Nine lessons from general account investing in 2021

Channels: SAA/ALM, Risk, Regulation

2020 bruised many chief investment officers who had to fight to maintain their general accounts. But insurers' full-year results are revealing that the year wasn't a losing battle for many. David Walker reports

COVID-19 unfortunately still holds societies very much in its sway, despite the vaccine roll-outs underway. But its brunt-force on capital markets has generally lessened, leaving chief investment officers (CIOs) and onlookers to take a breath.

Peeling through insurers' full-year results one generally finds positive annual investment results – something underwriters and CIOs might have considered unlikely a year ago.

They got hurt by an awful Q1, before Q2 rubbed salt into the wounds of many, but then H2 and particularly Q4 were healing periods.

Life companies have largely defended gaps between their average minimum guarantee and their investment yields, though their reinvestment yields fell, as they widely expected.

Looking forward, alternatives have won the CIOs' hearts, as have protective hedging programmes. And some industry juggernauts will put greater focus on asset management units that were the chief defenders of full-year operating profits.

Lesson One: All is not lost

In its full-year review Beazley summed up the bleakness of Q1 when spreads billowed, global equities devalued by 27% in euro terms, and "even [US] short-dated securities with investment-grade credit ratings saw spreads increase by more than 200 basis points...generating significant losses". The subsequent recovery during H2 was, it said, "even more remarkable [than] the dramatic financial market volatility...in the first part of the year". Beazley made 3% in 2020 - a not a-typical full-year result – helped significantly by rotations into debt that limited Q1 losses to 1%.

Few gains were available that quarter to insurers holding fast to their appreciating fixed income portfolios. Scor was one exception, harvesting €197m of gains mainly on real estate, before doing the same on fixed income in H2.

Without question, Q4 saved some insurers' investments. All asset classes generated quarterly income/gains for Gjensidige, and comprised most (NOK 1.2bn) of the Norwegian's NOK 1.3bn full-year investment result, although this still lagged NOK 2.3bn from 2019.

If Q4's rising markets buoyed all ships, some like Mapfre increased the floatation by "taking advantage of the movements of the curve" in fixed income, and investing in sectors/companies "that are more attractive from the point of view of ratings". It cut debt/credit and boosted equities from 7.6% to 9.2%. Its environmental, social and governance (ESG) funds showed "exceptional" returns – but more on that later.

No CIO is so long-in-the-tooth as to have experienced the last global pandemic a century ago. But those that survived 2008/09 may have been better equipped to stay calm in the market-storm of H1 2020.

Lesson Two: All may not be over

If the worst has passed, CIOs are not ruling out poor investment news in 2021.

Aegon's CFO Matt Rider expects about €300m of 'credit migration' – read 'downgrades' - as the pandemic unfolds and insolvencies prevented by government support measures gather speed as that support ends. This will also hit trade-credit and mortgage insurers, on underwriting, of course.

Beazley is pragmatic about a year on year fall in its investment return, "lower than could have been achieved by a more aggressive strategy". But the volatility of the re/insurer's return was reduced, it added. And while high-quality credit yields are now very low, Beazley says "the more volatile asset classes may offer better returns, but uncertainty about the global economic outlook remains elevated".

Lesson Three: CIOs can move fast

Trusting that better times would re-emerge did not mean inaction by CIOs in the meantime. Investment units have discovered their agility. This was highlighted at the time by GSAM's Etienne Comon as clients generated market-risk reports weekly, if not more often, for risk departments.

Now, CNP Assurances' CEO Antoine Lissowski is looking for more equities, having sold them down in late 2019, and despite re-stocking them opportunistically for the rebound in the pandemic.

Munich Re also partook in tactical asset allocation in 2020, too, making €1.5bn of disposals that eclipsed €1.1bn in 2020. But some of these were enacted to fuel the company's Zinszusatzreserve interest reserve.

