Investment disclosures

AGGREGATE INVESTMENT HOLDINGS ACROSS THE MARKET AND TRENDS OVER TIME

The following charts show the total invested assets and cash, and the aggregated allocation of each asset as a proportion of total investments and cash at 2020 year end.

Total invested assets & cash

Aggregated investment holdings

Across the 100 insurers in our review, the combined total amount in investments and cash had been broadly stable from the 2016 year end to the 2019 year end, ranging between £181bn and £184bn. However, this total amount has increased over 2020 to £194bn at 2020 year end.

There have been increases in the amount of combined assets in collective investment undertakings, corporate and government bonds, cash and holdings in related undertakings, partially offset by a £1.2bn reduction in the total amount invested in equities.

How aggregated investment holdings have changed over time

This chart shows how the aggregated allocation of each asset as a proportion of total investments and cash has changed over time.

In aggregate, 66% of assets were held in either corporate, government or other bonds as at 2020 year end. This proportion has remained broadly stable over time.

The total proportion of investments and cash in collective investment undertakings is 15%, up from 14% at 2019 year end and 10% at 2018 year end.

Collective investment undertakings are pooled funds that allow investors to access a wide range of investments in an efficient way. These funds can cover a variety of asset types and the QRTs are not sufficiently granular to allow more detailed analysis into the investment types being invested in.

On average, 3.7% of invested assets plus cash were held in equities at 2020 year end. This percentage has been decreasing over time from 6.2% at 2016 year end. The aggregate amount held in equities at 2020 year end was £7.2bn, down from £8.4bn at 2019 year end.

Some of this reduction in insurers exposures to equities has been driven by a reduction in equity values, and in particular over the year to 31 December 2020. However, some of the reduction is driven by strategic decisions taken by firms to move away from equities.

How the proportion of firms investing in each asset type has changed over time

The following chart shows the proportion of firms invested in each asset as at each year end. This is less impacted by movements in the market value of assets, and can highlight strategic decisions made by firms to invest, or not, in certain asset classes.

Of our sample of 100 insurers, 29 held some equities at 2020 year end, compared to 41 at 2016 year end.

Ecclesiastical disclosed a reduction in market risk over the year, which was predominantly the result of reduced equity exposure following significant falls in equity markets in the first half of 2020. Despite some recovery in the second half of the year, the equity exposure at the end of 2020 was still significantly lower than at the end of 2019.
NFU Mutual’s investments in equities reduced from £4.1bn to £3bn over 2020. Its market risk also decreased over the year. NFU Mutual notes that the reduction in its SCR is primarily due to a combination of falls in the equity market and re-positioning of some equities assets into corporate bonds in response to the volatile stock markets.
The proportion of RiverStone’s investments and cash in equities decreased from 21% to 15% over the year. It disclosed a deterioration in investment result which predominantly reflects unrealised losses across the equities portfolio during the year, primarily due to the impact of the COVID-19 global pandemic.
XL Insurance’s invested assets in equities reduced materially from £203m in 2019 to £12m at the 2020 year end. It disclosed net realised losses on investments of €35m (£31m) in 2020 which was driven by the strategic decision to withdraw from the equity market resulting in the sale of equities in volatile market conditions.

89% of the insurers analysed hold some amount in corporate, government or other bonds, and most firms (75%) hold at least some amount in collective investment undertakings.

The proportion of firms invested in property has been increasing gradually over time from 18% at 2016 year end to 21% at 2020 year end.

CHANGES IN INDIVIDUAL INSURERS’ INVESTMENT HOLDINGS

In addition to material changes to some firms’ equity exposures already discussed, some firms saw material changes to other asset class holdings over 2020, including:

BHSF’s proportion of cash increased from 18% at 2019 year end to 38% at 2020 year end. Its SFCR notes that the reduction in claims caused by COVID-19 has boosted its cash reserves significantly, although noting that future claims volumes may reduce this going forwards.
Fairmead stopped investing in collective investment undertakings, previously accounting for 96% of its investments, and increased its investment in government and corporate bonds from 0% to 92%. It notes that its previous investment strategy was to hold a multi-asset investment portfolio comprising of government bonds, corporate bonds, equities and property. As at 31 December 2019, as part of the sale of the company, all investments were transitioned into a LGIM Sterling Liquidity Fund and, in January 2020, investments were transitioned into a portfolio containing government and corporate bonds.
Sabre reduced the proportion of its investments in government bonds from 90% to 52% and increased its proportion in corporate bonds from 0% to 35%, having widened its investment guidelines to allow a more diversified portfolio.

Range of asset allocations across insurers

The following chart shows the range of investments held in each asset class across our sample of insurers at the 2020 year end.

The proportion of each firm's investments in each asset class varies significantly. Some firms hold 100% of their assets in cash, such as Financial & Legal, whilst others hold more than 99% of their assets in collective investment undertakings, such as Aviva International and British Gas.

Holdings in equities, property and derivatives are, on average, much smaller than holding in other asset classes, however actual holdings can vary considerably for individual insurers.

