Managing liquidity in a pandemic

Periods of market volatility often bring with them some long-term lessons about—or reminders of—how re/insurers are doing on the investment side of the balance sheet.

As the global economy went from lurching forward to abruptly halting altogether as governments across the world implemented national lockdowns to combat the spread of SARS-CoV-2 in March, financial markets took a swift nosedive in response, requiring some deft manoeuvring from investment managers.

For investors such as re/insurers this caused a number of issues. How did life carriers manage in a period of such market turmoil?

Speaking during the Bermuda International Long Term Insurers and Reinsurers’ (BILTIR) annual virtual conference, investment professionals from a number of carriers spoke about how they managed the liquidity issues brought about by the volatility and how it impacted their companies as a whole.

Juan Mazzini, senior vice president at Global Atlantic Financial Group, said that the onset of the COVID-19 pandemic prompted a rethink of how to manage the investment side of the balance sheet.

While a number of strategies and different approaches were discussed, Mazzini said that the issue at the top of everyone’s mind at the time was ensuring liquidity of assets in a time of deep uncertainty over valuations.

“On liquidity, we’ve expanded our thoughts. We need to ensure that if times like these come back, you can be proactive and opportunistic as opposed to being on the defensive. It’s reassessing what we call liquid in our portfolio.

“It became evident when we looked to interact with the market in March 2020 that what you may have thought was liquid was quickly redefined,” Mazzini said.

“From a credit perspective it’s the old adage: stick to your strengths.”

Mazzini explained that as the market experienced severe ruptures it was essential to focus on the known areas rather than expanding into asset classes which provided more uncertainty for the portfolio, even if the opportunity was there for higher returns.

“Don’t go for the marginal buy, especially in this type of environment, where it’s hard to come by good opportunities. When you do try to find those opportunities, make sure it’s part of your core set of capabilities that you’re not simply going for that new asset class that others may be doing.

“Instead try to build deep in-house expertise for those key asset classes you have conviction over, and then you’re willing to stand behind the underwriting, so that you don’t need that asset to be sold in stressful times,” he explained.

“The concern was around liquidity more than actual risk of default.”

Clark Jeffries, Somerset Re

Being prepared

Clark Jeffries, chief investment officer of Somerset Re agreed that liquidity was the main issue that portfolio managers had to tackle as the pandemic raced across the globe, and that the event had provided a timely reminder of ensuring that carriers’ portfolios were braced for such events.

“It’s also a theme around liquidity for reinsurers like us that collateralise most of our business. Events such as March 2020 are a huge reminder that exposure to market value triggers like fair value trusts can be a source of liquidity that is very difficult to manage,” he said.

“It conversely highlighted the value of having book value collateral which, fortunately, the vast majority of our collateral arrangements were and continue to be, so definitely the concern was around liquidity more than actual risk of default, thankfully, as markets snapped back so quickly.”

Jeffrey Jacobs, chief investment officer, Insurance Solutions Group, at asset manager Apollo, added that there was a danger the swift recovery following the initial dip in asset prices last year may have given some “false confidence” for lending in future, and warned that the events underscored the need for confidence in credit underwriting.

“It’s perhaps correct to say that the nature of the snapback we saw in March created a bit of false confidence that maybe people thought: ‘my homework must have been immaculate, since everything has come all the way back’,” Jacobs said.

“Looking forward and thinking about the nature of market volatility, and a likelihood of what the next risk-off move might look like, it emphasises the need to have confidence in your credit underwriting and how you approach individual investments.”

“It emphasises the need to have confidence in your credit underwriting.”

Jeffrey Jacobs, Insurance Solutions Group, Apollo

Image Credit: Shutterstock.com / Kentoh

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