The asset allocation of an insurer is different from that of a traditional asset manager or private bank. On the one hand, there are the provisions imposed by the regulator and, on the other, the long-term obligations. Low yields on government bonds are also a challenge for AG Insurance, explained Olivier Colsoul (pictured), Senior Strategist at AG Insurance. This is countered by strategically increasing the equity weighting and adding alternative asset classes, he explained. “A stagflation scenario does not stand much chance.”
“We have to take into account the limitations of the regulator,” said Colsoul. “As we take more risks in our investment profiles, we also have to set aside more capital. For equities, for example, it is much more than for government bonds. That is a first constraint. In addition, we also have long-term obligations to our clients. That is why we usually invest in a buy and hold optic, especially for bonds, which we buy and hold for the yield.”
“In addition, we may also invest in riskier instruments such as equities and infrastructure, which can provide higher returns at an acceptable risk,” said Colsoul. “We also mainly take into account the net cash flows available for reinvestment. So this differs from, say, a fund, which can quickly adjust its strategy. So our strategy is relatively stable with tactical emphasis.
Strategic asset allocation
The strategic asset allocation is the starting point for the portfolio. The aim is to maximise and stabilise the expected return and the investment margin in the long term in accordance with the risk appetite. This is regularly reviewed, most recently earlier this year. A number of adjustments were made. For example, the equity exposure was increased by a few percentage points because the lower interest rate environment yields little return in the government part. This is more achievable with equities. In addition, there are other issues. For instance, infrastructure equity requires less capital.
“The effective equity weighting will therefore probably be increased further in the medium term,” said Colsoul. “Illiquid investments in credit, for example alternatives to very expensive corporate bonds, are also an option. We can also include mortgage loans or direct loans in the portfolio that we choose from third parties. In this way, we can also achieve 100 basis points or even more return than with investment grade corporate paper.” Real estate also remains an attractive diversification pool thanks to AG Real Estate’s historical activity.
Acting tactically
Perfect timing is not possible, but with stock markets more volatile, AG Insurance’s portfolio managers have been tactically buying into the equity segment. “However, we do not expect a severe correction because we are in the midst of an expansionary phase which, although it will slow down a bit, is above structural growth.” Colsoul said growth will come from households over time thanks to high demand for orders, new jobs being created and plenty of savings. This, he says, will drive corporate profits and share prices in the medium term.
Sustainability
AG Insurance is also subject to sustainability rules, such as the SFDR and the European Taxonomy. “There are the internal criteria such as the exclusion of controversial activities, ESG integration and engagement with mainly Belgian companies. We also work with the Towards Sustainability label to certify sustainable investments. We currently have EUR 7 billion of investments that comply with the label,” said Colsoul.
These are also in line with Article 8. “We also have a more limited number that comply with Article 9, but the number of green assets will certainly increase. There is also the internal target at Ageas level of EUR 10 billion in sustainable impact investments such as ESG bonds and sustainable real estate. We are now at 6.5 billion, and that will increase in the coming years.”
Stagflation
Finally, Colsoul said that stagflation is not a scenario that stands a great chance, in his opinion. Inflation will indeed derail a bit longer and harder in the coming weeks and months, but that is mainly due to energy prices and bottlenecks, “but it is rather temporary in our view and once those bottlenecks are resolved, inflation is likely to cool. In particular, services and wage inflation in Europe remains subdued. We do not believe we are going back to the 1970s.”