Seeking investment in new places

There was a time when insurance companies thought that all they had to do to guarantee stable investment income was to buy long-term government bonds (gilts) and then sit on them.

But with interest rates at historical lows in the US, UK and Europe, gilt returns have also hit rock bottom, forcing investment teams within insurance companies to start looking about for something else. Many ‘something elses’ in fact.

First, some history.

“It’s helpful to think about where the P&C market and the reinsurance market have come from, why they have historically followed very liquid gilt-heavy strategies in the past,” says Gareth Haslip, global head of insurance strategy and analytics at JP Morgan Asset Management.

“You look at the historical asset allocation in the Lloyd’s market or the wider P&C market over the last 10 years, and how it’s changed after the financial crisis of 2008.

“Before the global credit crisis P&C insurers would generally have very stable and global investment strategies, with a heavy focus on cash, gilts and some allocations of corporate bonds, and those strategies served them well in that period of time, when interest rates were much higher and they’d get the level of return they were seeking with a generally quite low-risk investment strategy.

“The focus of the Lloyd’s market and some of the Bermudians tended to be more around underwriting strategy and their capital providers were generally focused on the underwriting abilities of the businesses as opposed to their investment teams. Most of the specialist reinsurers or Lloyd’s places tended to have quite small investment teams,” says Haslip.