Going off-piste - how French CIOs are embracing alternatives

By David Walker

As French insurers venture 'off-piste' in their general accounts, David Walker examines if the 'black runs' of alternative asset classes will be simply exciting - or could break a leg or two

No doubt some French chief investment officers will be using these winter months to schuss down – snow allowing - Europe's alpine ski-runs, perhaps testing themselves on a black run or two.

For an increasing number of them, going off-piste is not confined to their holidaying, as they venture beyond well-worn paths in their general account investing, too.

It's not quite an avalanche of interest – alternative, PE, infrastructure and equity funds still represented just €170bn, or the minor share (37%) of the €455bn of their funds and only 7% of their entire €2.2tn general account by Q2 2022, according to the European Insurance and Occupational Pensions Authority.

But the trickle of interest slowly becoming a tide.

And, so far at least, there are no outward signs of mishaps – but the winter is yet young.

Thomas Buberl, chief executive officer of AXA, has made a habit of highlighting how much better AXA IM's alternative fixed income returns are than its core fixed income performance and domestic debt yields remaining fairly dire in 2021 convinced many of Buberl's local peers to go off-piste.

Together, they still directly held €396bn worth of French govvies – a comparative 'blue run' – by Q2 2022, and 10-year yields recovering to 2.73% by this week, according to Bloomberg, no doubt put smiles on their faces.

But they seemed to imply in their latest solvency and financial condition reports (SFCR) that, even while rates seemed to be rising, the 'GA core' just wouldn't cut it.

'Beyond the mainstream' was where the investment action was, and they allocated accordingly.

Equities fire up

Local equities in the Cac 40 benchmark making 28.9% in 2021, after a 7% tumble in 2020, helped ease insurers' pain, amid a 17% jump in shares globally.

Audiens Prevoyance spoke of "renewed confidence among investors, confirmed by the rebound in global economic growth" as "massive stimulus plans" met with accelerating vaccinations and friendly monetary policies. The paper gains that resulted at the composite insurer - listed equity made 21%, and PE 25% - contributed to its financial income rocketing 125%.

Some 19% of Audiens's investments were in shares in 2021, "allowing us to generate significant financial results in recent years, which have largely contributed to balancing our results".

Yes there were downsides, too, chiefly in the group acknowledging its allocation "remains a high consumer of the solvency capital requirement".

And if holding equities had any 'downside' in 2021, it was the higher capital charge. Overall, equity risk represented 36.6% of the market risk SCR of French groups that used the standard formula, according to analysis by Insurance Risk Data of 16 French groups with a combined general account of €827bn. That was the second highest capital-exposure to shares of the EEA countries and regions that IRD analysed in its Insurance Investment Outsourcing Opportunities - EEA, UK, Switzerland 2023 research report.

The 26% year on year leap, to €5.2bn, in the equity risk of the BNP Paribas Cardif Group as markets improved, for example, was not an atypical result for French CIOs. And many were willing to pay that price, for holding onto shares.

In any case, Audiens noted, the confluence of inflation, economic recovery and monetary normalisation had "made 2021 a tricky year for bond performance".

Groupe Prudentiel Ocirp commenced equity investing "to give asset managers the possibility of reinvesting maturing bonds and loans...faced with the state of very low interest rates, even negative for government bonds up to 10-years".

CCPMA Prevoyance also belied the stereotype of the equity-shy French insurer, by trumpeting taking gains amid "the good performance of share markets" contributing to its average 3.04% overall book yield.

Many crystallised their gains. This, plus favourable FX moves, lowering fees and property rent, helped Covea SGAM boost its investment return by 30 basis points to 2.2%, year on year, or from €1.7bn to €2bn – and it found room to bemoan the "erosion of bond income".

Coface also found equities more than offsetting its falling bond returns during 2021, keeping the trade insurer's rate of return at 1.6%.

As Europe's economy stuttered back to post-pandemic life in 2021, BNP Cardif's Assurance Vie unit said the region had been "particularly affected by the crisis [and so was] sensitive to a restart of activity and presents higher potential for appreciation than other geographies".

