Pool Re avoids illiquids for now, mulls multi-factor

European insurers firms are more advanced in their investment strategies than their Asian peers but there are some that do not own illiquid assets – and for good reason.

Some, like London-based Pool Re, do not have liabilities as long-term as those of life companies. They have a greater need for liquidity too.

Pool Re in some respects is a special case; it covers terrorism risk to UK commercial property and is backed by the country's UK government. So it cannot easily plan for its liabilities because it has no idea when and how much it might have to pay out at any time.

The reinsurer, with an eye on diversification, has considered investing in assets such as infrastructure, real estate, private equity and debt, and also distressed debt, chief investment officer Ian Coulman told AsianInvestor.

“But we haven’t got comfortable around the illiquidity aspect of them yet,” he said. “Because we have the government guarantee behind us, if there is an event that wipes out all our assets and we go to the government to borrow money, we have to be able to liquidate all our assets.”

“The last thing we want is to be in a position whereby we’re holding onto something that we just can’t sell or we’ve got to take such a significant haircut that makes it uncomfortable,” he added.

That is a particular issue in today’s volatile and uncertain environment, especially as even public bond markets are less liquid than they used to be.

“There’s a distinct lack of liquidity in markets today if you’re a forced seller, particularly in fixed income markets,” Coulman said at the Insurance Asset Management Summit hosted by Clearpath Analysis in London last month.

And insurance firms should be able to handle any liquidity issues, provided they are sufficiently diversified across asset classes, he said.

DIVERSIFYING EQUITY RISK

Pool Re’s portfolio (see chart below), which is run entirely by 10 external managers, can weather a fair bit of volatility, so they can afford to be a little more aggressive when allocating to risk assets, Coulman said.

Indeed, this year the firm broadened its public market exposure by making its first allocation to alternative risk premia with a view to enhancing returns and further diversification. It shifted 2.5% of its assets out of corporate bonds and into systematic market-neutral type strategies such as long/short equity, fixed income carry and foreign-exchange carry strategies, he said.

POOL RE’S PORTFOLIO BREAKDOWN

The reinsurer has also considered diversifying part of its equity portfolio into a multi-factor strategy. The allocation is passively managed against the MSCI All Countries World Index, with a value bias, and accounts for 10% of its assets under management.

Prior to Coulman joining in 2011, Pool Re’s equity portfolio had been run entirely according to a standard, market-capitalisation weighting.

“We first looked at moving away from value to a multi-factor approach in 2016,” he said, potentially incorporating other factors as well, such as quality, size and momentum. “But we came to the conclusion that value was still cheap, firstly relative to itself, but certainly relative to most of those other factors. And many of the other factors were expensive.”

So Pool Re stuck with its value approach and, again, in late 2017 when it revisited the question –because value remained relatively cheap.

“The divergence that’s occurred between value and many other factors has widened to such a degree that it will start to come back to the mean at some point, so we’re sticking with value right now,” Coulman said. “But we’ll keep it under review.”

Diversification is a big focus for Pool Re in the current turbulent environment.

For Coulman, the overriding concern in 2019 will be geopolitical risk, which he sees driving continued volatility. He cited the uncertainty being fuelled by US President Donald Trump’s unpredictable nature, along with the political turmoil in Italy over the new government’s budget proposals and in the UK around the Brexit negotiations.

The British prime minister, Theresa May, survived a confidence vote last Thursday but the outcome of the country’s decision to leave the European Union remains anyone’s guess.