Understanding emerging insurance asset investment risks and returns

Understanding emerging insurance asset investment risks and returns | Insurance Business America

Insurance News

Understanding emerging insurance asset investment risks and returns

Panel discusses the challenges and trade-offs involved with certain asset classes

Insurance News

By
Kenneth Araullo

Real estate, hedge funds, private equity, stocks, and credit instruments present numerous opportunities for investment managers. In a new report, a panel of industry leaders discussed the trade-offs of these asset classes with AM Best TV.

Jason Hopper, associate director at AM Best; Mark Silverstein, chief investment officer at Sompo International; and Leena Punjabi, executive vice president and chief investment officer at F&G Annuities & Life Inc, tackled emerging risks and opportunities in managing investment portfolios and matching them against potential claims.

Punjabi noted that opportunities in the market are not as plentiful as they were in 2022 and 2023. She attributed this to the significant and rapid increase in rates and banking turmoil during that period, which led investors to demand higher spreads.

“However, given the continuing strength in the labor markets and the economy in general that we see now, risk has taken a backseat and spreads have come in meaningfully, especially for public assets,” Punjabi said.

She identified private asset classes, especially those historically retained by banks, as areas where value is still found.

Hopper, on the other hand, highlighted that life insurers have been increasing their allocations to commercial mortgage loans over recent years. He explained that commercial mortgage loans offered higher yields than typical public corporate bonds during the low-interest-rate environment of the last decade.

“Historically, they’ve performed well—very few problem loans. In general, [there has been] tighter, stricter underwriting typically than their banking counterparts,” he said. “At the same time, problem loans have not been an issue. However, over the last two years, we have seen problem loans ticking up, but still, those totals are still less than 1% of capital and surplus, so nothing large in terms of impairments that we’ve seen yet.”

Silverstein described real estate as a sector with varying risks and opportunities, depending on the subsegment, geography, and property specifics.

“Real estate is such an interesting and fascinating sector, because there are so many parts of it when you look at all the different subsegments and geographies and vintages and, of course, location, location, location. It varies from one property to another whether it’s an opportunity or a risk,” Silverstein said.

Punjabi added that her firm is avoiding commercial mortgage loans, as the spreads do not justify the risk in office, multifamily, or industrial sectors.

“For the most part, we do not see the spreads justify the risk, whether it’s office or multifamily or industrial. What we’re focused on really within the real estate space is residential mortgage loans. That’s where we are seeing the value,” she said.

Concerns around corporate credit, volatility

Silverstein also discussed corporate credit, noting that public market spreads are tight and priced for a relatively healthy economic environment or a soft landing.

“A lot of the opportunities are actually in the private markets where you can get extra credit spread relative to the risk that you’re taking,” Silverstein said.

He also mentioned that the macroeconomic environment is currently stable, with few maturity wall problems.

Punjabi emphasized that we are in a different economic regime compared to the post-global financial crisis decade. Higher inflation and interest rates are unlikely to return to previous low levels, leading to more volatility and uncertainty in the markets.

“What this really means is the era of ultra-cheap, easy money is over,” Punjabi said. “Central bank policy across the globe will likely diverge from here. I also think the trade-off between inflation and growth will be hard to navigate for central banks. The result of all of this is going to bring more volatility, more dispersion and more unknowns.”

Hopper, meanwhile, pointed out that alternative asset classes have been growing, particularly in the life annuity space.

“Hedge funds have fallen out of favor or have continued to fall out of favor, similar to the last number of years. Overall, alternative assets are not typically correlated to the broader market, which is helpful in times of uncertainty, which we’ve been going through since 2020 or so. That was a benefit overall to overall investment portfolio yield,” he said.

Silverstein commented on the decline in favor of hedge funds, attributing it to their inability to produce expected returns.

“Especially now, with rates higher, you can earn a pretty good return out of private credit and even high-yield credit,” he said.

Managing liquidity remains critical for property and casualty insurers, according to Silverstein. He explained that insurers must ensure they are not caught in a liquidity pinch, especially during unexpected high claims events.

“We think about liquidity through a series of different scenario analyses. We’re always trying to estimate how bad things could be in terms of different types of events and where the liquidity needs to be in terms of which entities that we have, and how long they would take that we would need cash flow versus how fast we could get that cash flow,” he said.

Finally, Punjabi addressed regulatory changes, noting that the insurance industry has evolved since the global financial crisis, prompting regulators to update their oversight.

“What we are really pushing for is a thoughtful and transparent data and analysis by process so there are no unintended consequences on investment portfolios as well as policy borders,” she said.

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