Insurance Insights Q3 2024: Optimizing fixed income portfolios
Jaijit Kumar, Invesco’s Head of Asia Insurance Solutions shares his case study for Q3 2024 which looks at optimizing insurers’ fixed income portfolios.
Invesco Insurance Insights
This newsletter brings the latest topics impacting insurers, aimed to help those managing investment portfolios while considering an insurer’s business, regulatory and solvency needs.
Welcome
For the final issue of our Invesco Insurance Insights for 2024, we recap the topics we covered in past editions of the newsletter and share our 2025 investment outlook for insurers. In earlier quarters we illustrated how updated capital market assumptions can help insurers construct a fit-for-purpose strategic asset allocation. We also shared case studies on the benefits of a multi-alternatives approach to portfolio construction and how insurers can look to optimize the fixed income component of their portfolio.
For the final issue of our Invesco Insurance Insights for 2024, we recap the topics we covered in past editions of the newsletter and share our 2025 investment outlook for insurers. In earlier quarters we illustrated how updated capital market assumptions can help insurers construct a fit-for-purpose strategic asset allocation. We also shared case studies on the benefits of a multi-alternatives approach to portfolio construction and how insurers can look to optimize the fixed income component of their portfolio.
As we have always maintained, insurance investment portfolios (for lifers) should be constructed with a generally longer time horizon in mind – but needs to have the ability to weather shocks (to some extent at least!) that the market throws at them. This can be accomplished by having a well-defined framework while developing such portfolios and, indeed, while managing them on an on-going basis.
Our newsletters are designed to outline key steps, asset classes and processes that can assist with constructing and managing insurance portfolios. We do hope you find these useful. And, as always, please do not hesitate to reach out to us – your thoughts on such topics are always much appreciated.
Jaijit Kumar, Head of Asia Insurance Solutions
Invesco Insurance Insights 4th edition 2024
Invesco Insurance Insights 4th edition 2024
In this edition of the Insurance Insights newsletter, we will recap the main items we discussed in previous editions. The aim of these newsletters is to illustrate that we can look for efficiencies at all levels of an insurer’s asset allocation, and this is indeed something that we believe should be assessed on a regular basis.
Quick take: Invesco Insurance Insights 4th edition 2024
Transcript
Hello everyone, in this 4th Insurance Insights newsletter of the year, we thought we’d briefly recap the main items we discussed in our previous editions.
Ensuring insurance portfolios remain well suited for requirements is always a key consideration for insurers, various objectives need to be balanced and effective ALM (Asset Liability Management) practices and a careful selection of asset classes remains quite key.
And, indeed, this selection of asset classes is what we focused on in our first edition of the year. We showed how updated capital market assumptions can help provide this perspective, and, importantly, help in assessing what adjustments may need to be made. This year, in our case study, we observed a slight decline in expected portfolio returns (compared to the previous year), and this led to a consideration of additional asset classes to stabilize this to some extent – of course, while ensuring capital implications remain well under control.
Private market assets continue to be a key focus for insurers – higher expected returns, ability to diversify portfolios, and somewhat efficient under capital requirements – what’s not to like. But, it remains vital to assess the specific types of assets within this broad area and thoroughly understand the sources of risk and return. In our second edition, we demonstrated the potential benefits of using a multi-alternatives approach within insurance portfolios – diversifying even within this universe can lead to enhancements for the portfolio.
In our third edition, we then changed our perspective to focus on what is typically the largest component of an insurance portfolio – public fixed income. The case study we went through showed how there is potential to even enhance this allocation. While interest rates are expected to moderate, overall yields on fixed income are still not unreasonable, and this core allocation continues to play a relevant role in helping optimize the overall ALM profile of an insurer - whether though higher yields, lower charges, possibility of matching adjustment, or a combination of them. This exposure would continue to dominate portfolio allocations we believe.
The aim of these newsletters is to illustrate that we can look for efficiencies at all levels of an insurer’s asset allocation, and this is indeed something that we believe should be assessed on a regular basis.
We hope that this will help you in your on-going management of portfolios in this constantly changing environment, and we look forward to any comments or suggestions that you may have.
Thank you.
Insurance investment insights
Insurance Insights
Key considerations for insurers
In this 2024 recap, Jaijit Kumar underscores the importance of asset and liability management and incorporating specific asset classes for insurers to achieve optimal outcomes. He also outlines the specific asset classes that he feels remain well suited for insurance portfolios in the current environment.
Previous editions
Insurance Insights Q2 2024: Strategic Asset Allocations using multi-alternatives
Jaijit Kumar, Invesco’s Head of Asia Insurance Solutions shares his Q2 2024 review of Strategic Asset Allocations (SAAs) using multi-alternatives.
Insurance Insights Q1 2024 : SAA review using updated capital market assumptions
Jaijit Kumar, Invesco’s Head of Asia Insurance Solutions shares his Q1 2024 SAA review using updated capital market assumptions.
The macro outlook and implications for asset allocation
Insurance Insights
Fixed income and private credit opportunities
We believe easing monetary policy and financial conditions will be a tailwind for the global economy and markets in 2025. We think fixed income investments will continue to be a cornerstone for insurance portfolios. In terms of private credit, we believe the current environment will lead to improved deal activity, and as such, insurers should consider staying the course.
2025 Capital Market Assumptions
Invesco Solutions is proud to present our 2025 Capital Market Assumptions providing the long-term estimates for over 170 major asset classes to aid in strategic and tactical asset allocation decisions.
Fixed Income - Reframe Income Potential
Invesco fixed income capabilities are designed to capture market potential. Explore active fixed income approaches.
Reach a world of opportunity with Invesco Private Credit
Uncovering the potential of Private Credit starts with gaining access to them. It’s a world of opportunity – and we have the expertise and the network you need to unlock it.
Footnotes
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Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Diversification and asset allocation do not guarantee a profit or eliminate the risk of loss.
Invesco Investment Solutions (IIS) develops Capital Market Assumptions (CMAs) that provide long-term estimates for the behavior of major asset classes globally. The team is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. The assumptions, which are based on 5- and 10-year investment time horizon, are intended to guide these strategic asset class allocations. For each selected asset class, IIS develop assumptions for estimated return, estimated standard deviation of return (volatility), and estimated correlation with other asset classes. Estimated returns are subject to uncertainty and error and can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates.
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Invesco Vision is a decision support system that combines analytical and diagnostic capabilities to foster better portfolio management decision-making. Invesco Vision incorporates CMAs, proprietary risk forecasts, and robust optimization techniques to help guide our portfolio construction and rebalancing processes. By helping investors and researchers better understand portfolio risks and trade-offs, it helps to identify potential solutions best aligned with their specific preferences and objectives.
The Invesco Vision tool can be used in practice to develop solutions across a range of challenges encountered in the marketplace. The analysis output and insights shown in the document does not take into account any individual investor’s investment objectives, financial situation or particular needs. The insights are not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. For additional information on our methodology, please refer to our CMA and Invesco Vision papers.
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