How insurance investors can make the best of the current yield environment
Mike Hackmann, Vice President of Investments at Shelter Insurance, explains how to combat low return forecasts for insurance portfolios.
CPA Adminposted on Tuesday, March 15, 2022
The challenges or opportunities given where the insurance investor industry sits in the current yield environment are numerous, says Mike Hackmann, of Missouri-based P&C insurer Shelter Insurance, specialising in auto and home lines.
From an inflation standpoint, every car accident is a lot more expensive than it was a year ago
In a recently released Clear Path Analysis report, Insurance Asset Management - North America 2022, several market experts from insurance groups including AllianceBernstein, Mercer, and Sun Life, explore issues around how to combat current economic trends as the markets recover from the pandemic.
“From an inflation standpoint, every car accident we have is a lot more expensive than it was a year ago,” Hackmann explains in the report, saying that the current financial situation is increasing complexities. “The severities on what we pay on an average claim is up 10% over the last year. Historically it has steadily increased at around 3%, so inflation is biting us on the operations side.”
I would actually like to have a little more inflation and market dislocation so that I can generate decent yields on corporate and muni bonds
He states that the big question for the US Federal Reserve is whether they will increase monetary stimulus if there is a slowdown in the economy or a spike in unemployment.
“I see this as one of the biggest risks on both the operations and investment side,” Hackmann says. “I would actually like to have a little more inflation and market dislocation so that I can generate decent yields on corporate and muni bonds, which has not been possible in recent years.”
According to an AllianceBernstein report from 2021, muni bonds performed well when the US economy reopened after the end of the Covid-19 lockdowns. “Rising interest rates haven’t impacted municipal bond yields. Average yields on 10-year AAA muni bonds rose less than half that of Treasuries year to date and hover just below 1%,” the report said. “Municipals have outperformed as a result, with the Bloomberg Barclays Municipal Bond Index returning 0.68%.”
Everything that we have done in the portfolio over the last three years has been about liquidity
The current US inflation situation has also seen record levels, now up to 7.9% for the 12-month average in March. This trend has also been exacerbated by the situation in Ukraine, which saw the US ban the import of Russian oil and a concurrent spike in petrol prices at the pump.
“Everything that we have done in the portfolio over the last three years has basically been about liquidity and finding everything private that will drive a bit of additional yield,” Hackmann explains, adding that this includes private placements or anything that he feels has investment grade quality that pays non-investment grade yields on.
For your average insurance company, they probably have way too much liquidity
The opportunities for finding this level of placement for good yield, however, is still expected to be available despite the economic situation.
“You just can’t ramp it up too much,” he says. “Sometimes, you get sector constraints or too much exposure, but for your average insurance company, they probably have way too much liquidity.”
Other sources, such as investment firm Callan, said in September 2021 that there were still plenty of good options, such as investment-grade private placements. This was a strategy that “presents opportunities to increase portfolio yields with higher spreads compared to other types of fixed income for similar levels of required capital.”
Hackmann, however, see this situation and the issues continuing for some time. “You see this through peer studies that people come and do for us. I see that there are many organisations where the majority of their fixed income book is public. I just don’t know how then can compete today without evaluating and implementing some of these strategies.”
To learn more about this issue and others facing insurers, read our report Insurance Asset Management North America here.