Those interviewed were:
Felix Schlumpf: The largest part of insurance assets are still invested in bonds. This is given that the liabilities of insurers also behave like bonds and the financial risk of interest rates can be mitigated in that way.
In my opinion, the most effective investment objective is to try and achieve superior risk-adjusted investment return, relative to liabilities.
This is an economic view and it is also encouraged by regulators.
"The most effective investment objective is to try and achieve superior
risk-adjusted investment return, relative to liabilities."
Another interesting behaviour of our liabilities is their stickiness on the balance sheet or to put in other words, the money the policyholders pay as premiums are with a life insurer, like ourselves, for many years before it must be paid out.
This means that we and our peers are naturally able to invest in illiquid assets.
Erik Ranberg: To determine what the most effective strategies are, you must first differentiate between life insurance versus non-life insurance, as they might have somewhat different balance sheets as well as challenges in today’s environment.
As a non-life insurance company, we divide the portfolio into a hedging and a return seeking portfolio.
In the hedge portfolio, there is focus on the duration of liabilities, as well as the inflation exposure that we have in our liabilities. As a consequence the main part of this portfolio is fixed income.
In regards to the return seeking portfolio, today it is not that different from what we have been doing for many years.
"We’ve taken on a higher illiquidity profile into the portfolio,
as well as more credit."
However, in today’s environment, the opportunities to establish a running yield into that portfolio is definitely more challenging then it was a couple of years ago.
Consequently, we’ve taken on a higher illiquidity profile into the portfolio, as well as more credit. However, we are very cautious to not give away too much of our flexibility i.e. we want to have the opportunity to change the portfolio around if the regime were to change.
We are staying mainly with the asset classes that we have known before.
"We are staying mainly with the asset classes that
we have known before."
Felix: Indeed, insurers are invested in illiquid asset classes like real estate, private equity and private debt. This is not done solely to diversify but also to earn an illiquidity premium. It is important though to manage the illiquidity risk in order to not become a forced seller of these illiquid assets.
Another investment strategy of increased interest to insurers is factor investing, also known by the more popular term of “smart beta”. This is an elegant way to add additional beta return with low correlation to the core portfolio without increasing the market risk. The low yield environment is indeed a challenge. One important consideration of using a smart beta approach, is to have reasonable return expectations and to be able to communicate them to the relevant stakeholders. For instance, some life insurance products with guarantees are not possible anymore in today’s low yield environment.
Erik: We have been particularly cautious, not running too much of our portfolio assets in illiquid securities. We don’t feel that the illiquidity premium is very onerous but at the same time, when you go for these asset classes you are going into new knowledge areas, i.e. you must ask yourself whether you have the expertise to manage these asset classes, like infrastructure.
We have had quite a lot of experience with real estate and private equity, for many years now, so illiquid investments are not new to us. However, we haven’t pilled further into these asset classes due to their regime, we have remained very stable.
For those who haven’t been in these asset classes, it might look as though there are opportunities. However, you need to actually build new and develop your existing organisational teams, to be able to handle these asset classes.
