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Europe destabilised by war, the world reeling from a devastating pandemic, and regulators and governments trying to tackle the greatest sustainability challenge of the time as they deal with environmental crises. An eerily familiar story, but this was a century ago. At that point, early in the twentieth century, insurers relied on real estate and private debt as their core asset classes. Proving there is nothing new under the sun, insurers are turning once more to the private markets.
Private assets offer investors both less volatile returns and an opportunity, in an inflationary environment, to benefit from higher floating rate instruments after 20 years of falling and stagnant base rates. Insurance firms, in particular, are attracted to the improving valuations of the securities behind the market, such as those exposed to real estate.
ESG in, short-termism out
Along with this interest (in every sense) comes the relatively recent focus on sustainability, now a key part of how assets are managed across all markets. Private markets offer investors a unique opportunity to analyse thoroughly the environmental, social and governance (ESG) profile of their holdings. Unique, because they have greater access to data about the firms and products they invest in than is available on public markets. That insight has proved invaluable to insurance firms.
But the analysis of an asset’s ESG profile is very different from reviewing more traditional financial information. In our view, it’s not enough for market participants to lay an ESG process over the top of their usual investment analysis; it must be incorporated as an inherent part of the investment process.
This is not a completely unfamiliar approach for the insurance market. Today housing estates such as the Ina-Casa estates in Italy funded by Generali or Parkchester, a planned community in the Bronx backed by MetLife, stand as testament to the determination of insurance and mutuals to invest in high quality housing. Many insurers trace their history back to the co-operative movement of the 19th century, and just as the industry has returned to its roots to focus again on the importance of private markets, the recent push towards ESG has echoed their original values in the same way.
Equally, while insurers have always taken a longer-term view – with corporate memories stretching back to the early 20th century and typical investment periods of 20 years or more – sustainability concerns have now also prompted asset managers to work with a view to longer timescales too, with repeatable investment processes based on solid, bottom-up analysis.
It’s a match!
For more than a century, insurance investors’ compatibility with private markets has remained undimmed. Fixed income assets are key for insurance investors to take a cash flow management approach to liabilities, while insurers’ long-term outlook (with liability structures ranging over five to 20 years) make them natural buyers of long-dated securities such as loans and other unlisted assets. Private markets have also met the need for cash-flow prediction, seniority, and security over the decades, while facilitating diversification. Private assets can not only offer attractive covenants but are also much more transparent about the quantitative information of a holding, which helps with risk analysis.
Small wonder then that since the global financial crisis, the relationship between insurers and private markets has grown. Not only do private assets fit in with the requirements of Solvency II regulation for insurance investors, but as banks have deleveraged their balance sheets and retreated from lending to much of the mid-market, insurers have filled the gap and increased their exposure to the sector in their wake.
The private markets therefore remain as important as ever to insurers. But after more than 100 years, an innovative, even disruptive approach that encompasses new thinking around sustainability is needed to ensure that this enduring relationship remains fresh.