Regulatory outlook - the biggest trends facing insurance investors today

William Nicoll, Head of Institutional Fixed Income, M&G Investments discusses how Brexit, ESG and low yields will affect insurance investors

Insurance Investor Editorposted on Thursday, October 10, 2019

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Insurance Investor: What changes in the investment arena do you think Brexit will bring for insurers?

William: Most UK insurance companies have a natural bias towards sterling assets and thus will be looking at the UK market. While this will change, no one knows to what extent, but there will still be a need for funding for companies, infrastructure and long-term projects and it would be normal for UK insurance companies to carry on investing.

Similarly, any large insurance company will have diversified their investments across Europe and beyond and will continue to do this.

So, in some ways a negotiation between a large block and one country shouldn't have a significant impact on large insurance companies with international reach and highly diversified portfolios.

As with everything, a scenario such as this could create a little bit of volatility and then long-term players such as insurance companies should be able to pick up some value in the market.

However, I feel that as so many investors are waiting for a little bit of excitement and volatility created by Brexit, in the hope of finding some bargains, they ultimately may be left disappointed.

The importance of sustainability and ESG is only going to increase over the next 5-10 years as will the continued development of the capital markets in Europe as they reflect more of the diversification we see in the US.

These are the two themes that seem to me to be the biggest drivers that will influence investor behavior and market participants over time.

Insurance Investor: What other trends will you see developing within the next 12-18 months in the insurer investment arena? 

William: Given the low yields that we have seen across the market, there is more acceptance of deals that are more complex and difficult in their nature than there was five years ago.

For example, we did a deal where we bought a large block of mortgages and then we funded them through a securitization and made some of this securitization Solvency II friendly.

This was the first time that anyone had done something like this and so it had to be done from scratch.

Five years ago, this wouldn't have happened because most insurance companies would have felt that whilst it was a nice idea, it would be a lot of work and there were other deals / assets offering good value.

Whereas now, because yields are much lower, diversification is more important and regulatory changes have continued, there is more interest from insurance companies to find assets that are different and fulfil their particular needs.

When I talk about the markets becoming more efficient, the main driver for this is the growth of the private debt market but again it is of paramount importance for investors to understand that there isn't a single private debt market; there are many of them and all of them have their own cycles.

There has been significant interest and capital raised for particular markets, such as direct lending, and even suggestions that the direct lending market is the private debt market, which it isn't. It is only one market within the wider private debt markets.

When an individual market becomes overheated, investors and market participants often make the mistake of thinking that the opportunity has eroded in the whole of the private debt markets, rather than just one segment of it.

This means some investors are missing the bigger picture and the opportunities created by the change in European markets as they develop and become more efficient, increasingly reflecting how the US capital markets operate.

The trend of insurance companies switching into private assets is accompanied by a lot of noise, and this noise will be ignored by investors with sufficient competence, experience and expertise to understand when they are being adequately rewarded for the risk they are taking.

William Nicholl will be speaking at the Insurance Asset Management Summit in London on November 14. To find out more or register to attend, click here.

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