As DB schemes approach the end game and continue to rebalance their portfolios, we think insurance companies have an opportunity to capture value opportunities across a range of asset classes.
In this paper, we look at how a changing asset management landscape has opened the doors to potential opportunities across the balance sheet for insurance companies. The unprecedented levels of volatility in gilt markets during September 2022 brought a fundamental shift in the UK defined benefit (DB) pension scheme market, also altering asset class demand dynamics.
"European insurers are one of the few large institutional asset owners who may be able to take advantage of these changes".
Despite the spike in gilt yields following the 'mini budget' causing significant challenges for many pension schemes – especially those that used 'liability-driven investment' – the overall funding position for DB schemes is now at a stronger level than before the crisis. The rise in gilt yields generally led to a decrease in the present value of their liabilities as a consequence of the higher discount rate. They are now in a position to arrange a buyout, whereby their liabilities are transferred to an insurance company.
Schemes will typically look to reduce their exposure to illiquid assets and to lock-in their current funding position by switching to lower-risk, more liquid instruments. As DB schemes approach the end game and continue to rebalance portfolios, we believe insurers have an opportunity to capture value across a range of asset classes. In our latest insurance paper, we focus on the opportunities we see in three key areas: asset backed securities, senior real estate debt and multi-asset credit (MAC).
These asset classes have been affected, either in the short-term, or in the longer-term as a result of likely changes in demand from pension schemes following the fallout from September 2022, and may offer a range of benefits for insurers such as liquidity and defensive qualities, diversification and additional yield.
Insurance investing trends tend to be focused in areas such as expanding non-core holdings, diversifying fixed income portfolios and out of cash. We explore how insurers with the ability to take a long term investment view with the right internal frameworks can position themselves for long term, compelling and continued investment opportunities.
