Dual Investment Challenges for Insurers
After a unique year, insurers look for reliable yield and capital protection.
Insurance portfolios are known for quality and being reasonably benign from a risk standpoint as they endeavor to support policyholders. However, the events of 2020 didn’t spare global insurance investors. Yield challenges facing life companies intensified, while for P&C and health companies, credit spreads are nearer to pre-crisis levels and total return expectations are muted, to say the least. As a result, identifying reliable yield and protecting capital are front and center in 2021.
Given limits facing traditional insurance-related asset classes, we see particular interest in private markets and extended fixed income to identify reliable forms of yield. Esoteric ABS, infrastructure and other private markets are appealing, but challenging to access; emerging markets debt and CLOs continue to gain strategic share in portfolio allocations, while taxable munis are seeing interest from Europe and Asia as a source of high-quality duration. Putting capital to work is particularly challenging when new premiums flow into portfolios.
Global life insurers have consistently traded liquidity for yield, as alternative allocations have steadily grown over the past decade. In public markets, life companies have not compromised on quality to chase yield. Among European insurers, there has been more attention on private lending and infrastructure as a means to address the increased impact of convexity of their liabilities. P&C portfolios have generally followed the shape of markets in investment grade sectors, and tax-exempt muni exposure has given way to BBB rated credit after corporate tax-rate changes. Short tail writers including the U.K. and Bermuda are paying more attention to return expectations and focusing on how to preserve capital given the prospect of higher interest rates (at least in the U.S.).
The regulatory landscape continues to evolve, particularly in several Asian markets, as new solvency standards take shape. Given liability mismatches, we see a bid for duration forming in order for insurers to satisfy the new rules. In the U.S., there’s more attention on rated funds and notes as private credit exposure is transformed into rated securities on balance sheets.
In our view, a platform-based approach continues to be the “best medicine” in the current environment to better address current market challenges and regulatory considerations. We favor reliable carry opportunities for short-tail companies, including short duration markets (both investment grade and high yield), bank loans, CLOs and other floating rate assets, including securitized markets. For longer-tail insurers, yield and duration are in focus and we see taxable munis as a great diversifier away from investment grade credit concentration. For those who can absorb lower-quality solutions, high yield and full-market EMD are also very much part of our portfolios these days. Private markets including residential whole loans and European private loans are other diversified sources of return in the current environment.