The future scenario we envision is one in which the Fed is likely on hold, with rates pinned near the zero lower bound for several years. As this “lower-for-longer” period persists, insurers are faced with the problem of continual book-yield decay and what is generally described as the difficult choice between accepting lower yields (thus lower profitability) and reaching for yield but taking on additional risk. Neither option appears particularly attractive at this point in time, making the efficient use of capital a key consideration. The specifics of the problem and potential solutions vary depending on the exact nature of the liabilities in question. Consider the following...
Our team is tactically positioned for a cyclical recovery in EM credit; however, we also feel strongly about strategic EM fixed-income opportunities that may be appropriate for our insurance clients and prospects. The type of EM allocation we are talking about goes beyond the standard ETF or “off-the-shelf” EM fund solution and speaks directly to insurance investors who have a more refined palate with regard to their income, return and capital needs.
This white paper reviews leveraged loan market growth and valuations, examines how they fit in insurance portfolios, explains regulatory considerations and concludes that they offer opportunities for insurance investors.
Insurance companies around the world continue to outsource their investment management needs to third-party asset managers, creating a growing opportunity for investment consultants to assist in these efforts. Insurers also are expressing greater interest in non-traditional asset classes where consultant experience in these asset managers may be at a premium.
COVID-19 impacts on the insurance industry are widespread, but not the only important industry development, according to Conning’s research team. This report details emerging issues specific to the life-annuity industry and property-casualty insurers.
JP Morgan provides a compilation of research on coronavirus. The compilation includes infection, mortality, economic and market research to date, and will be continuously updated.
Institutional investors today face tough challenges, from the limited supply of US long-duration investment-grade credit to increased volatility and a potential spike in US corporate debt downgrades within liability-driven benchmarks. Learn how infrastructure debt can address those problems and why it fits best within core fixed-income allocations.
P&C insurers are facing underwriting uncertainties and investing challenges during the COVID-19 crisis. How can they navigate the uncharted, wide-ranging scenarios?
The degree of BBB-rated exposure, the threat of widespread downgrades and the corresponding impact to Risk Based Capital (RBC) are of particular interest to insurance CIOs. While this concern is valid, we believe the likely impact in the months and years ahead won’t be as dire as some insurers fear.
Insurance investors face unique challenges in any environment but especially against today’s backdrop of continued low rates and a global economic slowdown. Barings’ Ann Bryant and Eric Lloyd discuss strategies for incorporating private assets as part of the solution.
Is there a disconnect between the market's recent rally and the economic fundamentals? Tim Antonelli and Danny Cook offer their perspective and consider the investment implications in their mid-year outlook for insurers.
Traditional accounting measures of investment performance such as yield and price return are generally intuitive, but alone may not provide a complete understanding of the risk and return characteristics of a portfolio. When asset allocation decisions are evaluated using accounting return measures alone, opportunities and their underlying costs may not be fully appreciated.
The ability of emerging markets to effectively manage the risks associated with the pandemic thus far should give investors greater confidence that some alarming projections related to EM debt may reflect a misunderstanding of EM more than true vulnerability. Three trends underlie EM’s lower Covid mortality rate.
The Capital Markets Bureau provides insights on insurance companies’ use of unaffiliated investment managers, based upon analysis of the annual statements filed with the NAIC. Topics covered include the percentage of companies using one or more third party managers, in total and broken out by company type and size. This article also ranks the most often-named third party investment managers. Insurance Asset Outsourcing Exchange data is cited in this report.
Key takeaways from the ninth annual report released by GSAM Insurance Asset Management, which incorporates the views of 273 Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs) on investment trends, ESG investing, insuretech, ETFs and more. Full report available from your Goldman Sachs representative.
When confronted with today’s combination of investment challenges, it is natural and prudent for an investor of insurance assets to retreat into a defensive posture to protect and preserve capital. However, sourcing uncommon value across an array of fixed income markets is achievable for investors with a combination of available risk envelope, an eye for long-term value and the intestinal fortitude to deploy available liquidity.
U.S. fiscal and monetary stimulus measures have been massive, leading many investors to wonder about the short and long run implications for the U.S. Can this go on Ad infinitum, or will inflationary pressures make a comeback? This article explores the likely outcomes ahead.
With understanding that COVID-19-related volatility may be quite different than the past, this analysis of historical private equity performance during two recent periods of market distress provides some perspective on current conditions.
A thoughtful in-depth look at YE2019 asset exposures in the U.S. life industry that have a high likelihood of being impacted by the effects of and response to COVID-19.
