Ankit Shah: It is getting very interesting as with the changing dynamics, especially for general insurance companies, we are looking for more diversification in the portfolios.
It is no longer about that core fixed income and IG portfolios; we are trying to diversify and enhance our returns.
That being said, risk becomes a very key metric for insurance companies for any other investments so while considering any approach, the overall risk framework that is setup by the company is important for us to be able to look into.
In this environment we cannot remain static, we constantly try to review our risk appetite and risk measurements to try and be more proactive with the changing investment universe. We try to educate our boards and risk committees to see if we can diversify.
“It is no longer about that core fixed income and IG portfolios; we are trying
to diversify and enhance our returns.”
We use a strategic asset allocation as one of the key tools for this in order to identify how those new risks fit into the overall allocations. We ask: what are the key return metrics for this and what could be the implication on our capital?
When moving into the more illiquid assets, questions include: what are the illiquid premiums that we are getting for those new investments or risks we are taking?
At the same time, it is important for us to make sure that diversification is achieved in the portfolio, that we have good market knowledge that is acquired before getting into any new risks including how they complement our existing portfolio, as you don’t want to create duplications.
We continue to monitor this through various stress testing and scenarios.
Ankit: It is no secret that more insurance companies have gotten into the alterative asset space. This is becoming, regardless of size, ever so important in this low yield environment.
This is because it creates good diversification in your portfolio whereby you can have a core fixed income asset, which we like to do, rather than going into much more volatile, listed equities.
We would rather take that exposure and the return enhancement to alternatives. Even though they could be a slightly longer duration, etc., and more complexity comes with them, overall, they do give enhancements to your returns even in capital terms.
It is important but is still a small percentage for most insurance companies due to the liquidity requirements and the illiquid nature of these allocations.
“You don’t want to end up incurring so many costs to monitor this simply
because you don’t have the right knowledge.”
It then becomes inevitable to be quite careful when choosing what asset classes are suitable for your balance sheet.
You need to know how much you want to allocate and whether you have the resources to understand private equity. This could have so much underlying allocations, or are you better off doing something in the infrastructure, real estate space or, because you may understand the fixed income book, do you want to go into private loans.
It becomes quite important for insurance companies to understand, as you don’t want to end up incurring so many costs to monitor this simply because you don’t have the right knowledge. With limited resources it is always interesting to see these allocations.
At the same time, if you allocate say 7% of your assets going into alternatives and you end up allocating pretty much all of them on day one, your assets are not going to double every year, they will only grow so much per year.
“It is important to keep up with market trends and have a regular chat
with your managers about the existing allocation.”
You then cannot participate in any future opportunities because you already utilised your allocation. This is why it is important to monitor your new allocations and at the same time, manage the existing allocations.
It is important to keep up with market trends and have a regular chat with your managers about the existing allocations or how the approaches have changed.
For instance, with Covid, we have a diversified alternative book across the group, and we have been on regular calls with all of our managers asking what they have done to look into each and every underlying investment.
We asked whether they have spoken to the management of those companies, what they have done to see the covenants of the underlying debt and the implications, and what they have done to value these portfolios or recoveries of these portfolios.
These are important issues that you to be aware of during a volatile period and especially when managing alternatives.
Ankit: It becomes challenging for insurance companies if they don’t have a global presence or understanding.
We sit in a little bit of a unique position because as a QIC based company out of Qatar, we do have in house management team in Qatar, so we benefit from that emerging market and GCC perspective.
As we operate out of Europe often and work with external managers, it allows us to have this very nice blend of in house understanding of emerging markets, which allows us to explore a lot of new geographies from South East Asia, APAC, even into Latin America and areas that many insurance companies in Europe, might feel slightly nervous about getting into.
Of course, our core portfolios are still managed through US dollars or Sterling and Euro.
The first and most important element for us is the ALM and the risk appetite because this needs to be borne in mind for every decision made on allocations.
“Exploring these geographies is becoming important in the hunt for
yield, as well as for diversifying portfolios.”
At the same time, the new geographies do bring new challenges, so you need to make sure that you have understanding, that you do bottom-up research not only for the underlying issuances but also the macro outlook for those particular countries.
This does become daunting for most insurance companies, especially when managing in smaller terms. So, you have to be careful or you have to work with some of the global asset managers who have a presence in most of the local regions so you can leverage on their knowledge and experience.
Inevitably, exploring these geographies is becoming important in the hunt for yield, as well as for diversifying portfolios.
There are some very good rated bonds out there in the world and with the overall growth coming from Asia and emerging markets, it is important that they are a reasonable allocation within your portfolio.
