Insurance Asset Risk Awards 2019 - UK & Europe

Building an insurer's fixed income portfolio

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What expertise does Insight Investment bring to insurance clients in the fixed income space?

Heneg Parthenay: For insurance clients, we utilise our two investment engines. One is a traditional fixed income investment practice that looks at all fixed income asset classes from government bonds to illiquid loans.

The second investment engine is a risk management platform, also known as our liability-driven investment platform, where we develop solutions to match liabilities.

We often use the risk management platform to design solutions, and the fixed income platform to implement those solutions.

Heneg Parthenay, Head of insurance, Insight Investment'sIt is important to bear in mind that not all insurers manage assets themselves, particularly on the non-life side.

There are many players who do not believe asset management is part of their core business and they prefer to leave that to professionals like us.

For the insurers that do have an asset management practice, we usually have broader capabilities than they have, so we can help them to invest in asset classes they do not cover.

When it comes to risk management, our scale and size is an advantage, particularly in the core fixed income and derivatives markets.

For example, in hedging foreign exchange or interest rate risk, we have significant market access, and the documentation in place to deal with all the main counterparties.

What is specific to portfolios managed for insurers?

Simon Richards: Our starting point when structuring an investment solution for an insurer is to assess the type of liability we are matching the assets against.

We also think about the liquidity requirements for meeting those liabilities, the certainty around those liabilities, and then the sensitivity of the liabilities to factors, such as interest rates.

These are starting points for producing an appropriate fixed income portfolio. We then need to think about the regulatory implications of different sorts of assets and the insurer's desired risk profile and capital budget.

For example, for corporate bonds, as we move down the credit curve and are longer in duration, more capital is required.

Heneg Parthenay: If we look back 15 years ago, the majority of the fixed income assets held by insurers were government bonds.

But over the last decade with low interest rates, we have seen a departure from government bonds and an increase in allocation to corporate bonds, starting first with investment grade corporate bonds and then, for some insurers, moving a proportion of assets into high yield bonds, emerging market debt and illiquid credit.

Once the parameters of a portfolio have been agreed, how do you typically manage an insurer's asset portfolio?

Heneg Parthenay: More and more of our insurance clients are moving away from market benchmarks.

That means moving from a classic market index and instead using an insurer's liabilities as a benchmark.

An insurer will use their own liabilities as a benchmark because at the end of the day, you want the parameters of the assets to be consistent with the parameters of the liabilities.

The insurer will also define their risk appetite in terms of either capital consumption or maximum risk, for example concentration by issuer or sector.

Once the asset portfolio finalised, we usually manage it on a buy and maintain basis. The objectives of the approach are to maintain the credit quality of the portfolio and avoid defaults.

Such an approach also allows transaction costs to be kept at a reasonable level, while maintaining the characteristics of the portfolio aligned with the characteristics of the liabilities.

How can Insight Investment evolve a portfolio for an insurer and maximise the investment opportunity, while also managing the impact on regulatory capital?

Simon Richards, Head of insurance solutions, Insight Investment Simon Richards: One of the often-overlooked ways we can add value is in the initial take-on.

Quite often, we are not receiving cash to build a portfolio.

There is an existing portfolio that is managed by someone else and we are taking on those assets and transitioning them to the assets we believe our client should hold.

Our approach is then to identify assets that need to be sold more quickly and those that can be retained in the short-term looking for a more opportune time to sell.

Where we have added a lot of value for clients more recently is expanding the range of assets they can hold, but focussing on overall risk and capital requirements.

For example, rather than being focused on only local markets, such as sterling investment grade bonds, we have been able to look at bonds in euros and US dollars hedged back to sterling, to improve diversification and access more efficient yields.