AXA IM: Insurance Investment Outlook 2024

AXA IM: Insurance Investment Outlook 2024

January 9, 2024

Outlook Insurance companies
Outlook vooruitzicht (01)

AXA IM recommends a phased investment approach for insurers for this year, starting with rebuilding book yields while managing duration and reinvestment risks. For the second phase, AXA IM advocates for credit derivatives or active fixed income ETFs and recommends actively managed short duration strategies for riskier market segments.

For 2024, AXA IM sees three main areas for insurance companies to consider: decelerating but still high inflation; higher for longer – albeit more volatile – but expected to ease interest rates; and liquidity risk. In this context AXA IM recommends taking a phased approach while bringing an element of sophistication in the management of insurance fixed income solutions.

In phase one, we prefer to stay on the safe side given the uncertainty on the economic outlook and to focus on rebuilding book yields and managing duration and reinvestment risks. The biggest part of yields is the risk-free rate currently, and long-duration high-grade assets offer a decent investment income, well above average book yields.

Combining bond investing and interest rate swaps can free some capacity to also exploit multi-year-high yields in the investment-grade credit space while remaining defensive and shorter in credit duration. As always in the credit space we advocate for both selectivity and diversification outside the domestic market to mitigate volatility and drawdown risks.

Forward swaps – another type of derivative - or forward bonds are potentially useful to hedge reinvestment risk and secure future investment earnings and the beauty is they can be structured in a way that is less painful from an accounting standpoint. Setting up a robust liquidity and collateral management framework is key.

Phase two is contingent upon less uncertainty or risks materialising with wider spreads across the credit universe, potentially using credit derivatives or active fixed income ETFs to increase credit beta exposure and capture volatility spikes.

In the riskier market segments, i.e., high yield and emerging market debt, we continue to prefer actively managed short duration strategies which exhibit higher returns on capital, lower volatility and drawdown risks and a better liquidity profile. We are probably not there yet but better to get prepared to catch opportunities across the risk spectrum.

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