analysing allocation trends in the global insurance industry · powerful and irreversible drivers...
TRANSCRIPT
This communication is intended for investment professionals only and must not be relied on by anyone else.
Bruce Porteous
Investment Director - Insurance Solutions
Owen McCrossan
Investment Director – Multi-asset Investing
FT
Managing Assets for Insurers Conference
24 February 2015
Analysing Allocation Trends in the Global Insurance Industry
The Importance of a Liability Aware Outlook Powerful and Irreversible Drivers of Global Insurance Asset Allocation Trends
• Regulatory change
Market consistent balance sheet and risk-based capital requirement
Global and pensions
Very high degree of technical complexity
• Market volatility
Alternative assets and use of diversification
Enhanced ALM
To stabilise the balance sheet
• Low interest rate environment
Alternative assets and use of diversification
Enhanced ALM
To generate capital efficient yield
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The Drivers of Insurance Liability Aware Asset Management Markets are Volatile - Spreads on Euro Corporate Bonds
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Source: Bank of America Merrill Lynch.Note: Spreads (in basis points) over German government bonds for both plain vanilla bonds and bonds with embedded options (for which the value of the option is stripped using proprietary models). ESRB Risk Dashboard, December 2014
The Drivers of Insurance Liability Aware Asset Management Insurer Asset-Liability Duration Mismatches
4Source: EIOPA Insurance Stress Test 2014
The Drivers of Insurance Liability Aware Asset Management Low Interest Rates - Global 10-year Government Bond Yields
5Source: FT, 19 February 2015
The Drivers of Insurance Liability Aware Asset Management European Insurer Guarantees
6Source: EIOPA Insurance Stress Test 2014
Risk premia – nice to have, but
10 years (p.a) 25 years (p.a.) 50 years (p.a.)Equities 5.9% 6.4% 4.7%Treasuries 3.5% 3.8% 2.1%Corporate Bonds 6.0% 6.1% 2.8%Property 3.9% 2.5% 3.4%
7Deutcsche Bank Long Term Asset Study, Standard Life InvestmentsUS markets except UK Property
Excess return over cash
... are volatile
8Source: CRSP, Barclays Research
Source: IPD UK Monthly Property Index, All Property; Federal Reserve Trade-Weighted Exchange Value of US Dollar vs 6 Countries; Dow Jones UBS – Commodity Index; Barclays Capital Global Corporate Index, Excess Returns; Barclays Capital Emerging Markets Index, Excess Returns; Barclays Capital US High Yield Index, Excess Returns; Standard Life Investments, 31 December 2011
Unstable risk characteristics
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Property FX Basket CommoditiesCorporate
BondsEmerging
Market BondsHigh Yield
Bonds
2000-2007 2008-2011
Correlation of Global Equities with other market sectors
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Buy portfolio insurance?
Historically you would have needed to pay 1.7% per quarter, on average, to cap losses at 5%
0
200
400
600
800
1000
1200
1400
1600S&P 500 Total Return Index Protected index, no cost
Protected index allowing for costCash Return Index (3m rates)
Tail risk protection as many imagine it would be. Fantastic if it was affordable
2.2% p.a.
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Portfolio construction - a strategy with good protection
11Source: Standard Life Investments, Bloomberg
But not systematically paying for it
12Source: Standard Life Investments, Bloomberg
Bringing it together
13Source: APT, Standard Life Investments, February 2015
Stand Alone risks Correlations Position removal
Risk Comparison
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* Source: FactSet, MSCI World (£) net of tracker fund fee. ** Source: Standard Life Investments, net performance. *** Source: Standard Life Investments, gross performance from 01 July 2006 to 31 January 2015Source: Standard Life Investments, gross performance from 12 June 2006 to 31 January 2015. Portfolio performance is based on the £, institutional pooled pension portfolio
Delivering returns with less risk
• Volatility: GARS 5.4% Global Equities 14.2%
(annualised, using monthly data from 01/07/2006 to 31/01/2015)
• Maximum Drawdown: GARS -13.9% Global Equities -37.8%(using daily data to 31/01/2015)
• VaR (95%, weekly): GARS -1.3% Global Equities -3.6% (using weekly data to 31/01/2015)
Up months*** 75/103 vs 63/103(GARS vs Global Equities)
Upside capture 32.7% Downside capture -2.5%
Questions?
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