“It’s nice to see higher rates after nearly a decade of ultra-low rates.” This was the view of Anna McMullan, Director, Reinsurance Group of America (RGA) when asked how the current rate environment, particularly with high yields at the short end of the curve, has changed her view of less liquid, higher-risk assets.
McMullan was quoted at Clear Path Analysis’s inaugural Insurance Investor Midwest even earlier this year, on the topic of “Will illiquid alternative investments maintain the lustre of years past?”.
The discussion has now been published in the Insurance Asset Management Midwest 2023 report, where McMullan and her fellow panellists – including senior figures from Fidelity Security Life Insurance Company, Credit Suisse Asset Management, and Adam Street Partners – were asked about whether the rate environment was still viable and if so, how.
“We still see value in illiquid assets,” said McMullan. “We believe that there is an illiquidity premium there, but ultimately, our investment thesis hasn’t really changed. We don’t manage to a static strategy.”
"We ultimately match the cash flows that we want to match. Our approach hasn’t changed. If we want to generate illiquids for six months, we can do that.”
Schroders’s asset allocation views earlier this year was that “The wide range of possible economic outcomes favours a diversified exposure and a nimble approach,” it said. “The hurdle for illiquid exposure in portfolios is generally higher in an environment where cash yields on offer are attractive and where opportunities are likely to emerge in liquid asset classes if economic growth weakens.”
McMullan said RGA has a huge platform that enables it to go where they see opportunities regardless of the market conditions, especially as some in the market say alternatives may become less attractive as the market cycle continues. “[It means we can] adapt to the market, which is always changing,” she said. “We ultimately match the cash flows that we want to match. Our approach hasn’t changed. If we want to generate illiquids for six months, we can do that. And if we don’t, we won’t.”
The panellists were also asked about solvency and the ways the volatile market had changed the ways they looked at it and their strategies.
As solvency for insurers is always a big consideration for insurers, McMullan was asked if illiquid assets are still appealing especially considering the “play with regulation”.
“I don’t believe we will be shut off from illiquid assets altogether;
capital markets need capital."
McMullan said the regulatory environment was constantly changing in this sector and it made it difficult to see where it was headed in the future and where the risk appetite would factor into the equation. “We are continuously adapting,” she said. “So, in a sense, there is no change as we are always going to be doing this.”
She added there “will be things that we used to do in the past that we may not be able to do in the future”.
“I don’t believe we will be shut off from illiquid assets altogether; capital markets need capital,” she said. “We will continue to adapt as we always have done, and we do believe that private credit is still viable”
Looking to 2024, when asked which assets were the most attractive going forward, however, McMullan was unequivocal.
“Esoteric Asset-Backed Securities (ABS), hard assets in transportation sector and middle market loans.”