Conning and affiliate Octagon Credit Investors have developed a Viewpoint – “Amid CLO Downgrades, Monitoring, Stress Testing, Robust Credit Analysis Key for Insurers” – that discusses the issues in depth. However, the full impact of the COVID-19 pandemic has yet to be determined. Insurers may be wise to continue the ongoing monitoring, stress testing and credit analysis of their CLO holdings to help them safely navigate today’s challenging market conditions.
The May Conning Commentary offers an in-depth review of the COVID-19 pandemic business interruption, and how property and casualty, life and annuity, and health insurers are faring during this period, as well as a look at what may be next.
The current decline in economic activity suggests that there may be a material uptick in corporate issuer downgrades. In light of the pandemic-induced economic slowdown and market volatility, we take a moment here to examine the potential impact on regulatory capital charges under the current and proposed frameworks for corporate bonds held by US insurers.
For months, the AllianzGI US Recession Monitor has indicated an uncomfortably elevated level of risk. Coronavirus has shattered that fragility. Our models have now converged to a base-case for a US recession. We think the start of the recession could be backdated to March 1, once the National Bureau of Economic Research reviews yet-to-be-released data, which we expect will be ugly.
Insurers should consider, given current dislocations in the fixed-income market, opportunities that may potentially enhance income without committing new cash by borrowing through FHLB programs and re-investing the proceeds in highly rated structured securities.
Investment decision makers at North American insurance companies are likely to see environmental, social, and governance (ESG) factors as a way to inform risk-aware, economically sound decisions about fixed income assets.
OVER THE PAST YEAR, I HAD THE PRIVILEGE OF MEETING WITH MORE THAN 100 GLOBAL INSURANCE COMPANIES, with total assets of around US$12 trillion on their balance sheets. While each insurer has its own particular risk tolerance, distribution strategy, regulatory issues, and accounting regime, they all shared many similar core concerns about what lies ahead. As a new decade begins, there are three key themes that we believe insurers must navigate in order to be successful in 2020 and beyond.
While European and US CLOs are structurally very similar, there are crucial differences between the markets that can impact some of the key risk metrics we evaluate as fixed income investors. The aim of this paper is to explain those differences, and why we remain convinced European CLOs have a preferable risk-reward profile to their US cousins
With negative interest rates becoming more commonplace in Japan and Europe, we think it’s only a matter of time before they reach the US. Here we discuss how we think the Fed, Congress and private banks will introduce and implement a regime of negative rates, and how we believe the unintended consequences will likely play out in practice. We question the effectiveness of the negative interest rates already in play beyond the US, and describe how US savers might behave in an effort to circumvent negative rates.
A guide to integrating sustainability across asset classes. This article looks at three approaches the asset management industry uses to address ESG issues in portfolios, and some of the questions investors should consider about each approach.
A review of NEAM’s 2019 fixed income return forecast and our return outlook for 2020. This article takes a detailed look at the influencers of fixed income returns in 2019 and the outlook for 2020.
In a recently published article, Allianz explains how “building the first mile” is often critical to the success of an infrastructure project, and includes an interesting and factual discussion of the evolution and modernization of the US power grid.
Against the backdrop of shrinking risk-free asset allocations and growing allocations to alternative investments to maintain book yield, a well-designed strategic asset allocation (“SAA”) framework could help companies navigate risk and improve investment efficiency. This article introduces and discusses a “Solvency Sharpe Ratio” as a new risk measure for SAA optimizations.
This article distinguishes “core alternatives” from alternative investments that rely on price appreciation to drive most of the total return, and explains how core alternative asset classes can provide insurance companies with stable income and low total return volatility.
The Exchange is pleased to promote this forum for experienced female professionals focused on investment of insurance general account assets. Industry leaders gather in a marketplace of ideas to share their knowledge and insights.
This white paper examines insurance companies’ investments in the US commercial mortgage market and offers useful observations for US insurance company investors.
This white paper explains how to decompose P&C insurers' return on surplus into four ratios that better identify drivers of profit.
A cursory view of industry results presents a picture of improvement. A more thorough review reveals several challenges along with continued wide variation among insurers.
Based upon insights from 360 senior insurance and reinsurance executives across 25 countries, this report covers views on market conditions, portfolio construction challenges, the role of private markets and ESG, as well as providing BlackRock’s latest perspectives on key issues affecting the insurance industry.
