The best strategies for insurance investors holding collateralised reinsurance

The benefits of holding collateralised reinsurance as part of a portfolio rather than the use of cash is a topical issue that insurers are not in agreement in, especially in terms of the best strategy for how to do it.

Insurance Investor Editorposted on Monday, May 09, 2022

Robert Hauff, Vesttoo (top left), Nick Dixon (bottom left), and Tom Sumpster, Phoenix Group (R).

The benefits of holding collateralised reinsurance as part of a portfolio rather than the use of cash is a topical issue that insurers are not in agreement in, especially in terms of the best strategy for how to do it.

“It depends on the duration of the instrument that you are looking at and how you match up from an ALM perspective”

In a Clear Path Analysis webinar, in association with Vesttoo, “Diversifying with Non-Catastrophe Insurance-Linked Assets” several panellists including Huayin Liu, Senior Investment Portfolio Manager, Aviva Investors, Nick Dixon, Former Investment Director, Aegon and Tom Sumpster, Head of Private Markets, Phoenix Group were joined by Robert Hauff, Portfolio Manager at Vesttoo discussed their thoughts on portfolio strategies.

“It depends on the duration of the instrument that you are looking at and how you match up from an Asset Liability Management (ALM) perspective,” said Hauff. “You want to be matched with your cashflows and underlying collateral when looking at these structures.” He explains that if you are going longer than cat bonds, which have been thought to be shorter in duration but can be slightly longer in duration depending on how losses play out, then you would benefit from the steepness in rise that has been seen in the front end of the curve.

“Six months ago, you were getting little, if any, carry from a two-year treasury and now it is multiples of what this former carry was, so it allows additional income growth in the calculations,” he says. “You can do this without taking market risk or adding volatility into portfolios.”

“This relaxation of rules might impact investments. The private sector could play a part in infrastructure investing and the levelling up agenda, rather than government continuing to fund this”

Nick Dixon, formerly of Aegon, added that it must be examined for how it related to the Solvency II liberalisation, which the current UK government has vowed to continue with as a priority for its post-Brexit reforms to the country's financial services model. “If we liberalise the asset classes that can be held and there is, therefore, less pressure to own fixed income and cash. However, if the demand for government fixed income declines as rules are liberalised, the price will go down, which means interest rates will go up,” he said. “If the insurance company invests less in government fixed income, then all other things being equal, this interest rate will increase with impact across the economy.”

A counterpoint to this was mentioned by Sumpster was that companies may not issue as much government debt and use private investment or institutional funding to fund public initiatives. “This relaxation of rules might impact investments,” he said. “The private sector could play a part in infrastructure investing and the levelling up agenda, rather than government continuing to fund this.”

To see more about the webinar, please click here.

 

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