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The risk exposures in 2024 that hadn’t previously been a major concern, and what should have stakeholders be doing about this, became a massive concern over the course of 2024 with many insurance investors having to pivot their strategies for ‘higher for longer’ environments.
Therefore looking ahead is pivotal, with that Justin Hook, Senior Director, Portfolio Manager, Legal & General, joined Clear Path Analysis’s Maya Sibul for a discussion at the Insurance Investor Live | Midwest event in Chicago earlier this year, which is now part of the Insurance Asset Management Mid-Year Insights report.
In the discussion, Hook gave his thoughts on how investment teams at insurers should be mitigating concerns around the current environment and making changes to their portfolios in H2 to prepare for 2025 and beyond.
Below is an excerpt of the conversation that appears in the report.
Justin Hook: As you think about insurance portfolio management, the focus can’t just be on total return or improving income, you also have a lot of externalities that you need to put on an insurance lens to evaluate the market and the opportunity set and there is liability driven, which broadly for life insurers, like me, are focused on, as we consider their opportunities.
One of the interesting dynamics of the market right now is, coming into [2024], everyone was pricing in five to seven cuts, and it was almost as if it was going to happen but now that narrative has changed and we are going to be in an environment where rates are going to be ‘higher for longer’ but given the potential outcome, sponsors who are issuing debt are looking to issue in the three to five year where life insurers typically have a much longer liability profile in the eight to 10- year range.
"Given the rate volatility, it makes sense to keep your duration profile on your asset balance sheet for your reserves in line with your liability."
This is a challenge that we need to look to overcome and as you evaluate the pipeline across public and private markets, this needs to be taken into consideration.
One way to do this is to put on a barbell trade to take advantage of the cross-sector relative value that you can see across markets by purchasing front-end asset-backed securities (ABS) to take advantage of the yield curve where spreads are still wide when you compare them to publicly traded investment grade (IG) and you can then barbell this in the long end whether it is public IG that is more stable whether it is in the utility space or other private sectors or even infrastructure debt that is going to give you that longer duration profile and there is stability in the cashflow. This means that you can barbell in a duration as well as in a credit basis.
Given the rate volatility that we have seen, it makes a lot of sense to make sure that you keep your duration profile on your asset balance sheet for your reserves in line with your liability.
Justin Hook: The starting point matters as you think about where your portfolio is positioned and where your strategic asset allocation is. From here you can decide how you are going to navigate the opportunity set that you see.
To your point on term premium, we have seen an erosion there and it is predicated on the strong technical, particularly in public markets. Everyone is looking for that long duration and when it does come to market, everyone is chasing it, and spreads are tightening so you are not getting that spread pick up in the public markets.
"From an overall relative value perspective, securitised markets
still makes a lot of sense."
There is an opportunity to look at the private markets where you can work with originators and negotiate specific customisation on the assets that you are looking for so you can still focus in private credit, infrastructure, commercial mortgage, etc. There are areas where you can set the box that you are looking to invest in and have a customised solution to match those liabilities that you are looking for.
From an overall relative value perspective, securitised markets still makes a lot of sense. As you look to rotate away from some of the traditional collateral pools that you see on the consumer side, there are a lot of opportunities in new spaces with digital infrastructure being an area where you are going to see tremendous amounts of growth. Whether it is a data centre, fibre, etc., you are going to see a lot of opportunity there, but you still want to be mindful of the bottom-up approach in how you look at these investments and be mindful of the spreads.
We have seen some of these come to the public markets and sometimes they are oversubscribed, and the spreads compress pretty dramatically so you still need to be mindful of those and focus on the top tier sponsors.