Conning’s Insurance Insight report “Insurance M&A in the First Half of 2019: Taking a Breather” provides a detailed review of the more significant transactions across industry sectors, offering insight beyond the headlines as well as thoughts on potential next steps.
This paper is a good primer on yield curve history and theory, and a take on where we are now. The yield curve inversions that have preceded every recession of the last 50 years were cases where the yield curve clearly looked inverted. Not just were 10-year yields below T-bill yields, but almost every longer-maturity yield was below almost every yield of shorter maturity.
Multi-asset products may be popular, particularly among insurers. But low yields and an increasingly stringent regulatory environment are posing challenges. Factor-based solutions that efficiently integrate sustainability criteria are a natural solution to address the challenges insurers face.
This paper compares the current expected risk/return characteristics of various asset categories with consideration of current influencing factors.
An objective comprehensive analysis of the key themes impacting alternatives asset classes.
Since the financial crisis, for a relatively liquid investment CLOs consistently have had the highest spreads net of capital costs for US life insurers. Most large life insurers built up allocations to CLOs of 3%-5% of total assets, starting around 2013. However looking at changes in total industry level holdings obscures widely divergent behavior in CLO investments among individual life insurers.
Insurance companies have been broadening their below-investment grade allocations to include loans and tranches of collateralized debt obligations (CLOs) alongside high yield bonds. This paper argues that the advantages of a broader credit universe are realized only when investors take a “platform” approach, breaking down the silos and considering all asset classes, regions, currencies and access routes through the same fundamental lens, unconstrained by traditional market index benchmarks.
Is core fixed income strategy a commodity? This paper examines a universe of institutional core fixed income managers with comparable objectives and characteristics. Differences in long-term performance are evaluated gross of fees and factors that contribute to differences in performance are evaluated.
Life insurers traditionally follow a bottom-up asset liability matching approach to construct their investment portfolios. Do you know the benefits of taking a top-down enterprise approach?
The majority of assets owned by insurers are invested in investment grade fixed income. In search of a way to achieve more capital-efficient returns, diversification and illiquidity premiums, insurers often turn to high yield markets and alternative asset classes. But we argue factor investing in corporate bonds is an attractive alternative approach to generating capital-efficient returns.
Slowing global growth and the reintroduction of market volatility set the backdrop for this year’s GSAM Insurance Asset Management Survey, which reveals heightened credit cycle concerns, significant shifts in perceived risks and capped expectations for returns. This year’s title, Cautiously Opportunistic, underscores insurers’ approach to selectively taking risk in light of this view. The eighth annual survey released by GSAM Insurance Asset Management incorporates the views of 307 Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs) representing over $13 trillion in global balance sheet assets, which accounts for approximately half of the global insurance industry.
Rising market interest rates have piqued curiosity in convertible securities, but many insurers do not fully understand how convertibles work or what they can add to a portfolio. The fact that they can be converted into the issuer’s equity speaks to their value proposition: possible equity upside with a bond’s downside protection.
Round table discussion with WFAM's fixed income leaders to consider ramifications of climate change and the investment opportunities arising within their investment team's strategies.
Our insurance-industry strategist highlights the major forces he sees shaping insurers’ investment portfolios. The thoughts that follow are intended to complement the slew of investment outlook pieces published at this time of year, understanding that the capital markets are only one piece of the insurance asset-management mosaic. Although many of the points raised here are based on US industry data, our conversations with some non-US clients indicate they tend to apply globally.
Recent trends in leveraged loans and CLOs have raised eyebrows. What’s in store for these closely related sectors and how should they be regarded in insurers’ portfolios?
This paper describes the characteristics of Insurance-linked Securities (ILS) and their usefulness to institutional investors. We show that adding a particular type of ILS, Industry Loss Warranties (ILWs), to typical endowment, pension and insurance portfolios would have led to an improvement in risk-adjusted returns and resilience to tail market scenarios, while conforming to the usual constraints and regulatory requirements faced by these investors.
A wide gulf in performance is about to open between those managers who have fully integrated technology into their investment processes and those who have not.
It’s no secret that bank loan underwriting standards have loosened. In addition, CLOs – a primary source of demand for bank loans – are experiencing some softening in deal terms, often dipping into lower-quality collateral to make the arbitrage attractive. While these changes are not yet sounding alarm bells, click below to read more on our view of bank loans and CLOs.
Understanding the differences between the current market environment and dynamics leading up to the 2008 crisis can help investors more effectively prepare their portfolios for the next phase in the cycle.
