Christian Thompson, director of insurance solutions at M&G Investments, explains why fundamental credit and alternatives are so important for insurance investors – and M&G's expertise and approach in both areas
What is M&G's approach to fundamental credit?
Fundamental core credit is the most important part of an insurance company's balance sheet and the way that this is managed has a significant impact on portfolio returns, coverage ratio volatility and overall company profitability.
M&G are value-based investors and believe that a fundamentally-driven, bottom-up approach to credit management results in lower volatility and higher returns over the long term. We believe that patience and pragmatism are rewarded in credit markets, so we only make investments where we receive an appropriate level of compensation for taking the associated risk. This has been borne out in M&G's consistent investment performance across the entire team.
Credit research is at the heart of M&G's investment philosophy. We have one of the largest and most experienced teams of career fundamental credit analysts who specialise in their own sector and do not rotate.
They analyse and apply our own, independent credit rating to every bond that comes to market, supporting those views with fundamental credit recommendations to the fund managers. Additionally, our sustainability and stewardship team also reports into the global head of research, which ensures full integration of ESG factors into our credit research.
Does geopolitics have an impact during the credit cycle? What can insurers do?
Recent geo-political events and the global economic environment have brought the importance of good credit selection to the forefront of investors' minds. As we move into the later stages of the credit cycle, investors should be looking to employ a much more active approach to their core fixed income portfolios.
Economic contraction leads to increased defaults and credit downgrades and from an insurers' perspective, it is imperative to guard against these risks by taking good, active credit decisions centred on research and fundamental analysis.
M&G looks to add value to their insurance clients by making ongoing active decisions on what is included, and is not included, in portfolios, both identifying good value, but also looking to avoid or trade away from problematic credits.
Insurance companies, in particular, can face significant repercussions from credit events, such as a loss of principal, an impaired solvency position, increased regulatory scrutiny or an additional reporting burden. Therefore, maintaining agility, based on a well-founded risk view, is critically important to running insurance portfolios and is brought into significant focus during this time of the cycle.
Do you expect insurers to increase their allocations to alternatives over the next 2-3 years?
Outside of fundamental core credit, increasing allocations to alternatives looks set to continue and increase in the insurance investment community over the medium term.
Driving consistent, steady underwriting profitability is increasingly difficult as claims inflation continues across the industry, thus putting pressure on insurers to drive investment profitability.
Given the challenges faced on the core business lines, delivering optimised performance and return outcomes on the invested portfolio is a crucial part of overall profitability of an insurance company.
The surplus portfolio (i.e. assets not backing liability streams) is where insurers are able to selectively expand their risk budgets to drive additional portfolio yields and deliver optimal return outcomes – and this is where we expect the allocation to alternatives to pick up.
Alternatives have many benefits for insurers outside of a pure return perspective. Increased diversification of risk, versus both the overall invested portfolio and the underlying insurance business, can bring greater portfolio stability alongside higher returns.
There is also a wide range of investment choice in the sector that allows insurers to be selective over which alternative assets best fit their investment portfolio and risk appetite.
ESG is also a key element of the asset class and investments can see tangible positive social and environmental impacts. Therefore, we see alternatives as a good way for asset owners to be directly responsible and accountable for the ESG impact of their investment portfolios.
Why should insurers choose M&G Investments when it comes to alternatives?
M&G has been an investor in the alternatives markets since the 1930s and have subsequently invested considerably on behalf of our insurance sister company, Prudential.
As such, we have been able to develop a broad spectrum of capabilities that are well suited to the needs of our insurance clients. M&G is now the third largest private credit investor in Europe and the ninth largest in the world, and our scale in this market allows us compelling access and asset sourcing.
We are a long-term market participant, trusted partner and have the unique ability to structure multi-asset solutions to meet our insurance client's needs. Emerging market debt, European loans, real estate debt and impact private equity are all asset classes that insurers are currently interested in.
