Investment directors at Aberdeen Standard Investments (ASI) Neo Mooki Watson and Richard Roberts explain how the asset manager has supported insurers during Covid-19, its focus on ESG and how to secure high yields in the current environment
How has ASI been helping clients during the Covid-19 pandemic?
Insurers have been mainly concerned about portfolio resilience.
At the height of the pandemic, and to date, ASI has proactively supported portfolio resilience through identifying risks and swiftly executing large-scale tactical opportunities.
Some of the investment actions we have taken include our market strategy team, under the leadership of our chief economist Jeremy Lawson, providing insurance clients with regular macro-economic views, Covid-19 scenario analysis and associated asset price impacts.
We also carried out portfolio downgrade analysis, which resulted in our credit team identifying triple-B rated cliff-edge credit names, which formed ASI's hit-list.
This hit-list enabled our clients to consider the potential solvency impact that would arise in the event of downgrades and to also consider management actions.
As well as the hit-list facilitating management actions, we collaborated with clients to identify and implement alternative asset allocation options.
Repositioning actions included making relative value switches, including selling dollar credit for sterling credit, to take advantage of the dislocation between the markets.
We also rotated out of sectors exposed to Covid-19, and into sectors more resilient to the disease. This activity not only generated a credit quality and solvency benefit, but also generated a yield uplift.
Has Covid-19 presented any opportunities for insurance asset management?
We expect interest rates to be lower for even longer, cementing the need for yield enhancement. We also expect insurers' ESG activities to accelerate.
While insurers' solvency ratios have held up well during the pandemic, insurers are still paying closer attention to the potential volatility as they are concerned about lower for longer rates, uncertainty around mortality, potential business interruption and emerging political risks.
Opportunities to support these areas exist for managers that have insurance expertise embedded in their asset management approach.
What is ASI doing in terms of environmental, social and governance (ESG) considerations?
We have been working with an industry-leading climate modelling company called Planetrics to generate a set of climate scenarios that can, for example, be used as part of the regulatory stress test requirements from the Prudential Regulation Authority.
Those climate scenarios will also be used as an input into expected returns for portfolio optimisation, which itself can seek to maximise allocations to climate solutions whilst targeting the same expected returns. This will allow our clients to embed net-zero objectives in portfolios.
We are also working with clients to try and assess how we can reduce their overall portfolio exposure to carbon-intensive companies. Obviously, this needs to be underpinned by the need not to affect investment outcomes.
Finally, we have a broad ESG product offering and we are also undertaking work to industrialise ESG reporting across all our products and all our funds.
How can ASI help insurers secure high yields in this low-rate environment?
Private markets have been the preserve of life insurers for several years now. But we are seeing more P&C insurers come to the market as well.
For life insurers, areas such as infrastructure debt have been popular. Thinking about P&C insurers, we also offer a number of short-duration private market asset classes. One of which is fund financing which typically offers loans of one to four years to private market funds in their early stages.
For both life and P&C insurers, commercial real estate debt has been ever popular due to the attractive spreads and solvency-adjusted returns available.
For those with more of an investment risk appetite, we are also seeing a return of insurers looking for emerging markets debt.