Now in its seventh edition, the 2018 BlackRock Global Insurance Report summarises the key findings gained from surveying 372 senior executives in the insurance and reinsurance industry across 27 countries. As well as assessing trends in investor sentiment and the outlook for investment strategy, the report explores how insurers increasingly take into account environmental, social and governance (ESG) considerations.
The Uniform Mortgage-Backed Security will be introduced next year. What do investors need to know and will the market be ready in time to ensure a successful transition?
This paper examines the "private credit" asset class, explains its characteristics, and explores some of the advantages and risks of investing in private credit.
The search for higher yielding investments secured by quality collateral and a desire for diversification has spurred insurance companies to explore alternative investing options such as private commercial real estate debt, including subordinate debt like mezzanine loans. We currently believe CRE debt can benefit from strong underlying commercial real estate fundamentals, continued favorable economic growth, strong borrower demand, and a diversified choice of strategies across the capital stack which may offer attractive risk-adjusted returns.
The NAIC Investment Risk-Based Capital Working Group continues to progress on its project to update the factors applied to bonds in the risk-based capital formula. This will most likely increase the number of bond rating buckets from 6 to 20. The impacts...
Emerging-market (EM) debt's strong returns over the past two years have attracted significant flows. While recent volatility has tempered that broad enthusiasm, investors interested in a strategic EM allocation are still actively exploring the space. However, to properly evaluate EM opportunities, it is important for insurers to consider the cost of capital as well as the risks.
Over many years of investing surplus assets on behalf of insurance clients, we think the need for a solution to address both the governance and investment challenges of overseeing such assets has become increasingly apparent. This paper describes Surplus Equity Solutions (SES), a holistic approach for the equity component of an insurance company’s surplus investment portfolio.
The Solvency II Directive (2009/138/EC) imposes a specific solvency capital charge on currency mismatches between insurance companies’ assets and liabilities. Most insurers choose to hedge the bulk of their foreign-currency exposures unless they hold a particularly strong view on currency valuations, but a 100% hedge will almost certainly fail to yield the best volatility-adjusted portfolio returns over time.
Recently, we explored how tax changes have influenced the attractiveness of tax-preferenced investments and the impact of accounting regimes and taxes on rating agency and regulatory solvency assessments.1 This Perspectives addresses the impact of these tax changes on risk tolerances and asset allocation when taxes are explicitly considered in the decision process.
Many insurance companies and other investors now look to private credits, also known as private placements, to provide the duration they need along with potentially higher returns and lower losses. Voya presents this overview of typical covenants used to protect the interests of private credit investors.
The Society of Actuaries Committee on Finance Research is pleased to make available a research report that describes trends in asset allocation of major life insurers across eight Asian markets (China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Taiwan, and Thailand). The report was authored by a team from Coherent Capital Advisors Limited led by Fred Ngan.
While there appears to be widespread recognition of the benefits of EMD investing among insurers, there is little evidence in their behavior to suggest that they treat the asset class as anything more than a tactical source of yield. As we discuss in this paper, it's clear to us that EMD should represent a strategic allocation for most insurers.
While alternative risk premia have existed for some time—and have long been used by hedge funds—they have only recently begun to be evaluated by a broad swath of investors. Given the growth of investor interest in this space, we thought it timely to share our insights on what constitutes effective due diligence.
Insurers have taken into account many of the risks resulting from the increasing frequency and intensity of extreme weather events in underwriting, but have failed to address physical climate risk to the same degree when making their investment decisions. In this article we explore the solutions that can be considered from a listed equity perspective with the potential of these investment solutions spreading into other asset classes.
In this Perspectives, we seek to reconcile VaR metrics to conventional solvency methods, emphasizing its usage for evaluation and guidance rather than dicta to be proscriptively followed.
The “Tax Cuts and Jobs Act,” effective January 1, 2018, will have meaningful implications for tax-advantaged securities, particularly municipal bonds. This Thought Leadership paper examines the implications for insurance companies.
Conning’s view is that the recently passed U.S. tax plan should drive significant capital expenditure and increase take-home pay, providing a meaningful boost to U.S. growth via the consumer. However, its immediate impact on the municipal bond market may also cause investors such as property and casualty (P&C) insurers to revisit their portfolio strategies and allocation.
New rules for prime money market funds caused investors to pull most of their cash out of these vehicles and turn to other liquid investments. However, prime funds have performed reasonably well since the rules went into effect, allowing investors to consider boosting the role of the funds in their cash investment strategies.
