L&G, Poste Vita, Cattolica and Aviva Investors reveal what they want next

Some of Europe’s largest insurers are exploring some fascinating niches for what they expect to be ‘investments of the future’.

Timberland and insurance-linked securities (ILS) are two that have attracted Cattolica’s group chief investment officer Massimo di Tria. His interest in timberland is not just for its ESG credentials that allow insurers “to do something good”.

“It is sustainable and trees are growing things, so unlike normal commodities when the price is not good enough or there is no demand, you can just let them grow - and it is an interesting characteristic.”

ILS is more suitable for pure life insurers, or for underwriters where life obligations dominate, di Tria said, to get exposure to risks that do not correlate much to those of their existing liabilities, he added.

For Irene Carella, head of asset-liability management and asset allocation at Poste Vita, finding the ‘next investment’ for an Italian underwriter is about discovering income/return streams that exhibit stability and correlate little with the returns profile of BTPs.

Poste Vita, as a standard formula user, may not face changes in market spread risk from its nil-risk European govvies, when BTP yields fluctuate as they did in Q1. But Carella said: “The high weight of government bonds in [Italian insurers’] own funds make [the own funds] very volatile, due to the high variability in the market value of the BTPs, [which is] due to the high volatility in the spread.

“The issue, in fact, is not related to the solvency ratio’s denominator – the capital requirement – but to the volatility of the numerator – the overall market value of market investments, which increases or decreases the overall ratio.”

When Insurance Risk Data analysed the sensitivity of 15 insurers’ solvency ratios to BTP spreads widening by 100bps, it found the pre- widening average ratio fell from 203% to 180%. At the end of last year, about 83% of the central government sovereigns held directly on Italian insurers’ general accounts were local, about double the pan-European average.

To counter the effects of this, Carella said Poste Vita sought “a market-value balance sheet that is stable over time, but one that generates a cash yield comparable to a benchmark, which for an Italian insurance company is the average return from Italian government bonds.”

Carella and her team are considering emerging markets securities, global debt and alternative asset classes, for “resilience to market movements”.

For Alex Wharton, head of insurance relationships at Aviva Investors, meeting the challenges of climate change presents investment opportunities. “The three big challenges...are real estate, which will be about de-carbonising the heating and cooling of buildings; decarbonising transport and decarbonising power. Anything that allows you to do these, and allows you to be in line with your carbon objectives, will be a really big shift over the next few years.”

Emily McDonald, an investment director in Aviva Investors’ credit investment specialist team, names perhaps the biggest challenge facing all European insurers – a ‘cash drag’ that sees them actually losing 40bps, on average, from euro money market funds. She suggests locking ‘strategic cash’ away for less than one week longer can generate incremental additional returns, without increasing the Solvency II capital charge.

For James Kenney, head of capital management at L&G Capital, nuclear fusion is an investment of the future, and one that his unit has put some of its money into, via an early-stage company “working hard” on the technology. “If they succeed, that business will be absolutely incredible, though the odds are against them,” he said.

To experience a discussion of ideas with as much energy, join the Insurance Asset Risk EMEA conference and post-panel discussions on 19 and 20 October.

More information about the event is available here.

David Walker