Conning's North America chief investment officer Rich Sega and Russell Büsst, CIO Europe, share some thoughts on their approach to insurance asset management

How have insurance companies used credit to address low investment yields?

Rich Sega: In most cases, our insurance clients have already tried the easy answers, such as going down in credit quality or extending duration. The downside with these strategies is that they often compound our clients' exposure to corporate credit, so they need to find alternatives that can deliver good yield in the current environment and respond well to potential changes that lay ahead. Conning's acquisition of Octagon Credit Investors in early 2016 underscores our strategy of anticipating client needs in a changing investment environment.

Octagon, a below investment grade corporate credit investment adviser, supports institutional investors, such as insurers, with collateralised loan obligations (CLOs), which have attractive yields in current markets but are also responsive to rising interest rates, because they reset periodically. Additionally, they have a stellar credit history. While an insurer wouldn't allocate 100% of its assets to CLOs, exposure to CLOs is a great way to access decent yields and take advantage of rising rates, which we are starting to see.

Asset diversification has become a cornerstone to many insurers. What are the risks to this approach?

Russell Büsst: Real diversification may improve the risk-reward profile – that's not a new story. But the risk is that a seemingly diversified investment strategy may actually be more correlated than intended. Investors have to be aware of potential correlations between assets that could easily be overlooked, and considered to have a low correlation. For example, after the UK's Brexit vote and the 15-20% depreciation in Sterling, the UK equity market almost became a currency play, as the biggest impact on the profit & loss of the FTSE 100 companies is the currency effect on overseas earnings. Many models and investors may not have captured this when making allocations to UK equities.

Note that too much diversification may dilute the positive effects of diversification for a number of reasons, including fees, liquidity, and costs associated with overseeing a more complex portfolio.

How do you understand those constantly changing correlations?

Russell Büsst: Our experienced asset management team is supported by Conning's risk solutions group to develop a strategic asset allocation strategy against a set of potential future economic scenarios. To that extent, each quarter a significant focus for our risk solutions business in our Cologne, London, and US locations is the calibration of our models, which are supported by our GEMS® economic scenario generator software. We look closely at the assumptions in these models to be sure we appropriately understand changing correlations.

Rich Sega: In addition, Conning believes a risk factor-based approach is important to understanding correlations. Many consultant reviews and RFPs consider diversification by asset class or industry, but each of those classes has a blend of risk factors – credit exposure, liquidity, currency, etc. – that are the true risks. We work with our clients to assess where they are under- or overexposed on a risk factor basis, and balance that appropriately.

What are your plans to develop your asset management business?

Russell Büsst: From a European perspective, Conning's London-based investment team has been particularly focused on serving the needs of the Lloyd's market, P&C, and the Bermuda insurance market, where we have been able to manage entire balance sheets and make asset allocation decisions within discretionary accounts.

We continuously strive to expand our investment reach and offer products to larger insurers that are not necessarily looking for a holistic approach, but need a manager who understands the impact of proposed investment strategies and asset classes on their balance sheet. This includes the solvency and regulatory implications of implementing their investment strategies. As such, we offer a customised approach to investment management for which we not only utilise traditional asset classes historically favoured by the insurance industry, but also non-traditional investment options.

Rich Sega: Conning knows how to find value – and realise it – in a constrained investment environment. Conning's experience and expertise in managing insurance portfolios that need to support a business can meet the needs of other types of institutional investors. In particular, mature pension plans have liabilities that look very much like insurance obligations, and endowments have long-term objectives. Our approach leverages more than three decades of experience managing customised asset-liability focused investment mandates, designing and delivering specialised investment products, as well as our award-winning, proprietary risk modelling software.