Investors have been flocking to private debt to escape the paltry yields from fixed income and exploit the retrenchment in bank lending since the global financial crisis. We have analysed the Cliffwater Direct Lending Index data to assess the extent to which private debt’s perceived attractions bear out in reality. Our findings provide food for thought for investors thinking of making an allocation to the asset class.
This paper provides perspective on EMD investing in China and other countries. It concludes that the paradigm of long-term EM debt investing remains intact, as fundamental improvements reassert themselves, albeit with greater differentiation across countries.
Bill Poutsiaka, consultant to New York-based hedge fund Weiss Multi-Strategy Advisers LLC, among others, introduces Enterprise-Driven Investing – a valuable tool to help insurers consider all possible variables when it comes to investing. EDI provides a four-step business management process for insurers who seek to address investment pitfalls, improve decision-making and enhance results through their investments.
In revisiting our analysis of declining P&C industry book yields, we have been interested to observe how closely actual figures have followed forecast. In addition the future trajectory shows less degradation than last year’s forecast, as the entire yield curve has risen over 50 bps since August of 2016, providing a better reinvestment rate. Although the future looks better, it does not appear that we have reached bottom.
Asset class risk and return characteristics are morphing as markets move to a new reflationary environment. Investors should reassess their portfolio construction to take these new characteristics into consideration and evolve allocations accordingly.
The disruptive force of online retail is by no means a new phenomenon, but the pressure on traditional brick-and-mortar stores has escalated, judging by the national retail bankruptcies and store closing thus far in 2017. For the investment implications, we consider the appropriate portfolio actions in the face of this dramatic structural shift.
Post-crisis dynamics in the muni market have created new challenges for insurers and make the case for specialized and dedicated attention.
The ultimate impact of a Trump presidency is uncertain, however. Trump’s focus on infrastructure with his $1 trillion proposal is likely to be positive.
U.S. Municipal Debt - An Infrastructure Opportunity for European Insurers... Infrastructure has emerged as an interesting asset class for European insurers. In this issue of Perspectives, we address questions associated with embarking upon investment in a new sector and moving away from a domestic market currency, and explore other issues impacting bond holdings, Solvency II and infrastructure investments.
As the Federal Reserve raises short term interest rates, Credit Risk Transfer securities potentially offer an attractive floating rate opportunity.
The NAIC presented a proposal of new risk-based capital (RBC) charges for C1 investment risk in 2015. This issue of Perspectives highlights the differences between the current and proposed C1 factors, then utilizes the U.S. life industry data to illustrate key differences between optimized portfolios under current and proposed C1 factors.
In a rising interest rate environment, the case for senior floating rate loans should be revisited. This paper provides a primer for investing in this asset class.
In this Q&A, Portfolio Manager Timothy J. Settel outlines why we believe bank loans present an attractive investment opportunity.
This white paper reviews the role that floating rate loans can play in a diversified portfolio.
Back in the early 2000’s we began speaking with our insurance company clients about the potential benefits of membership in the Federal Home Loan Bank System. We immediately identified this program as a relatively inexpensive source of liquidity which could be particularly useful at times of capital market volatility when execution costs would be abnormally high.
As in all fixed income markets, secondary market liquidity is not abundant in EM. The decline in market liquidity means that investors who take too short term a view can end up being “topped and tailed” (i.e., selling out too soon or buying too late) when volatility increases. A longer term investment horizon, plus strong liquidity management, is key.
This Quick Takes explores potential tax changes of the new administration and their effects for holders of municipal bonds, specifically property and casualty insurers.
In this Perspectives, we assess the potential impact of a decline in corporate tax rates and rising interest rates on asset allocation and earned investment income, relying on industry aggregates as a representative company proxy.
The potential for lower tax rates under a new administration could have a significant impact on Property-Casualty (P/C) insurers' capacity for municipal bonds, and will certainly affect the tax-equivalent yield (TEY) (makes the yield on a tax-advantaged security comparable to a taxable) multiplier yield.
A key question among insurance company investment professionals--especially at US life insurers--is whether allocating away from core fixed income is worth the risk.
In this issue we examine the potential timing and magnitude of additional book yield degradation for the P&C industry.
As the range of approaches to private debt investment widens, fund managers increasingly need to show that they can operate across geographies and the capital structure. Ian Fowler of Barings explains why this is so important.
It is to an insurer’s advantage to adopt an enterprise capital management approach to optimizing asset allocation which encompasses a more complete integration with enterprise risk appetite and tolerances, a comprehensive vetting of investment guidelines and consideration of capital structure and management.