Trade finance offers greater diversification

Trade finance is weathering the economic storms of the coronavirus pandemic and still offers insurers an attractive investment opportunity.

This was the key takeaway from the recent Insurance Investment Exchange CIO digital roundtable held in partnership with Allianz Global Investors.

The asset class itself is vast - some $13 trillion in size globally - though it has long been dominated by the banks. More recently, trade finance has been growing modestly as an asset class for institutional investors since the global financial crisis as the banks were forced by tougher regulation to cut back on their risk exposures, and more generally began to shrink their balance sheets as well. This created an imbalance in supply and demand, opening up the market to other capital providers.

This imbalance has been exacerbated by the Covid-19 pandemic as many of the large credit insurers have cut their limits, creating cashflow strains and forcing businesses to explore other financing options to plug the growing gaps as they aim to ride out the economic storm.

The topic is not unfamiliar to insurers. Many have become interested in the asset class in recent years given its attractive profile, inherent liquidity and most importantly, the capacity to absorb significant allocations.

A previous IIE roundtable last year explored the practicalities of how this relatively new asset class might fit into an insurer’s portfolio, and this recent one picked up to understand how the asset class had performed since then. Importantly, it considered case studies to understand what the journey of implementation had actually been like and the lessons learnt. 

Martin Opfermann and David Newman from Allianz Global Investors argued the opportunity is still there as the economy opens up again and revenues start to flow again, resulting in strong recoveries in the repayment of credit lines. The participants had a robust discussion, examining diverse areas such as origination, scaling up, building a diversified portfolio and managing operational complexities. While some participants were concerned that short-term recoveries might be illusory as firms were faced with a pay up or default dilemma, that did not appear to be the experience of the trade finance partners Allianz Global Investors had worked with as they were enjoying hard revenues. Nevertheless, some defaults among smaller firms were always going to be part of the trade finance game.

The discussion emphasised that the keys to success in this sector are research, finding quality partners, diversification and flexibility. Experience also shows that investors who are prepared to change their focus over time are more successful. Some participants also felt that the short-term nature of trade finance means that portfolios can be reshaped very quickly, making it potentially attractive as an asset class for property and casualty insurers. Othrs noted that the provision of credit lines was a long-term commitment to a relationship, so with the appropriate structures, this could also be suitable for life and annuity insurers, particularly given the atrtactive capital treatment.

The polls amongst the participants indicated that there is broad interest in trade finance as a diversifier but many also still felt they needed a greater understanding of the underlying assets and how they performed in different environments. But it is a journey that has begun for several, and it is clear that this is likely to continue to be a growing area of interest for the insurance community.


Report by David Worsfold