insurercio quarterly digest vol. 8.pdf · “with profitability of insurers under increasing...
TRANSCRIPT
InsurerCIO Quarterly DigestVol. 8 October 2014
© InsurerCIO, Inc. 2014 All Rights Reserved
Table of Contents
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The Changing Face of Insurer Asset Allocation
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Are Fossil Fuels the Next Subprime Danger?
What Would You Own If You Could Manipulate Markets?
Global Insurer Outsourcing to Grow With EU Rule
The Central Bank Illusion
Hedge Fund ‘Risk Adjusted’ Performance is an Illusion
Insurers Bonding with Climate Change Battle
Anticipating the Next Liquidity Crisis…in Corporate Bonds
Inverting the Logic on Inversions
Insurers Reassess Their Investment Strategies
* Articles and the content/links within them belong to the noted author and publication. All content is summarized by Strategic Asset Alliance.
July - September 2014
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via The Economist Intelligence Unit
The Changing Face of Insurer Asset Allocation
Executive Summary:
“With profitability of insurers under increasing pressure, boosting returns on investment is a top priority for the industry. Not only is risk appetite going up but the range of investment risks insurers are taking on is also becoming more varied. This is evident in the willingness among senior insurance executives to allocate a much greater proportion of their portfolios than ever before to higher-yielding opportunities, in particular to private asset classes.
The proportion of insurers who intend to allocate more than 15% of their portfolio to private assets is set to nearly double over the next three years. However, significant barriers remain: good investment opportunities in private asset classes such as infrastructure and real estate can be hard to find. Nonetheless, the significant and growing demand for such assets implies that insurers are no longer averse to venturing out of their comfort zones.”
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Insurers are increasingly looking at an ‘absolute’ return approach to fixed income, as well as RE and other alternative assets.
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Are Fossil Fuels the Next Subprime Danger?
By Ambrose Evans-Pritchard of the Telegraph
“Can the fossil fuels industry be the unforeseen weak link in the economy?
A sort of ‘next subprime’ danger?”
Investors placing money on the fossil fuel complex of oil, gas and coal has become a major act of irrational behavior as investors are likely to be left latching onto worthless projects as renewable technology sweeps in below radar, and the Washington-Beijing axis embraces a greener agenda, Evans-Pritchard explains.
Bank of America’s data shows that oil and gas investment in the US has ballooned to $200 billion a year. For the first time in U.S. History, oil and gas has reached 20pc of total US private fixed investment, the same share as home building.
A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even. This does not mean shale has been a failure. Opti-mistic investors believe shale has/will not be a failure with hope that it will reach a “positive inflexion point” in five years or so, which is the typical pattern for a fledgling industry.
Article Summary:
Click Here for Full/Original Article
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Abstract:
That is not a rhetorical question. Alas, there are those who can indeed manipulate financial markets at the stroke of a pen, the mention of a brief comment, or the utterance of a sigh.
Who, you may ask, can consistently do such a thing?
Warren Buffet? Not really. Even the wizard of Omaha is subject to seeing where Mr. Market prices securities before he can dream up his next move, which in turn moves a very small part of the market.
President Obama? Yes, but what he says or does could have unexpected and varying impacts on financial markets. Is Obamacare good or bad for markets? We shall see, but its impact will undoubtedly vary depending upon the company, person, etc. Will declaring war on ISIS cause markets to fall or rise? A case can be made on both sides of that question.
Of course, the granddaddy of all market manipulators would be the Chair of the Federal Reserve. He or she has direct, effective control of short term interest rates offered by the largest debtor in the history of the Universe (as far as we know). And, he or she can create money out of thin air with a press of computer key (QE).
What Would You Own If You Could Manipulate Markets?
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Original Article by Alton Cogert of the View from the Northwest Quadrant
What would you own if you could manipulate markets?
The Chair of the Federal Reserve has answered, but is it correct?
Click Here for Full/Original Article
By Thao Hua of Pensions & Investments
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Global Insurer Outsourcing to Grow With EU Rule
Article Summary:
“More than a decade in the making, Solvency II integrates the EU’s 14 existing insurance and reinsurance directives under a three-pillar system: measurement of assets, liabilities and capital requirements; governance and supervi-sion; and reporting standards. As key components of Solvency II are being exported around the world, life and non-life insurance companies in those jurisdictions likely will follow suit in the way they approach asset allocation, according to consultants and money managers.” - Thao Hua
Solvency II is reaching far beyond its European Union origin, placing capital constraints on insurance asset allocation globally just as the low-yielding environment is pushing the boundaries of portfolio diversification.
The European Union directive, which will be implemented in 2016, promises to transform the way insurance portfolios are externally managed in two ways, sources say:
Some insurers are likely to outsource a larger proportion of their assets.More outsourced assets likely will be invested in higher-margin strategies such as hedge funds, real estate and infrastructure to seek better risk-adjusted returns.
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Click Here for Full/Original Article
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By Ron Rimkus of the CFA Institute
Article Summary:
Let’s judge the central banks on the longer term impact of their policies, not just the ‘rescue’ from the Great Recession.
In this piece, Rimkus compares the tale of Sir William of Rutland to the Fed and U.S. Treasury from the 2008 Financial Crisis in the fact that the focus of the event has fallen on the rescue and not the process leading to the crisis.