Mortgages, credit and real estate were where NN sought and found opportunities for its life general account assets during 2020, and it will require more ESG investing in 2021 to help 80% of its assets under management be integrated into ESG precepts by 2023, up from 74% last year. NN may also want more fiduciary mandates for its affiliate manager NN Investment Partners after it bought $4bn of assets by acquiring a team from Dutch fiduciary manager MN.

It's a stretch to say CIO turned into traders in 2020. But they realised they could, if they had to.

Some are hesitant to wade in now. Torbjörn Magnusson, Sampo's group chief executive and president, says the pandemic "left an investment environment in which it is difficult to deploy money at attractive returns, further emphasising the need to invest in our underwriting capabilities".

And don't expect immediate share purchases by Aegon, whose CFO Rider calls equity markets "almost surrealistically high at the moment".

Lesson Four: Life CIOs sure know how to mind the gap

CFOs accepted the almost inevitable fact in 2020 that their reinvestment yield would deteriorate. Immense central bank- and government stimulus measures assured that.

But they kept making more than the minimum required by their life policy books.

For Allianz the total life-unit yield of 4.18% still beat the 1.85% minimum product guarantee with a margin in 2020 that Allianz called "resilient".

Its main rival Axa generated a total yield on its life and savings asset base for in-force business of 2.7%, against an average 1.5% guarantee, making for a margin of 120bps. But the size of that gap varies enormously, from 270bps to just 30bps, by region of policy. For its new life and savings products Axa's margin is 100bps, whereby a fixed income reinvestment yield of 1.2% sits above a 0.2% average promise.

As lower for longer looks more like lower forever, the pain of rolling off long-dated bonds will only add to the pressure.

Frank Grund, head of insurance regulation at BaFin, Germany's financial regulator, suggested recently that this unending pressure and the benefit of transitional measures disappearing by 2032 will leave some German life firms inadequately capitalised from a regulatory perspective.

Lesson Five: Life chief underwriting officers sure know how to re-engineer products

Life CIOs were not the only actors minding the gap in 2020.

Chief underwriters were designing products with lower guarantees, for distributors to push.

CNP Assurances and Crédit Agricole Assurances (CAA) were consciously attuning life products to low rates, by putting the risk on the buyer. At CNP Assurances, one-quarter of domestic life sales were of unit-linked products (2019: 20%), and 77% were, across the EU. It shed 'traditional' savings assets, and transferred old-policy customers to low-guarantee ones, which they can do without losing tax advantages after passage of a recent law.

CNP Assurances wants more SRI funds, in part for unit-linked offerings and partly to meet its 2050 goal for investment carbon-neutrality.

CAA is tilting its life work towards unit-linked, too, although its investment return was 186bps above its minimum policy guarantee - 2.13% versus 0.27%.

Some groups seem in a race between their life guarantee and falling yields.

Intesa Sanpaolo cut its average minimum life guarantee by 10bps during 2020, but its investment return fell twice as sharply, by 22bps, leaving a gap of 1.59%

CIOs are not alone in battling low rates. CUOs have a stake in that combat. The two will increasingly work together against their common foe.

Lesson six: It's never too late to hedge

If Q4 2019 was a perfect time to hedge investments, CIOs have realised 'it's never too late'.

Munich Re stood out in Q1 as having made almost perfect timing on equities hedging, and reaped €1.6bn or €18m every working day – as share markets plunged.

Swiss Re may have come to the game a little late, as CEO Christian Mumenthaler says various departments came together in early February 2020, upon seeing how disastrous COVID-19 could become for investments. "All of us in risk management and finance realised this could become a very big pandemic and therefore we started to hedge the portfolio and work on different segments in terms of how exposed we thought they would be."

But as aftershocks rumble on into 2021, and still react to good/bad news from vaccine programmes, CIOs are still constructing, refining and growing hedging programmes.

The equity hedging using put options at CNP Assurances, for instance, grew in notional amount from €12.5bn to €13.6bn during 2020, with the CAC-40 and Eurostoxx-50 being referenced.

Lesson seven: CIOs are considering alternatives

Alternatives will gain in importance in 2021.

