Methods for insurance investors to mitigate high inflation pressures

Higher inflation looks set to continue throughout 2022, causing problems in the economy, but some insurers see sure-fire ways to see their investments safeguarded from negative effects.

Insurance Investor Editorposted on Wednesday, May 18, 2022

Rip Reeves, Chief Investment Officer, AEGIS.

Should insurance investors be worried about how increased rates of inflation will impact the economy as well as their investments, panellists were asked in a recent report – or will investors and insurance companies be able to overcome it?

“The first challenge in an environment like our current one is to consistently remind interested parties to lower their expectations of what we can deliver from the investment portfolio”

In a recently released Clear Path Analysis report, Insurance Asset Management - North America 2022, several market experts from insurance groups including AEGIS, Mercer, and Shelter Insurance, explore issues around how they intended to do – or already had – combat the pressures of higher inflation.

Rip Reeves, Chief Investment Officer, AEGIS, said he believes that the industry will be able to swallow the effects of higher inflation.

“One of the luxuries we have in our particular case is I that am not required to spend all the money I am allotted from a capital allocation standpoint across the Enterprise”

“The first challenge in an environment like our current one is to consistently remind interested parties to lower their expectations of what we can deliver from the investment portfolio,” said Reeves, who recently announced his imminent retirement from New Jersey-based AEGIS after 11 years.

“The returns we are annually forecasting are low and likely to remain that way,” he added. “One of the luxuries we have in our particular case is I that am not required to spend all the money I am allotted from a capital allocation standpoint across the Enterprise,” he said. “Fortunately, going into the pandemic, we had a more conservative investment strategy in place and realised some profits on both the equity and fixed income allocations,” he said.

This is not as uncommon as first thought; a 2021 report from Deloitte, said that 40% of insurance companies they surveyed had already increased their budgets for 2021, and 31% expect to boost spending even more over the rest of this year. Over half anticipate both higher revenues and an improved bottom line.

The report cited more change from the pandemic for investment strategies came from increased ESG prioritisation instead of budgetary changes overall.

“We have little investment risk from an accounting and performance reporting standpoint on a reasonable portion of our portfolio either because it is private (barring a credit event) or held-to-maturity”

“[AEGIS] gradually became more conservative over the past couple of years, and we reduced additional risk in mid-2020 as the risk markets recovered,” Reeves said. “We already had full allocations in private corporates and mortgages - where we’ve experienced a yield advantage and strong investment performance.”

He added that one of the factors that allows the company this flexibility on spending some of its risk budget in the private area is its “liability” portfolio, comprised of agency mortgages and investment grade one-to-five-year corporates. “We categorised these mandates as passive and held-to-maturity,” he said. “We have little investment risk from an accounting and performance reporting standpoint on a reasonable portion of our portfolio either because it is private (barring a credit event) or held-to-maturity.”

To learn more about this issue and others facing insurers, read our report Insurance Asset Management North America here.

 

Please Sign In or Register to leave a Comment.