Bermuda-based Resolution Re plans to add to its $840 million of illiquid assets – notably in private debt and equity, infrastructure and middle market loans – where it still sees value in the wake of the Covid-19 crisis.
The reinsurer, which has $7 billion under management, is also open to increasing its emerging market debt exposure.
“We continue to see value opportunities in the coming years in private equity, so will continue to build positions in that asset class. We will supplement this with infrastructure opportunities following a similar geographical profile,” said Karl Chappell, director of asset management at Resolution Life Group, which owns Resolution Re.
The private equity portfolio is weighted towards buyout, with a focus on the US but with exposure to Europe and Asia too. The firm has made large allocations to private equity managers over the last two years, much of which has not yet been invested by the general partners in question, he told AsianInvestor. It does not invest in public equity markets.
“We use a combination of long-term equity-like investments, such as private equity, to provide additional yield to support [our] long-horizon liabilities,” Chappell said. “This is combined with a sizeable hedging strategy to manage the interest rate risk associated with those very long-dated liabilities.”
The reinsurer also plans to increase its exposure to direct lending, he added. “We also see seeing opportunities in middle market loans that we expect to provide lenders with good yield over the coming years."
Resolution Re outsources its entire portfolio to external managers, focusing its efforts on asset-liability matching. “We have a partnership approach with a small number of asset managers,” Chappell said, declining to name individual firms.
While he observed that the reinsurer had benefited from the downward trend in fees charged by fund houses in recent years, he declined to give any specific figures.
The vast bulk (95%) of Resolution Re’s portfolio is in corporate bonds. Geographically, 85% is in the US, 14% in developed markets and 1% in emerging markets. It has a limit of 20% on non-US investments, including a 5% limit on emerging market assets.
RESOLUTION RE'S ASSET ALLOCATION
|Investment grade corporate credit||55%|
|Commercial mortgage loans||14%|
|Privately placed bonds||8%|
|Alternatives including private equity, real estate and infrastructure||4%|
|High yield corporate credit||2%|
|Cash and sovereign bonds||1%|
The firm is constrained to a small allocation to emerging market bonds for a number of reasons, Chappell said: the need to match its liabilities, with most of its policy-holders being in the US; the very long time horizon of those liabilities – policyholder payments must be made over 50 years and even 80 years in some cases; and the need to give comfort to reinsurance counterparties.
Chappell is open in principal to increasing emerging market debt positions, which would be funded by selling US corporate credit holdings. Indeed, he had said in September that he saw potential opportunities in Asian bonds.
“If we invested in emerging market investment grade [names], we would have to be sure it wouldn’t get downgraded at any point,” he said. But the final decision lies with its individual portfolio managers.
Resolution Re had already reduced risk a little in response to the Covid-driven market volatility in March, by increasing its cash allocation by 0.5 percentage points by selling corporate bonds. It also reduced exposure to energy names by 0.5 percentage points, using the cash to buy more defensive names, notably financials and consumer non-cyclicals, to take advantage of yield opportunities in those sectors.
Meanwhile, Resolution Re’s parent, Resolution Life, is growing its business. It will soon incorporate Resolution Life US, a life and annuity business with $26 billion in assets under management that it acquired from US group Voya Financial in a deal announced in December 2019.
The transaction is yet to close, so mandates are still to be migrated to managers selected by Resolution Life, on which Chappell declined to comment.
Resolution Life also has an Australasia unit, which has $20 billion under management.