Insurance Asset Risk Awards 2023 - North Americas

PineBridge's emerging markets attraction

Jeannine Heal, head of insurance investment solutions, Americas, at PineBridge Investments explains why insurers should be investing in emerging markets right now

Why are emerging markets a good fit for insurer portfolios right now?

Jeannine HealWe believe the value proposition of investing in EM debt is quite clear. Over the past decade, investment grade EM corporate bonds have delivered higher returns with less volatility, lower leverage profiles, better diversification, and a stronger growth outlook than investment grade US corporate bonds.

Faced with concerns about their investments' impact on statutory capital in today's rising rate environment, EM debt ("EMD") has been an efficient way for investors to add income and return and is one of the fixed income markets where insurers have been able to source attractive long-duration bonds – a historically favorable characteristic for life insurers, which are typically more sensitive to investment capital charges and the impact on overall solvency ratios. Our seasoned investment team has consistently delivered attractive risk-adjusted returns despite the constraints of insurance specific investment objectives—a testament to our investment approach and portfolio management diligence.

How should insurers navigate some of the challenges of emerging market assets in volatile markets?

Amid evolving regulations and a volatile investing environment, client education that focuses on the merits of EM debt – an asset class that is historically under allocated by insurers – is paramount. We work closely with insurers to ensure that their fixed income portfolio is diversified and meets insurance liability needs while also achieving capital efficiency. Through strategic portfolio repositioning, insurers can focus on enhancing income and leveraging dollar denominated assets to diversify exposure as well.

Working with a manager who understands key challenges facing insurers is crucial. With a deep legacy in insurance, PineBridge has sat at a distinct vantage point in understanding and helping insurance clients navigate the many complexities of this industry, including investing in emerging markets, when warranted. Our EMD team has been managing insurance assets for nearly 20 years and has one of the longest track records in the industry. The deep expertise of both our client and investment teams has allowed insurers to take advantage of a historically underutilised asset class that has delivered strong risk-adjusted returns despite common misperceptions around higher volatility.

What strategy has PineBridge taken to better tailor EM into insurance portfolios?

Our team's approach to helping clients navigate EM debt and managing insurance balance sheets is built on a foundation of in-depth fundamental analysis that aims to prioritise security and country selection, rating stability, and minimising potential credit-related downside risk. We partner with insurers on strategic asset allocation, which consists of modeling EM corporate debt using the appropriate indices and metrics that work to provide accurate assessments of EM risk to compare investment grade EM credit against US IG corporates.

A hallmark of our strategy has been our commitment to client service excellence through ongoing education and support. We pride ourselves on providing transparency and access to key investment leaders and timely communication on ever-shifting macroeconomic, geopolitical, market, sovereign and credit risks and deliver ongoing analysis and recommended courses of action on the expected impacts to portfolios beyond our detailed credit impairment commentaries.

Through customised solutions, we have helped clients overcome countless challenges, including concentration issues in long duration portfolios, offering yield pickup and diversification through EM bonds versus comparably rated US corporates, reducing hedging costs through cross-currency swaps, and helping clients gain key stakeholder support in making first-ever allocations to EM debt. In the insurance industry, one size does not fit all, and our firm has allocated extensive resources to ensure we can deliver innovative, tailored solutions to meet our clients' investment objectives.

Where do you see the environment for emerging markets going over the next few years?

We expect emerging market corporate bonds to continue their evolution from a highly cyclical market to a more mature, standalone credit market. The accumulation of wealth, urbanisation, industrialisation, and technological development across EM will continue to fuel a growth in domestic consumption, further reducing the dependence of emerging markets on export demand. That backdrop will likely keep many emerging market economies on track to experience an acceleration of growth in 2024 and beyond, despite the risks associated with a potential US recession and slower than expected recovery of China's economy.

The EM corporate bond market is supported by well-funded local demand and continues to draw both dedicated investments and crossover attention from developed credit market investors.

As the economic outlook continues to stabilise with strong credit fundamentals in place, we expect that insurers will maintain a healthy appetite for emerging market credit over the next several years.