Four firms hold more than 10% of their total investments in property. Two of these, Equine and Livestock and RAC, hold the majority of their remaining assets in cash. The other two, Ecclesiastical and Zurich, have very varied investment strategies, with assets invested in every Solvency II asset type.

Partner Reinsurance holds the highest allocation of derivatives in our study, at 38%. It notes that it employs a hedging strategy utilising derivative financial instruments to reduce net exposure for its main foreign currency exposures.

The firm with the next highest derivative allocation is Irish Public Bodies, at 7%.

ESG INVESTMENT CONSIDERATIONS

This year, many firms we analysed have reported concentrating efforts on sustainable investment practices. Some firms have made commitments to reduce their exposure to fossil fuels, energy exploration and extraction and other carbon-intensive sectors. Others have strengthened their ESG standards, integrated ESG criteria and considerations into their investment strategy and investment manager selection, and developed specific risk appetites for ESG investments.

Examples of firms that have mentioned integrating ESG criteria and standards in their investment strategies and practices include:

Aspen noted that during 2021, it will further develop and embed its corporate and social responsibility, and sustainability strategy, including its ongoing initiative to map the investment portfolio to ESG factors and integrate ESG criteria and considerations within its investment process.
Bupa has advanced its corporate responsibility and sustainability (CRS) agenda, developing its position on ESG. Bupa has strengthened its ESG standards for its Return Seeking Asset (RSA) portfolio, in addition to creating a climate change committee.
DAS Legal Expenses’ investment committee uses the MSCI ESG rating system to balance its investment portfolio and has a specific risk appetite for ESG investments. Its investment portfolio was also specifically tested against the PRA climate change stress tests for its resilience.
Ecclesiastical operates an ESG overlap on its investment strategy.
SCOR UK has put in place strong monitoring of ESG criteria when managing assets, based on exclusions of issuers most exposed to sustainability risks and ESG screening of assets in which the Group invests.
Tesco Underwriting introduced additional investment guidelines during 2020 in order to manage the transition of the investment portfolio to a lower overall carbon footprint, mitigating the risk to value from over-exposure to carbon-intensive sectors.
TransRe London has established a task force on ESG. Its initial priorities include an assessment of ESG (particularly carbon-sensitivity) factors in investment portfolios.
UIA notes that its investment managers incorporate ESG dimensions when considering asset purchases.

Other firms have made specific commitments to reduce their exposure to carbon‑intensive sectors and/or increase their exposure to renewable energy sources. Many of these firms have specific criteria to exclude certain types of issuers from their investment portfolios. Several firms also mention that they are looking for their investment managers to specifically consider ESG factors and provide ESG risk ratings.

Examples of firms that have made such commitments include:

AIG Enterprise Risk Management (ERM) monitors climate risk as part of their emerging risk work. AIG ERM has benchmarked the AIG UK investment portfolio against the wider corporate bond market and, as planned, its portfolio has shown a reduction in exposure to fossil fuel production and power generation and an increase in exposure to renewable energy generators. Its investment function is also looking at external vendors who provide ESG risk ratings as well as climate risk related ones.
Hannover Re notes that it has no direct equity investments within the energy and fossil commodity industry. It also signed up to the UN Principles for Responsible Investment in December 2020 and has developed a Sustainability Strategy. It is also considering involvements in fossil fuels and reducing its exposure accordingly. It actively excludes issuers from its investment portfolio that derive more than 25% of annual revenues from thermal coal extraction and power generation.
RSA Group (where Marine, RSA and RSA Reinsurance are subsidiaries) considers ESG factors in the management of its market and credit exposures. When reviewing investment managers, it takes account of their approach to sustainable investing, including voting policies and engagement. The Group considers factors impacting climate change and has made a commitment not to invest in: - Projects relating to energy exploration, extraction or production in the Arctic or Antarctic regions; - Projects relating to exploration, construction or operation of coal mines commissioned in 2015 or later; - New investment in thermal coal, oil sands and shales projects and pipelines; and - New investments in power utilities that generate more than 30% of revenue/capacity from thermal coal power generation, except where a transition plan indicates the company will be below the 30% threshold within three years.
Scottish Widows Group (where St. Andrew’s and Lloyds Bank GI are subsidiaries) launched its Responsible Investment Framework in March 2020. The Group also commenced a £2bn investment in BlackRock’s Climate Transition Fund (which delivers around 50% carbon reduction compared to benchmark) and announced a commitment to divest at least £440m from companies that do not meet its ESG standards (including manufacturers of controversial weapons, UN Global Compact violators and those deriving more than 10% of their revenue from thermal coal and tar sands extraction).

In addition, British Gas noted that there is a risk to the market within which it operates, from a potential move from gas to other forms of energy such as electrification. Its SFCR notes that it is less exposed to transition risks arising from moving to a greener economy which could lead to a large fall in asset values in some sectors as it invests in short duration, high-quality fixed interest securities and deposit-backed investments.