Although news around a potential COVID-19 vaccine is a positive step, the investment landscape remains extremely challenging for global re/insurers and there’s a continued need for creativity and innovation, according to industry experts.
On day two of Prospectus 2021, the audience heard from three very experienced investors whose firms collectively manage around $300 billion of insurance company assets.
The technical discussion, which can be viewed on-demand for free, explored the investment landscape against a backdrop of the U.S. election, the lower for longer interest rate environment, the ongoing global pandemic and more recent, positive news around a COVID-19 vaccine.
The panel was moderated by Van Hesser, Chief Strategist at Kroll Bond Rating Agency (KBRA), the associate sponsor of the very first Prospectus 2021 re/insurance and insurance-linked securities (ILS) conference.
During the session, Hesser noted some of the things that are shaping the way KBRA views the world both in 2020 and now as we transition into 2021.
He highlighted numerous forces that continue to shape the investment landscape as the world navigates unprecedented challenges as a result of COVID-19 and its influence on financial markets. Later providing a more forward looking view.
“As we look ahead we think about the following, starting with the vaccine; 90% efficacy. If true, Pfizer and Biotech’s announcement implies that herd immunity is a very real possibility in 2021, something we were very sceptical of as recently as a week ago. So, this is an important breakthrough.
“Two; the U.S. remains the cleanest shirt in the laundry, right. Investor trust in its economic engine and its institutions, has given it a pass in currency and rates markets, allowing it to continue to print money.
“Now, we also think about the behavioural reset that COVID triggered. Something that touches individual, commercial, and governmental activity. This is the economic drag that will result from not only the scarring as a result of COVID, but also the secular changes that are taking place. And, for that reason, we believe the recovery will be slower than expected, and unemployment will remain higher than the more bullish forecasts out there,” said Hesser.
Fellow panellist Jason Pratt, Head of Insurance Fixed Income, Neuberger Berman, stressed that while the news around the vaccine is directionally positive, “the market environment is still very challenging, and the need for creativity and access to unique ideas remains high.”
Speaking more broadly, Pratt explained that his firm, like many others has a dedicated global insurance solutions group of professionals across portfolio management, insurance analytics, and relationship management.
“The idea being that no two insurance clients are alike,” said Pratt. “And, having those resources was extremely important as we managed through this crisis, because we were positioned to help clients measure the impact of making tactical moves opportunistically into things like extended fixed income markets.
“Examples could include accessing the CLO market or high-conviction, high-yield portfolio. With the dramatic move in rates, there were unique opportunities in certain cases to reposition risk through the teeth of the COVID storm.
“So, I think, having access to the full spectrum of fixed income markets, and the integrated expertise across a global platform, gave us an edge to manage through that environment. Noting that size is important, but having access to markets is crucial in order to be nimble and take advantage of those market opportunities in what ended up being a pretty short window.”
Paul Norris, Managing Director, Head of Structured Products at Conning, also noted the short duration of the opportunity in the aftermath of COVID-19.
“First, people are scared. Second, they want to know what’s the opportunity and how to take advantage of it. And, I think as Jason mentioned, it came and went so fast that clients were almost as dumbfounded as we were, in that you woke up one morning and the Fed had instituted all the programs and spreads were a few hundred basis points tighter, and the opportunity evaporated,” said Norris.
Adding: “So, it’s quickly back on the phone with clients explaining that these are the new sets of opportunities. And, I think unique to insurers, is that there’s a dearth of yield opportunities for them and so for us, it’s going back to what we’re doing. It’s finding new asset classes for them to invest in.”
The expert investor panel also featured Vincent DeLucia, Chief Investment Officer (CIO), New England Asset Management, Inc., who explained that when entering 2020, there weren’t really many opportunities in credit markets, or for that matter, equity markets.
“And, wow, did our positioning change come March,” said DeLucia. “We certainly did have clients that were, as Paul described, worried about the impact of this on their businesses. So, we did have a number of clients that had to kind of hold back for a while. But, we had the vast majority of our clients ready, willing and able to participate in the market dislocation.
“We were fairly aggressive getting money invested across markets. Primarily corporates, I would say, that’s where we did the vast majority of our spread duration extension, if you like. But also fairly aggressive in other areas.”
“So, it’s been a difficult year, the health news has been, from a human perspective, very difficult to absorb, very unfortunate. We did try to do what we could though to add some value to client portfolios. And, we have managed to add a fair amount of yield in that brief window that both Jason and Paul talked about, that will be durable in what now appears to be a low rate, low spread environment for who knows how long,” he added.
To watch every session on-demand please visit the Prospectus 2021 website.
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