The combination of below-market rates, major trade imbalances, loose lending and perverse incentives helped the financial crisis spread all over the world. Major trade imbalances enabled foreign central banks to purchase US Treasuries, which pushed rates down all along the yield curve, again affecting markets world-wide. Today’s persistent trade imbalances are possible only because fiat currency is not backed by gold or specie of any sort, affecting whole countries and mar-kets, Rimkus explains.
The lack of coordination between the Fed, Comptroller of the Currency, Thrift Supervision and FDIC created large gaps in the regulatory framework, allowing non-bank lenders to lend to anyone and letting banks sell their entire exposure to anyone.
“Just as treating Sir William as a hero would only en-courage him to create more deceit, treating central banks as saviors only encourages more of the same,” Rimkus states.
The Central Bank Illusion
Click Here for Full/Original Article
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The hocus, pocus behind hedge funds using Sharpe ratios to get paid big fees. So, why do most hedge funds exist?
In previous articles, Smith has discussed how several hedge funds had returns that looked like selling out-of-the-money puts on the Standard & Poor’s 500 Index and suggested that these funds were playing to investors’ put-option illusion. As it turns out, this strategy can be used to boost Sharpe ratios.
Sharpe ratios are the most common way that we measure the performance of a fund or other investment, Smith explains. Under certain conditions, they are the best measurement of the tradeoff between risk and return. Hedge funds can boost Sharpe ratios by acting like poorly managed insurance companies.
Hedge Fund ‘Risk Adjusted’ Performance is an IllusionBy Noah Smith of the Bloomberg View
The hocus, pocus behind hedge funds using Sharpe ratios to get paid big fees.
So, why do most hedge funds exist?
Article Summary:
Click Here for Full/Original Article
Insurers Bonding with Climate Change Battle
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Article Summary
Nearly one-in-five major investors in green bonds issued by one of the world’s largest players in that market is coming from the insurance industry as the financial world.
The path for insurers into the green bonds market was paved by Zurich Insurance Group’s $2 billion investment. Experts view green bonds as being highly attractive to an image-conscious insurance industry with its investments closely monitored and much to gain from funding resilience projects.
Cynthia McHale, director of Ceres insurance program, offers three reasons as to why insurers would want to invest in green bonds:
Green bonds offer the same returns as other bonds and they are no more or less risky.They have a positive impact on society.Investing in green bonds puts insurers in a leadership role in society.
1.2.3.
By Don Jergler of the Insurance Journal
Click Here for Full/Original Article
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Abstract:
“BlackRock, a major competitor in the bond market with $4.3 trillion in client assets, urged changes including unseating banks as the primary middlemen in the market and shifting transactions to electronic markets. Another solution BlackRock proposed: reducing the complexity of the bond market by encour-aging corporations to issue debt with more standardized terms.
BlackRock suggests more trading venues in which dealers and customers can trade with anyone; increased standardization of new bonds to pool liquidity; revamping the method by which traders offer and accept prices; and behavioral changes for market participants including investors, issuers and un-derwriters”
Anticipating the Next Liquidity Crisis… in Corporate BondsBy Mary Childs of Bloomberg
Liquidity problems in the corporate bond market are huge
Better to deal with this now than when the next crisis occurs
Click Here for Full/Original Article
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Article Summary:
And now for something completely different…
Why tax inversions – the practice of a US company merging into a non-US company to lower/avoid income taxes – could ultimately produce different, better results for the economy.
First some interesting reactions and ideas:
From Andrew Ross Sorkin of the New York Times, a look at how Wall Street banks are profiting from advising companies on taking advantage of this tax maneuver. We’re talking over $200 billion in fees…for Goldman Sachs alone…while these ‘too big to fail’ banks preach the importance of investing in America.
Let’s not forget that America (that’s we the taxpayers) bailed out those same banks who are now advising companies to merge and redomesticate for tax pur-poses to lesser taxing shores.
Meanwhile, the famous hedge fund investor, Stanley Druckenmiller, says the debate over inversions gives the U.S. a chance to debate tax policy from an investor’s perspective. And, since shareholders ultimately ben-efit, they should see their taxes rise (via a capital gains or dividend income tax increase) to offset the lost tax revenues.
Of course, raising capital gains taxes on all investors just to offset inversions that benefit a few does seem a bit self-serving in favor of investors who benefit from inversions. But, I suppose the venerable Mr. D believes he can ferret out those inversion candidates better than most.
Inverting the Logic on InversionsBy Alton Cogert
Click Here for Full/Original Article
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Insurers Reassess Their Investment StrategiesDavid Dankwa of Reuters IFI w/ Alton Cogert
Article Summary:
With insurers looking to reassess their investment approach, David Dankwa of Reuters IFI asks Alton Cogert, Strategic Asset Alliance President & CEO, five key questions on the increasingly challenging investment climate insurers continue to face.
Highlights from the Q&A include:
“Companies are assessing risk, assessing the ability to invest in things outside of core fixed income and to what degree; and finally looking at best execution practices.”
- on changes within core fixed income strategy.
“But the truth is you have got to use some kind of mathematical modeling simply because, based on behav-ioral finance research, we human beings can balance about four factors at once in our brain.”
- on increased reliance on investment models.
“One thing insurers are doing to varying degrees is taking a look at more risky asset classes. Another thing is diversification because for the most part insurance portfolios by design are sub-optimally diversified.”
- on dramatic changes on how insurers invest.
Click Here for Full/Original Article