Insurance Asset Risk Awards 2023 - North Americas

AllianceBernstein on treading the macro field

Gary Zhu, director of insurance portfolio management at AllianceBernstein, talks about the company's work helping insurers navigate a volatile year.

What is the company's investment philosophy and process?

Gary ZhuAllianceBernstein has been working with insurance companies for more than 40 years, which has resulted in a deep understanding of the complexities involved in managing insurance portfolios. Our portfolio management team's approach utilises a liability-driven, asset-focused framework, with an aim to find the best relative value with an insurance-specific lens. We position portfolios to meet insurer's unique needs – like managing to specific regulatory capital regimes and/or minimising negative credit migration. Partnership is at the heart of our process – both internally to leverage the best thinking from AB's traders, research analysts, economists and portfolio managers – and externally with clients to provide tailored solutions which maximise risk-adjusted returns.

How have you helped insurers through the volatile last 12 months?

Given rising rates and macro uncertainty, our bias over the last 12 months has been to stay close to home from a duration perspective, after staying short in duration in 2022, to focus on higher quality bands in credit sectors, and diversify the portfolio into asset classes with the best relative value. This has meant a tilt towards higher-rated tranches within securitised asset classes, private placements, and a less constructive view in asset classes where valuations are less attractive or have not captured potential fundamental weakening. Helping our clients in answering questions from constituents, we spend a lot of time providing market updates through frequent client meetings and our flagship monthly Insurance Relative Value note.

How have you responded to ESG-focused themes this year?

AllianceBernstein believes that environmental, social and governance issues present both potential risks and opportunities that can impact the performance of portfolios. Our firm understands ESG risks have long been a consideration and continue to be top-of-mind for insurers. When we became a PRI (Principles for Responsible Investing) signatory in November 2011, we began formalising the integration of ESG into our investment processes for most actively managed equity and fixed income client accounts, funds and strategies, a process that continues today. With these developments, we are better able to manage ESG risks that are typically important to insurance clients (like fossil fuel and/or tobacco exposure), we can better incorporate ESG into daily portfolio management, and we are proactive about ESG investment opportunities (like public ESG structures, private placement or impact opportunities).

Where do you see the challenges ahead for the industry? Is there a thematic or asset focus you're recommending?

Growth and inflation will stay at the centre of the investor mindset as we close out 2023 and move into a new year. We think while inflation should slow, elevated policy rates over a potentially longer period of time will hurt growth. Also complicating the picture is uncertainty around China growth and how it will affect global economies. In light of this, we are focused on credit fundamentals and credit migration. Finally, from an insurance-specific lens, we are staying on the pulse of National Association of Insurance Commissioners regulatory changes, like updates to bond definitions, as well as rating agency actions and their impact on insurer capital requirements. We continue to prefer high quality, intermediate credit over higher beta counterparts (high yield and emerging markets), where the compensation for insurers isn't worth the risk. We also continue to like parts of the securitised market for pockets of opportunity to invest in higher quality bands and attractive spreads.