The underwriter bolstered its equity allocations to industrials, construction, automotives and finance in particular against this backdrop, while its CIO may also receive plaudits for trimming emerging countries' equities, including China's given "the lesser effectiveness of vaccination campaigns in these countries [putting] a brake on the rebound in activity".

But for many, if not most, French insurers, the hunt for returns didn't stop at shares.

During 2021 Coface made additions to its EMD, high-yield debt and shares, and it flagged some rotation from property into infrastructure equity funds for 2022, for instance.

The real deal

Perhaps the doyen of French alternatives-seekers - if not AXA - was CNP Assurances.

Some 32 private equity funds in Europe and the US got €1.1bn from it during 2021, "with [underlying] investments mainly concerning holdings in SMEs and micro-entreprise in various economic sectors". That brought the group's net exposure to €5.2bn.

Property and agro/forestry investments received €765m of new commitments from CNP, too, and it highlighted a "still attractive" risk premium for the assets, but also the importance of its "promoting biodiversity and sustainable management of our forest heritage, and pursuing a policy of constant energy improvement of our property portfolio", as reasons behind the investments.

CNP almost doubled its exposure to infrastructure, too, adding €1.9bn to make €4.3bn by year's end.

France's insurers were not alone in Europe boosting infrastructure in 2021, of course. The €20.7bn worth of infrastructure funds that they held at the end of 2021 was a significant increase on €16.5bn in 2020, and continued to grow to €24.3bn by Q2 2022.

The asset class is being bought by numerous French chief investment officers, and at least examined by others – often directly rather than via funds.

Groupe Prepar Assurance, the composite, looked at infrastructure funds, supplementing them with private debt funds, private placements, and convertible funds in 2021, while BTP Prevoyance noted "continuing our deployment in diversified real assets – property, unlisted assets and infrastructure – given the low interest rate environment".

Some €1.1bn, or 9.3% of the portfolio of CCR, the reinsurer, was in real assets in 2021. Yes, it also benefitted from "buoyant" risk assets, and allowed its protection fund to take an average exposure of 80% to sharemarkets over the course of the year, but it was the decision to "significantly increase our exposure to transition-related energy infrastructure" that it highlighted in its SFCR.

"We have sought to invest in infrastructure that uses innovative techniques for carbon-free energy, and hydrogen appeared naturally as a source of energy for the future," it said.

As a major natural disaster and agricultural underwriter, CCR can, perhaps, see particularly clearly the danger of climate change, if lower-carbon ways are not adopted, and its SFCR also called for "a better knowledge of extreme [weather] events in terms of intensity and frequency by 2050".

Going off-piste means going green

Many insurers made forays away from core assets, in socially/environmentally beneficial ways.

Oddos BHF's Environment Opportunities fund was one beneficiary of the interest in sustainability at CCMO Mutuelle in 2021, which put fresh money into Oddo BHF's Article 8 fund. The Article 9 DNCA Invest Beyond Semperosa impact fund took CCMO's money, too, and the insurer highlighted having €1.4m in socially-responsible SCPI funds. Overall 2% of the insurer's pot was in Article 9 funds, 10% in Article 8, and 12% in Article 6.

At CAM btp, FPS funds came to €23.1m after the insurer participated in a second Fonds Professionel Specialise product during 2021.

Just a brief glance through the fund-based investments of BNP Paribas Cardif Group quickly gives insight into just how far beyond the mainstream its investment activities extend. Its funds sport names such as Cedrus Carbon Initiative Trends, Schroder European Operating Hotels, Tikehau Cardif Loan Europe, plus a co-investment fund with the alternatives experts Permal.

The BNP insurer did not shun local debt entirely – OATs comprised 55% of its sovereigns (2020: 58%), compared to about 8% in each of Italian, Spanish and Belgian paper – but it highlighted making "gradual purchases" of infrastructure and PE funds, too, in 2021.

If the French State can still rely on French general accounts for support, not least as OATs yields rise, alternatives managers might be smiling as broadly as Emmanuel Macron, amid CIOs' off-piste adventures.