November Seminar: Value and growth – ghostly apparitions or realistic aspirations?
2018 has been a tough year for insurance investment teams and it is certainly not ending on a high. This grim reality cast a long shadow over the final Insurance Investment Exchange seminar of the year.
‘Ghosts of Christmas past, present and future’ was the theme and keynote speaker Con Keating, CEO of BrightonRock, found plenty of ghostly apparitions haunting the sector.
With calm understatement, he opened by describing 2018 as “an unusual year”, producing the worst returns since 2008 as both equities and bonds went into reverse. He highlighted some of the reasons for the vulnerability of stocks that had previously been relied upon to provide stability in portfolios. In particular, the large proportion of book value now wrapped up in intangibles he saw as a concern. In the 80s this was typically around 14% while it is now in the mid-70% range: “This is a hollowing out of value of larger cap stocks”.
He did find some brighter spots, saying the outlook for returns on US Treasuries was looking positive as QE (quantitative easing) winds down and could reach 4%. Corporate bonds were already offering over 4%, although some caution would be needed given the rapid growth in recent years.
The shift towards alternative assets as insurers searched for better returns might continue but, compared to the rest of the world, UK insurers are already quite significant in alternatives, so the scope for growth looks quite restricted.
Keating did not see much potential in emerging markets in 2019, although they could bounce back in 2020. Sovereign risk, in particular, was being underestimated, he argued, especially where it involved loans made under the Belt and Road initiative. Countries were looking to renegotiate these but the IMF has made it clear that it will not advance funds for the repayment of loans to China, so the room for manoeuvre will be limited.
He finished with a simple solution for insurers looking for growth in overall profitability: “The easiest way to achieve growth in 2019 will be through M&A”.
The first panel session picked up some of the challenges currently faced by insurers and produced a variety of perspectives.
“Every insurance company doesn’t want to be an insurance company but wants to be a wealth manager”, said William Nicol, co-head of alternative credit at M&G Investments. This meant large annuity books were chasing a limited pool of assets: “There are a lot of investment managers already there and they are cutting each other’s throats”.
Achilles Sofroniou, senior portfolio strategist at Lloyd’s insurer Canopius, focused on the pressures in the property and casualty side of the business where the long-term weakness of underwriting performance is putting additional pressures on investment teams.
“The P&C market is a very difficult one to be in. The business model needs a complete overhaul”, said Sofroniou. The arrival of alternative capital from hedge funds and insurance-linked securities is proving a game-changer as it was “sticky money” that was flooding the market with capital.
One response to the pressures for better investment returns has been to drive people towards illiquid assets but these needed treating with caution: “We need to be careful about how these are modelled, and how governance and management is handled”.
The B word – Brexit – did not stay out of the discussion for long. Asked about the prospects for Sterling and Sterling-denominated bonds, all of the panelists believed these markets would survive the turmoil surrounding Brexit.
The second panel concluding the morning’s proceedings was asked to look towards the future and identify the ghosts that might haunt the industry in Christmases to come. They didn’t have to look far: climate change loomed large.
“The impact of climate change will materially affect your portfolios”, warned Russ Bowdrey, senior ALM manager with Aviva. “It is a many-headed beast”.
He pointed out that regulators now see it as a systemic risk to the sector but that there is very little reporting of exposures to climate change outside of France.
Scott Robertson, head of the financial management group at Phoenix Group, agreed that sustainability and the whole ESG (environmental, social and governance) agendas would grow in importance. Investments needed to be sustainable and profitable but it was important to remember that “we are responsible to shareholders and policyholders, not pressure groups”.
He said that the key to managing insurer portfolios in 2019 would be patience with greater diversification but no headlong rush after returns.
Caution was also the watchword for Bhavin Patel, managing director in liquid credit at Apollo. Overall, he felt “macro matters a lot more when tightening happens” but said the attention to detail was as important as a grasp of the bigger picture. Due diligence, especially in the private debt market, was essential for insurers.
Ranjiv Mann, head of global sovereign research and strategy for Allianz Global Investors, said that as the strength of the US dollar had driven down emerging markets, some EM assets, especially sovereigns, were becoming more value attractive. For him, the ghost that hadn’t appeared yet was inflation, mainly because of oil price weakness.
Participants at the seminar also had the opportunity to hear four in-depth presentations in breakout sessions.
- M&G Investments examined private asset life cycles, across a range of different areas of interest including renewable energy, social housing bonds, infrastructure, income strips and mortgage pools.
- Apollo explored balancing value and efficiency in private credit today with a survey of opportunities, such as commercial real estate, and the growing threats, such as the poor documentation and weakening of loan covenants.
- Allianz Global Investors focused on trade finance, asking whether it represented an efficient allocation for uncertain times. The constrained balance sheets of the banks now means that global financing demand now exceeds supply creating new opportunity sets.
- Aberdeen Standard Investments examined the growing role of private markets and the accompanying move towards multi-asset approaches. With a growing appetite for switching from public to private markets, multi-asset funds could offer an already diversified and balanced mix of assets.
The next Insurance Investment Exchange seminar will be on 26 March 2019.Category: Commentary