Diversification proves its value in pandemic

In the first of a new series of conversations with leading CIOs and other key figures in the insurance investment community, Emily Penn, Capital Initiatives & Investment Director at LV=, reflects with David Worsfold on some of the key learnings over the last year as we head for the New Normal.

For LV= the New Normal will be a completely new world. Its proposed demutualisation and sale of its savings, pensions and protection business to US private equity firm Bain Capital follows the acquisition by Allianz of its general insurance side early last year. There will, however, be many insights to take into the new world from the challenges of the pandemic:

“What we have learnt over the last 12 months or so is the value of diversification in our multi-asset portfolios both from an intra-asset class perspective and a global perspective. We have really seen that play out to our benefit in our flagship portfolios which are the smooth managed funds range.

“The other big area for focus and with the potential to be on the move is the illiquid asset side. We are not a huge player in that space, we are not a BPA [bulk purchase annuity] player but we do write fixed term annuities and source commercial mortgage loans to back that. While we did see a drop in supply through the middle of last year because of the uncertainty around property valuations, as we have seen that supply pick up in the loans that we fund we have started to see a lot of opportunities. We have seen some very attractive spreads. We have also seen as a lender that we have much more clout in negotiating covenants within these assets which gives us much more protection against some of the risks.”

Inevitably, the mid-year turmoil in asset prices and the continuing impact of lockdowns on the economy has produced some stresses in the portfolio, especially in the retail sector. This has led LV= to focus on defensive assets where there is both resilience and value, says Penn.

“Our retail assets are geared towards the defensive names that have traded well through the pandemic and are much more immune to the shift to online shopping. These tend to be the larger retail parks particularly if there is a large supermarket on site as that brings the footfall in, as well as the likes of Dunelm, Pets at Home and B&M that have traded well through the cycle.”

Even where assets have become distressed she says there have been lessons that LV= that her team will be able to take forward from the experience.

“There are obviously assets that have been distressed through this and we have learnt a lot about how to manage those assets and what to look for when making new investments.”

Working closely with the regulator was another feature of the last year, especially when it came to liquidity management. Some of the extreme market movements impacted their hedging portfolios. This meant providing weekly positions for the regulator around liquidity, solvency and any notable changes in the portfolio, something every CIO needs to take seriously nowadays, she says.

“If you are not factoring that in you are taking a considerable risk.”

It was by no means all about reacting to the pandemic in 2020 as LV= put its own “responsible investing framework” in place to ensure that environmental, social and governance (ESG) principles are embedded in the whole investment process. This is especially important to LV= as it outsources a large proportion of its investment management and wanted to create a more accountable regime.

“We expect all our asset managers to embed ESG into their bottom-up investment processes, we also expect a strong level of engagement from a stewardship perspective with the management of companies.”

Top quality management information and analytics are the keys to making this work, she says.

Looking ahead, she says the way the climate change agenda develops will be a major influence for firms, especially as there is “talk of the regulator setting a line in the sand around our commitment to the 2050 [carbon neutrality] targets”. These must be “authentic”.

There will also be a need to keep close to macro-economic trends, especially inflation and unemployment, and monitor corporate balance sheets as government support and stimulus packages unwind, with some firms not expected to return to previous levels of profitability quickly.

• David Worsfold is the Contributing Editor of the Insurance Investment Exchange.