New thinking is needed in the hunt for yield

Insurers have been asking themselves for some time how they can generate investment yield. But perhaps they have been asking the wrong question.

For the most part, sourcing yield has proven unexpectedly hard, with heavy demand chasing limited opportunities in areas such as infrastructure. Meanwhile, judging by a recent report from Standard & Poor’s (S&P), some firms are doing well by sticking to more straightforward approaches.

According to the report, the top 14 multi-line firms covered by the rating agency are improving earnings and strengthening their capital position – growing their available capital by about 6% a year.

Interestingly, regulation is playing a role. “We believe uncertainty on a global capital standard for global systemically important insurers might be one of the reasons for the continued capital build-up,” states S&P. “What’s more, future Solvency II regulation in the European Union and remaining ambiguity regarding the conversion of EU regulation into national law might motivate global multi-line firms to prepare for possibly higher requirements.”

At the same time, just how the firms in question are improving their capital foundation bears scrutiny. Yield-hunting in the form of buying riskier assets is notably absent from their list of main activities. Taken together the group has increased exposure to alternative assets by less than 0.1% of total investments year on year, according to S&P.

And yet the impact of low rates is less pronounced for firms in the group than for the rest of the industry, according to the agency. Investment returns have fallen, but not as much as expected. Why? There is no special secret – just doing the right things well. “We think this attests to many global multi-line insurers’ expertise in global asset management,” states the agency.

The firms in question are also benefiting from strategic decisions. They have increased non-life insurance rates, cut costs, re-priced life insurance products and moved away from capital-intensive products towards capital-light alternatives.

It certainly helps to be big and well-diversified with multiple lines of business and a geographic mix of business. Even so, the lesson for others in the industry is that success is built on shrewd management as much as bold investment strategies.