UK's Large Insurers
Guillermo Donadini is AIG's chief investment officer for the UK. In a 2019 interview with Insurance Asset Risk, Donadini explained AIG UK's basic investment strategy, "Today, we are very active in commercial mortgage loans and mid-market loans. We are evaluating other assets that might be too long in duration for us, like equity release or infrastructure. However, there are a lot of new asset classes which are great for life insurers, but for P&C where we are much shorter on the curve, there is not really that much." He continued, "Most of our investments are done with in-house asset managers, so we have very honest conversations about how much we really can ramp up our exposures on mid-market loans, on direct lending, collateralised loan obligations or collateralised mortgage loans."
LV= (Liverpool Victoria) "refreshed its investment strategy in helping LV= to reduce the effects of stock market volatility caused by coronavirus." The initial change began in 2019 as part of a Strategic Asset Allocation Review to rebalance the funds; "Four new asset classes, US Treasuries, overseas corporate bonds, high yield bonds and dynamic real return, were introduced while the amount invested in UK equities was reduced."
Iain Forrester, head of insurance investment strategy at Aviva Investors, believes corporate activity will stay brisk for the foreseeable future, partly because insurers cannot adjust their business models and shift unwanted risks off their balance sheets overnight. “A number of companies have started splitting their activities into ‘capital-lite’ and ‘capital intensive’ units. While the new regulations have encouraged many to look to shrink the latter, firms have had to balance capital efficiency with the impact on short-term profitability and their distribution relationships,” he explains.
Nick Dixon is the investment director at AEGON UK states, "There are good reasons for listed, liquid assets being the right vehicles for investment funds" when comparing the importance of listed equities available on stock exchanges and illiquid assets, such as workplace default funds. He continues, "One instance where unlisted assets can work is in investment trusts, and property investment trusts are a better vehicle for property than standard investment funds."
Prasun Mathur, head of shareholder investment, UK & Ireland Life for Aviva explained their philosophy for investing in illiquid credit portfolios, "We differentiate between residential and commercial ground rents. The majority of the franchise issues have been observed on the residential side." In reference to investing outside of the UK, he stated, "Competition for European real assets is quite strong and is often dominated by the banks. Further, the bank-financed debt structures are not optimal for insurers. That constrains the universe of assets that we can invest in the continent."
M&G Plc's financial statement provides a segmented breakdown of asset allocation, which includes equities, public fixed income, private fixed income, real estate, and alternatives.
Allianz Chief Investment Officer Ying Ye says “while it would be unrealistic for anyone to say they were prepared for a crisis of quite these proportions, we [Allianz] were certainly concerned about a major downturn. To protect against the downside and preserve more liquidity, we had switched to be underweight in equities and overweight in cash since the beginning of the year. In a crisis like this, there are two very important factors, the capital and the liquidity." Due to the current pandemic, he expects, "the industry to take a slightly more conservative approach in risk-taking."
In Theory
At a recent Sustainability Summit, which Insurance Asset Management held in London, SIGWATCH managing director, Robert Blood, emphasized how it is now commonplace for European financial institutions to consult with NGOs when drafting or revising policies on environmental and social issues. “This is a big change from just ten years ago, and the reason is the recent financial crisis, which left so many institutions bereft of public sympathy and deserted by political friends,” Blood stated.
Kablau and Weiss point out that low interest rates are particularly important for life insurance companies, especially if the risk-free yield falls below the maximum technical interest rate, which is the maximum rate that they can typically use to calculate the premium reserves and the guaranteed return of new contracts. "Insurers sell/buy (risky) assets when they experience a negative/positive shock to their equity in order to restore their financial position."
"In this paper, we develop a stylised model of insurers’ investment behaviour, which predicts procyclicality when prices fall due to increasing risk premia, and countercyclicality when prices drop due to rises in the risk-free interest rate. Using security-by-security data on government bond holdings of euro area insurance companies from 2009 to 2016, we validate these predictions empirically. In line with the theoretical framework, we estimate a positive and significant effect of the rise in the risk-free interest rate on insurers’ holdings (countercyclicality), while the effect of risk premia is found to be negative and significant (procyclicality). These results, however, only hold for insurers’ holdings of foreign ECB Working Paper Series No 2299 / July 2019 38 government bonds, while domestic bonds appear to receive preferential treatment. In particular, we find that insurers tend to respond countercyclically (rather than procyclically) to changes in the risk premia of their own sovereign."
The Prudential Regulation Authority published in its Business Plan 2019/20, UK life insurers have increased their holdings of illiquid assets such as infrastructure, commercial real estate (CRE) and equity release mortgages to back annuity liabilities."
Insurance Asset Management
Pages 96 and 97 of last year's The Investment Association Annual Survey details all the United Kingdom's insurance companies investment assets under management. It is noted that the majority (57%) of insurance companies' (in-house) investments were in fixed income assets during the survey period, while only 24.4% were invested in global equities. Also of note, in-house insurers held 13.4% of their investment in money-market or cash category, while third-party insurers only held 3.9%
In Insurance Europe's 2019 report, its Deputy Director General Olav Jones stated, "European insurers have committed to invest well over €50bn in sustainable investments between 2018 and 2020. She continued, “a variety of strategies are employed, including the use of stewardship and shareholder influence, which are quickly growing in importance. Through these strategies, insurers are contributing not just to environmental but also social objectives.”
