Pádraig: Markets fell fast as the pandemic broke. What has been the impact on solvency levels?

Gerard: The impact on individual insurers was very much varied. Overall however, solvency levels held up well and we have not seen any insurance companies falling to critical levels. This is in part due to the many risk mitigating and robust investment strategies adopted by insurers, including adoption of the VA-spread, the matching adjustment and other mitigating factors.

Illiquid fixed income strategies (eg infrastructure debt or Dutch mortgages) held up particularly well and Insurers with a relatively high exposure to such asset classes were witnessed more stable solvency ratios.

Pádraig: How did volatility in 2020 affect your strategies?

Gerard: The volatility in March and April 2020 was difficult to manage. Markets came into uncharted territory with historical correlations and diversification benefits being thrown out the window – all asset classes fell. At the same time, companies had to deal with the operational consequences of working from home. In terms of markets, and once the dust had settles,  we witnessed a clear buying opportunity in liquid markets such as investment grade credits, high yield and equities. High yield is an asset class that historically tends to perform well after crisis situations, and following careful analysis we advised our clients to step into the asset class. That turned out to be a good call.

Pádraig: Stimulus packages have made asset prices very expensive. How do you manage this?

Dr Gerard Moerman: This situation of asset pricing today certainly has similarity to the period before the pandemic. The one key difference is that there is now huge support by both central banks and unprecedented government fiscal packages. That may keep the markets at these level for a while longer.

Pádraig: Where do opportunities lie for insurers in this type of environment?

Gerard: Credit spreads show very tight levels nowadays. We believe that there is more value in alternative fixed income, where investors get rewarded for providing liquidity. Interestingly there are more and more (sub) asset classes in these strategies. In general, we still see huge appetite for private debt, Dutch mortgages and infrastructure debt on the back of higher spreads and proven resilience in the pandemic sell-off.

Pádraig: How has the role of illiquid assets changed in your perception/portfolio over the past year? How might that change over the coming year?

We believe the role of illiquid assets has not really changed. The difference is that following the pandemic sell-off,  illiquid assets showed great resilience. We expect more clients to invest a larger portion into such asset classes on the back of their long-term asset allocation plans. Building up such a portfolio takes time and attention, which is why it will remain a key focus. We do expect more opportunities to become available, via sub asset classes.

Pádraig: To what extent do the current markets create an imperative to de-risk, or present an opportunity to re-risk?

Gerard: Insurance companies tend to be slow moving in their overall asset allocation. Investors that wanted to de-risk have seen an opportunity during the pandemic sell-off. The prices of credits, high yield and equities have now more than normalised. Desiring may be early given the strong support of central banks and government. We believe the key focus should be on risk management and diversification, while looking for additional sources of return.

Pádraig: What will be the most important factors for insurance investors to manage over the short to medium term?

Gerard: A lot of different factors are still at play. A few important ones are the low yield environment and the upcoming regulatory changes. Concerning the first, we see that the pressure on insurance companies continues to increase with book yields continuing to fall. Finding yield and diversification will remain essential. Regarding the second topic of regulatory changes, we can state that the actual implementation is still a few years away, but these changes will most likely have an impact on the insurers balance sheet. In our latest webinar and research articles we spend more time on that.

Pádraig: Markets fell fast as the pandemic broke. What has been the impact on solvency levels?

Gerard: The impact on individual insurers was very much varied. Overall however, solvency levels held up well and we have not seen any insurance companies falling to critical levels. This is in part due to the many risk mitigating and robust investment strategies adopted by insurers, including adoption of the VA-spread, the matching adjustment and other mitigating factors.

Illiquid fixed income strategies (eg infrastructure debt or Dutch mortgages) held up particularly well and Insurers with a relatively high exposure to such asset classes were witnessed more stable solvency ratios.

Pádraig: How did volatility in 2020 affect your strategies?

Gerard: The volatility in March and April 2020 was difficult to manage. Markets came into uncharted territory with historical correlations and diversification benefits being thrown out the window – all asset classes fell. At the same time, companies had to deal with the operational consequences of working from home. In terms of markets, and once the dust had settles,  we witnessed a clear buying opportunity in liquid markets such as investment grade credits, high yield and equities. High yield is an asset class that historically tends to perform well after crisis situations, and following careful analysis we advised our clients to step into the asset class. That turned out to be a good call.

Pádraig: Stimulus packages have made asset prices very expensive. How do you manage this?

Gerard: This situation of asset pricing today certainly has similarity to the period before the pandemic. The one key difference is that there is now huge support by both central banks and unprecedented government fiscal packages. That may keep the markets at these level for a while longer.

Pádraig: Where do opportunities lie for insurers in this type of environment?

Gerard: Credit spreads show very tight levels nowadays. We believe that there is more value in alternative fixed income, where investors get rewarded for providing liquidity. Interestingly there are more and more (sub) asset classes in these strategies. In general, we still see huge appetite for private debt, Dutch mortgages and infrastructure debt on the back of higher spreads and proven resilience in the pandemic sell-off.

Pádraig: How has the role of illiquid assets changed in your perception/portfolio over the past year? How might that change over the coming year?

We believe the role of illiquid assets has not really changed. The difference is that following the pandemic sell-off,  illiquid assets showed great resilience. We expect more clients to invest a larger portion into such asset classes on the back of their long-term asset allocation plans. Building up such a portfolio takes time and attention, which is why it will remain a key focus. We do expect more opportunities to become available, via sub asset classes.

Pádraig: To what extent do the current markets create an imperative to derisk, or present an opportunity to rerisk?

Gerard: Insurance companies tend to be slow moving in their overall asset allocation. Investors that wanted to verisk have seen an opportunity during the pandemic sell-off. The prices of credits, high yield and equities have now more than normalised. Desiring may be early given the strong support of central banks and government. We believe the key focus should be on risk management and diversification, while looking for additional sources of return.

Pádraig: What will be the most important factors for insurance investors to manage over the short to medium term?

Gerard: A lot of different factors are still at play. A few important ones are the low yield environment and the upcoming regulatory changes. Concerning the first, we see that the pressure on insurance companies continues to increase with book yields continuing to fall. Finding yield and diversification will remain essential. Regarding the second topic of regulatory changes, we can state that the actual implementation is still a few years away, but these changes will most likely have an impact on the insurers balance sheet. In our latest webinar and research articles we spend more time on that.

 

Please Sign In or Register to leave a Comment.