When it comes to insurance investment in 2023, especially in the real estate space, there is “an opportunity to get interesting things at good prices”, said Nenna Gilmour-Platt, Head of Investment Strategy at Just Group plc. She added that, even so, there were still downsides to the market.
Gilmour-Platt was speaking at the Investors Forum on day two of Private Markets Investor | Europe, on in London last week. She discussed the topic in a roundtable debate alongside Chris Palmer, Head of Illiquid Assets Origination at Phoenix Group, and Daniel Blamont, Group Investment Operations Director at Royal London.
“People have been squeezed with liquidity during
the Liz Truss era.”
The panel saw speakers placing major emphasis on the headaches and hassles caused by so-called “Trussonomics” last autumn, new opportunities for investors due to inflation, and the uncertainty caused by the waiting period before ESG and Solvency II frameworks are ironed out.
“People have been squeezed with liquidity during the Liz Truss era, and there were margin calls on cross-currency and LDI,” said Palmer, referring to the short tenure of the UK's former Prime Minister and her ill-fated ‘mini-budget’. He said that, as a result, investors were forced to sell things they didn't want to sell, which meant that asset allocation was frustratingly skewed. “There are many cases of liquidity being overweight,” he added.
The panellists all mentioned market volatility as a key factor to monitor for investment teams at insurers, especially when making choices of which asset classes to continue to invest in or newly enter into. Palmer cited the level of current market volatility – with fallout from the war in Ukraine and recent bank failures and bailouts alongside Trussonomics – as contributing to this state of overweight liquidity.
Gilmour-Platt said that other hot-topic macroeconomic factors such as inflation were particularly influential in decisions to have inflation-linked securities comprise a major part of portfolios in 2023 for some investors.
“Certain sectors [not asset classes] have pricing power now
in terms of inflation.”
Blamont said it was important to note that, for him, the question of where to deploy capital for best return was not about asset class at all, but about which sectors looked more attractive. “Certain sectors have pricing power now in terms of inflation,” he said, and encouraged the market to consider the effects of downside risk. He said that the cyclical nature of price increases was important to consider.
However, he added that the case for private markets has certainly not diminished, even amidst this volatility; the challenge is to maintain market discipline despite the turbulence.
Another matter at the tip of everyone’s tongues was the proposed Solvency II frameworks for UK insurers – and potential portfolio reconfigurations as a result.
When asked about the predicted impact of these changes on return opportunities, Gilmour-Platt said that because the reforms are ongoing, they aren’t yet having an enormous effect. She identified three key items that insurers will need to consider going forward: the risk margin reduction, the widening of universal asset eligibility, and the removal of a BBB.
Whilst Gilmour-Platt cautioned that details are still being ironed out, she said that these factors – particularly the second – could “open up a whole new world of investment.”
“We really can’t know until the details are confirmed,” said Palmer on the issue. He added that capital charges were an important aspect to keep an eye on.
The panel were all in agreement that ESG was given proper consideration in private markets investment. Palmer said ESG pressures were a significant factor in determining which asset classes and investment areas were better for return in 2023, but that this came with downsides and distractions.
“Every CEO wants to talk about how green they are, which means they aren’t particularly good value from an economic point-of-view,” he continued. “However, if you talk about the ways your share price goes up and your shareholder earns more money, then holistically you will do better.”
He urged attendees to broaden their thinking on the subject.
“On the social housing side, it has been a difficult time due
to things such as rent caps.”
Real estate markets presented one of the better opportunities for return – but still required careful monitoring, the panel agreed. “It’s about fundamental credit,” said Gilmour-Platt. “We focus more on the social housing side, and it has been a difficult time for housing associations due to things such as rent caps and we’ve seen moves from AA to A-rated investments and maybe down to BBB.”
Whilst this means that profits have been squeezed, Gilmour-Platt added that she was hopeful on the whole – particularly due to the opportunities for good pricing that she was seeing elsewhere in real estate markets.
In response to an audience question about net zero and decarbonisation – and how these factors drive investment strategies, liability profiles, and return opportunities – the panel said that what was needed most was a consistent green rating and reporting framework, otherwise there could be no progress.
“A standard framework is essential, and regulators
need to get on board.”
“As soon as we get a reliable framework, it’ll be possible for regulators to say that capital charges can be reduced – in the case of BBBs, for example,” Palmer said. “But a standard framework is essential, and regulators need to get on board.”
He also noted that lower economic targets might be required for portfolios with a majority of green investments. But Blamont and Gilmour-Platt said that, often, greener investments go hand-in-hand with better returns – especially considering factors such as reputational risk and the importance of futureproofing portfolios.
“You can’t make these decisions on behalf of your clients,” Blamont added. “We have a direction of travel but no clear timelines; there is a lot coming in the future, but it’s difficult to execute on these things now.”
When asked to sum up their advice for return opportunities in 2023, Blamont, Gilmour-Platt, and Palmer said that investors should be looking toward real estate markets and inflation-linked securities – with decarbonisation likely to play a key role in the future, once regulatory regimes have been settled.