John Dean, head of impact investing at AXA Investment Managers, explains how impact investing is becoming an increasingly important part of UK insurers' investment portfolios. He details, " “Impact investing is about investing for market rate financial returns alongside intentional and measurable social and environmental outcomes, the market has grown tenfold in the last five years. When AXA Investment Managers entered it was a $50bn market, and now it’s a $500bn market.” He continued by explaining how his company is ahead of the curve, "we launched our impact programme in 2012, and year-on-year we’ve built on our expertise, leveraging the rapidly developing market opportunity to meet increasing demand from sophisticated investors, like insurers,”
This year he was interviewed about the subject and said, " For us, impact investing is about looking for problems in society, looking for problems in the environment, and then looking for solutions to those problems which we can invest in. We measure the success of those investments in delivering the solution to the problem, therefore being accountable for the impact change, all while looking to deliver a market rate financial return for our clients."
Lloyd’s of London Chairman Bruce Carnegie-Brown was quoted in a 2019 interview explaining Lloyd's investment strategy, "Our approach to investment management at Lloyd’s is driven by risk appetite rather than a target return objective. In this way we focus on capital preservation over the longer term to safeguard the Central Fund for policyholders. Our strategic asset allocation ensures that Lloyd’s portfolio is well diversified by investment risk drivers. Our investment managers are constrained by set parameters and guidelines and actively manage their portfolios to protect against downside volatility. The portfolio is continually monitored and regularly assessed against risk appetite criteria."
Black Rock's Global Insurance Report, based on survey results of 150 European insurance executives, details allocation changes to investment asset classes. Real assets and private equity lead the changes with an anticipated 37%, while private debt is set to be decreased by 21%.
Source Meanwhile, the same insurance executives responded to strategic asset allocation of private markets in the following manner:
Source Those with less than 5% of the strategic assets currently allocated to private markets mostly plan on decreasing over the next few years, while companies with higher allocations plan on increasing their investments of private markets.
Funds Europe reports, "Three-quarters of 200 chief investment officers at insurance companies say they are struggling to make returns and are increasingly looking towards alternative investments. Many of them (66%) said alternative investments are “essential” in order to diversify investment due to the low-yield environment since the financial crisis. Private debt and real assets are on menus."
"According to Invesco’s Global Fixed Income Study 2020, insurers favored higher returns of this asset class as opposed to diversification." The report explained, "“For many insurance companies struggling to generate returns in the context of solvency regulation, hard currency EM debt is an obvious choice. Hard currency corporate EM debt frequently offers enhanced yields compared to domestic bonds at the same rating.” It summarized, "For insurers, bank loans and direct lending offer a chance to gain additional long-term yield through an illiquidity premium, while also exerting control and remaining within solvency limits."
In the Natixis 2019 insurance survey, "Private investments are a key part of the picture for most insurers, with 98% of life insurers included in our 2019 survey and 89% of property and casualty insurers and reinsurers reporting owning these investments. Real estate, a holding traditionally associated with insurance portfolios, ranks at the top of the list with 70% reporting allocations. But significant numbers also include allocations to private equity (62%), private debt (58%), and infrastructure (46%). Only a smaller number report holdings in insurance-linked securities (18%) and other private assets (4%)."
Asset Management
J.P. Morgan Asset Management’s international head of insurance solutions, Mark Oldcorn, explained that "asset managers are having to deal with low interest rates and credit returns, so are stepping up their search for yield by looking for more remunerative fixed income and alternative investment strategies, under the whole diversification umbrella". He stated, "the fundamental analysis of fixed income and equity investments, along with analytical capabilities are the skills needed to benefit from this environment."
Tom Balaam, investment manager at MS Amlin, details, "our portfolios have short duration liabilities, so the need for liquidity is high. We already have fairly large allocations to Treasuries, short fixed income and short credit portfolios."
Reuters states Britain’s biggest asset manager is Legal & General Investment Management. CIO Sonja Laud explains how the "firm had cut global equity allocations in its funds to underweight due to a range of factors, from lackluster company earnings to weaker global growth and the risk of populist government policies." She continued, "“I wouldn’t take a position on sterling at this point." In responding to the plausible chaos Brexit brings, she said, "There are still a few really good (UK) companies that it might be worth hanging on to, (domestic stocks) are incredibly cheap so might see a bounce.”
HSBC Global Asset Management Head of Insurance EMEA Deepak Seeburrun believes, "Investment officers who had not considered hedging before, started exploring credit hedging strategies in their portfolios, in the form of credit default swaps." He also stated in relation to challenges around investment income, capital optimization and competitive insurance policies, insurers should invest in alternative asset classes. "We think investing in this asset class will continue to play an important role for insurers and we also think that an increasing number of insurers will lock book-yield in buy and maintain fixed income strategies. In terms of partnerships, an increasing number of insurers will be looking to partner with asset managers on strategic deals. This partnership could also be extended to enhanced bespoke investment reporting."
"The Investment Association (IA), which represents UK asset managers, is for the first time asking companies to explain in their annual report the impact climate change will have on their business model and how they are measuring and managing these risks."
A strategy+business article explains, "The environment and other aspects of sustainability are becoming top concerns for investment CEOs and their clients." It continued, "In January 2020, the world’s largest asset manager, BlackRock, announced in a letter to clients that it would place sustainability, particularly with respect to global warming, at the center of how it “manages risk, constructs portfolios, designs products, and engages with companies.” The company’s goal, ultimately, is to supplant its portfolio of passively managed funds with sustainable alternatives; reduce ESG risks in its actively managed assets, including by divesting from coal production; and push portfolio companies to completely disclose how they are managing these risks."