Thomas Buberl, Axa's CEO, heralded a 2.6% reinvestment yield on alternative fixed income (AFI), versus just 1.1% for core fixed income. AFI was mainly collateralised loan obligations and real estate debt – so not every CIO's cup of tea – but good enough for Axa, whose affiliate manager Axa Investment Managers grew its allocation by 14%, or €159bn last year. Higher fees from running non-mainstream asset classes were a key reason the asset management unit's revenues grew 4% year on year to €1.3bn, Axa said.

Zurich singled out its hedge funds for helping the investment income behind its non-life unit, although the P&C investment income overall was still down on 2019, "primarily due to lower investment yields". Realized capital gains of $305m, jumped $94m, year on year, boosted by the hedge funds.

Lancashire maintained exposure to hedge funds, though it halved from 8.7% in 2019 to 4%, and to private investment funds where exposure rocketed, proportionally speaking, from 0.9% to 4.7%. But Alex Maloney, CEO, praised the "conservative investment philosophy" as "again serving us well" in 2020, as the portfolio contributed to the group's full-year profits.

For as long as interest rates plumb the depths, CIOs will keep eyeing off the alternatives. Some are questioning if buying into illiquid asset classes is earning them an 'illiquidity premium,' or just a complexity premium, and how they should model that. It won't deter their appetite, but will need explaining when it arises as an issue.

Lesson eight: Location matters

The hit to insurers' investments was firmly linked to the insurers' geography.

Italians almost uniformly so far emphasised their attempts to lower the sensitivity of their Solvency II ratios to BTP yield spreads. Generali was yet to report at the time of writing, but Intesa Sanpaolo and Poste Vita both highlighted their sensitivity reductions.

Intesa Sanpaolo's insurance unit acknowledged the wide swings of BTP spreads - from 160bps at the end of 2019, to 199bps in March, 171bps by mid-year, then 139bps and 111bps in Q3 and Q4 respectively - and decreased its proportional exposure from 89.5% to 88.6%.

A similar story at Poste Vita, which hopes to diversify assets in its portfolio behind segregated accounts, which are still now about 60% in BTPs, the same level as in 2019.

The underlying problem for the groups is that changes in the value of BTPs mess with the levels of own funds they have to cover their solvency capital requirement. Poste Vita's solvency ratio fell from 276% in 2019 to 226% in Q1 2020, then 216% mid-year, before climbing to 250% in September and 279% at year's end.

Poste Vita has 15% in HY, EMD, private markets and equity, and these classes may well find further favour in 2021.

During 2020 Unipol slashed the share of Italian government debt in its investments from 50.1% to 42.2%.

Expect Generali, reporting full-year results on 11 March, to mention BTPs as well.

Lesson nine: Ethics matter

Perhaps the key lesson coming out of insurers' full-year results is, ESG investing, in particular climate change considerations, will only accelerate in 2021.

Folksam said: "It has become clear in 2020 that increasingly, global capital flows are directed towards sustainable investments [and] Folksam, which has long worked with sustainable investments, welcomes this."

Fellow Swede Länsförsäkringar examines its managers for their organization, returns and sustainability, and all managers have signed the UN principles for responsible investment (PRI). Of 18 funds Länsförsäkringar Fondliv launched in 2020 half were sustainability-oriented.

Customers are driving the demand as 40% of the insurer's sales reflect interest in sustainability-oriented equity funds and funds with low climate risk.

But it is not just the familiar Scandinavians and Nordic underwriters 'doing' ESG. Full-year reports from French, German, Swiss, and UK underwriters have all also mentioned ESG.


Insurance Risk Data is publishing its inaugural Insurer Performance Report, with details and analysis of the most recent investment performance of about 100 underwriters; details of the sensitivities of the solvency adequacy of around 300 insurers to investment markets moving, and more. It is the first compendium to bring together the most up-to-date general account investment returns across Europe and Bermuda. For further details and a free sample contact phil.manley@fieldgibsonmedia.com .