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Tobias Winter: UNIQA is an Austrian-based, mid-market insurance company. Before the Great Financial Crash (GFC) the asset management was very much return driven, like that of many other mid-market insurance companies.
With Solvency II on the horizon, UNIQA implemented a stricter asset liability matching approach. The meltdown of the capital markets during the GFC led to a less comfortable solvency capital situation, especially as given these circumstances, alternative market investments were foreseen to become less attractive from a regulatory point of view.
"Regulators on the insurance side have become increasingly familiar
with alternative market investments."
Nevertheless, with the yields coming down and the central banks flooding the market with liquidity, we started to look into alternative markets again. UNIQA started to invest into infrastructure, private debt and most recently private equity.
That is where we are currently building our private equity programme. We observe similar efforts or expanding programs at our Central European and especially German peers. Also, regulators on the insurance side have become increasingly familiar with alternative market investments, which helps to grow exposure to the asset class within the insurance industry.
Tobias: In Central Europe, companies rely heavily on their house bank. The market is less familiar with private markets financing unlike in the UK, the Netherlands, or France. This is especially true with regards to private equity. Given the changing landscapes on the banking side, however, driven by regulatory developments, the banks are less incentivised to provide long term financing.
Alternative ways of financing began to establish in the markets and companies have become more open to fund through those alternative asset providers; not limited for long term financing solutions on the private debt side but on the equity side as well. It is a culture change and that takes time.
Tobias: Coming out of the GFC, the insurance industry was facing a less comfortable capital situation across Europe. Subsequently declining interest rates hurt them on most parts of an insurance company's asset portfolio; life insurance suffered as the industry underwrites guaranteed returns. On top of this, increasing regulatory requirements were implemented - starting with stricter capital requirements and now these also include ESG.
It was the yield compression that pressured the industry to look at alternative, higher performing asset classes. Private assets are not only expected to deliver higher returns, but also offer rather stable valuations and accommodate more predictable returns compared to public market assets.
As the insurance industry is able to bear the illiquidity risk of private assets given the long-term nature of some of their liabilities it also makes economic sense for the industry to allocate to private assets, including private equity investments.
"Looking at private equity, this asset class is expected to
outperform public markets."
On the other side of the balance sheet, the recovery of the capital markets helped the insurance industry to strengthen its capital base, thus increasing the risk capital bearing capacity given the increased headroom on solvency capital.
Looking at private equity, this asset class is expected to outperform public markets. Investors being able to handle the complexity are able to reap a return premium. Not from the complexity itself, but in the expertise it gives of how to manage and administer private market investments. Returns earn an uptick versus public markets, which is another reason why insurers are looking into private markets. Furthermore, regulators become more familiar with private assets. That is why we believe the share of private assets in institutional portfolios will continue to grow.
Tobias: On the plus side, private assets reduce the volatility of the performance of the overall investment portfolio. Also, in a time when many insurance companies are listed on the stock exchange themselves with the obligation to report quarterly, it results in a higher predictability of forecasting results, which is appreciated by the market.
"Compared to public markets, reporting on and monitoring of these assets are more cumbersome, as they are private, so information is more difficult to access."
From a portfolio perspective, insurance investors can add exposures to the overall portfolio and risk factors that cannot be found in public markets. For example, looking at infrastructure assets, exposure to this asset class is harder to build in the public markets. It also diversifies the overall portfolio to some extent and offers benefits to an insurance portfolio.
However, this complexity premia comes with a drawback because one needs to handle the complexity of private markets, which means one has to have cash flow visibility, as investors have to be able to serve their capital calls and have to deal with all the monitoring requirements that come alongside it. Compared to public markets, reporting on and monitoring of these assets are more cumbersome, as they are private, so information is more difficult to access.
