He made a plea for greater clarity and clearer measures. He also warned that currency holds risk and said insurers need to be clear on “why you have risks and how you are going to manage them”

James agreed that it is about customer expectations and said credit managers must not switch off when ESG is mentioned: “It is no longer just an issue for the equity side. It is very much the bond side that can drive changes in corporate behaviour too”.

Inflation, the limited room for manoeuvre by central banks and the fear of illiquidity were also of concern to the panel. James sounding a warning for insurers’ investment teams as he urged them to pay careful attention to liquidity: If risk managers come to you, hold a gun to your head and say you have got to sell something you will be forced to sell the good stuff”. Keegan agreed: “You’ll definitely end up selling the good stuff”.

The second panel session looked at the place of private credit in an insurer’s portfolio.

Schroder’s Ped Phrompechurt argued that private assets were transitioning from satellite to core, although not without some challenges. They can add complexity to portfolio planning because of the time taken to identify, originate and risk assess assets. He also felt the illiquidity premium often cited as an attraction was being compressed as more people came into the market for private assets.

Russell Lee of Legal & General said that private credit had not yet been taken up by the P&C side but that it should be, especially as they seek to build a more defensive stance into their portfolios. He said that because life insurers cannot use all of the good assets, there are plenty available that can be liquid and have value.

You need to be able to discuss with regulators what risks you are talking when moving into private credit, said Bernoit de Kerleau from Flexstone Partners. This was not as easy as with other classes because the date provided by private equity firms was not consistent.

The morning also included four breakout sessions, allowing attendees to get to grips with some of the key issues in more detail:

  • • Private assets: Rethinking portfolio constructions was the topic of the session hosted by Schroders.
  • • Flexstone Partners explored Making the illiquid liquid
  • • Mitigating ESG risk: Building a sustainable credit portfolio was the theme for AllianceBernstein
  • • Russell Investments tackled Non-traditional fixed income absolute return strategies.

In the afternoon, Insurance Investment Exchange founder Bob Swarup took the chair to host The Pulse, one of the innovations for 2019. These events are focussed, practical and designed to explore a selection of asset classes in greater detail.

The September event focussed on a trio of credit strategies that have grown in interest to insurers as they look for new ways of sustaining returns in the low yield environment. This brought three expert managers to the boardroom table. Brigitte Posch, head of emerging markets at Apollo examined the new dynamics in emerging market debt; Paul Lannigan, CQS’s portfolio manager for senior secured loans looked at how to find opportunities and relative value in his asset class; and Matthew Wardle, a portfolio manager at M&G Investments looked at the scope for rethinking the role of ABS in insurance portfolios.

  • • Check out the events page for full details of upcoming Insurance Investment Exchange events and make a note of the date of the next quarterly seminar on 26 November.