Aspen CIO: Asset managers must be agile, innovative and operationally resilient
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Towards the end of 2021, the global energy crisis began in the aftermath of the Covid-19 pandemic and the cost of living increased sharply in many countries, including the UK.
Around that time, Aileen Mathieson joined Aspen as its group chief investment officer, leading a team of eight - five investment managers and three people dedicated to investment accounting and operations.
Mathieson joined the specialty insurer at a time of market turbulence, so looking after the firm’s balance sheet is no easy task. How does she develop the investment strategy of the firm with $7.1bn investible assets?
Speaking to mallowstreet, Mathieson explains the insurer’s rationale of how different investments are made across the different geographies in which it operates, the firm’s sustainability approach and what attributes she expects asset managers to hold.
Correlation between liquidity and geography
Aspen’s balance sheet is split into three geographies: Bermuda, the US and the UK. In the UK, for its Lloyd’s Syndicate (Aspen Syndicate 4711) and for Aspen UK, Aspen invests 100% in core fixed income.
“This investment reflects the liquidity dynamics and the capital regime for the Lloyd's syndicate and Aspen UK. As our syndicate grows, we may consider introducing equities or, for example, alternatives. Currently, it's 100% liquid through the fixed income portfolio,” she says.
For Bermuda, the company makes the majority of its investments in core fixed income and a combination of structured products, commercial mortgages and some high yield products. In addition to having illiquids and alternative assets, Aspen in Bermuda provides some funds at Lloyd's for the syndicate.
“In Bermuda, we have more flexibility to have more return-seeking assets,” she explains.
For its US entities, the majority of assets under management are invested in core fixed income, with the remainder allocated across structured products, private debt, commercial mortgages and commercial real estate.
“We have a broader range of higher returning, more illiquid assets in our US entities, reflecting the growth stage of these entities,” she notes.
Mathieson says the firm’s investments are less liquid in countries outside the UK.
“The distribution of our assets across the various portfolios is mainly driven by liquidity profiles, the capital regimes and requirements for each entity, and the strategic plan of those business units. We want to make sure the investment portfolio aligns with Aspen’s business plans, so this means we support different approaches to different portfolios, depending on the nature of the insurance and reinsurance risks written.”
Earlier this year, Aspen become a signatory of the United Nations-supported Principles for Responsible Investment. At the time, Mathieson said the six principles aligned closely with Aspen’s environmental, social and governance strategy. What else has the Bermudian insurer done as a responsible investor?
As a property and casualty insurer, she views the company is “relatively well placed” when it comes to ESG but compared with UK life and pensions insurers, she thinks the overall P&C sector is “somewhat behind”.
Despite this, Mathieson says: “We’re very clear about where we feel we can integrate ESG as part of our investment decision making in terms of which asset classes to invest in.”
Aspen has two primary considerations when adopting ESG into the process.
The first one is the availability of data to not only assess the ESG characteristics at the point of investment but also to monitor them as time goes on.
The other aspect is that, due to the nature of insurance businesses and how they link their assets to liabilities, Mathieson says the ability to choose freely which investments the company can put collateral into “can be somewhat restricted”.
“For me, when considering how to incorporate ESG into the investment strategy, it is as much about the decision to invest as not to invest in a particular asset class and, in some trust accounts, we are constrained in the asset universe and allocation limits,” she explains.
“For example, we exclude US Treasuries from ESG integration because the largest proportion of US Treasuries are in trust and collateral accounts. However, we apply ESG integration into corporate bonds, private equity and commercial real estate strategies. We currently exclude structured products, but we are looking to improve that as the underlying ESG data become more available.”
Aspen also makes regular reviews with third-party managers when it comes to ESG considerations, Mathieson says.
“For example, for corporate bonds, we discuss the ESG profile of the portfolio on a monthly basis with our managers. We perform deep dives into particular names. We sample some of the ESG ratings and look behind these into the rating analysis.”
US banking sector and Fed are top of agenda
Just weeks after the collapse of Silicon Valley Bank, California-based First Republic was seized by regulators and sold to JPMorgan Chase.
Mathieson says Aspen does not have exposure to these banks, but the recent events in the US banking sector are top of her mind as the team needs to ensure exposure is minimal at both primary and secondary levels to avoid any disruption in that sector.
“We work with all of our managers to ensure we understand where any of the underlying investments have any exposure and, if so, how that position is then managed. It’s certainly not 2007 again, but recent events have inevitably caused increased volatility and some credit reaction in the market.”
Any developments regarding interest rates set by the Federal Reserve are another priority for her.
“Reflecting the consideration that we probably will have a harder landing for longer as a result of the impact of higher interest rates and recent market movements, we make sure we have a high quality, highly rated portfolio from a credit ratings perspective and monitor that with our managers,” she says.
“Ensuring that the corporate bond portfolio, for example, isn’t over-exposed to sectors, which could be particularly impacted by a harder US recession than was anticipated six months ago.”
Three key attributes from asset managers
Aspen works with a number of managers to look after its assets. What attributes does the firm look for from managers?
Mathieson looks for three criteria: agility, innovation and operational resilience.
“The first is to have an agile and robust investment process, so they can respond and take advantage of market developments. That's been critically important in the environment of the last 12 to 18 months. Agility in identifying and executing against opportunities and threats ensures we can optimise our portfolios in volatile markets.”
She also expects managers to be innovative and forward-looking.
“That’s often overlooked. Innovation in terms of not just what we invest in, but how we invest is really important, particularly when you're looking at capital efficiency.”
Another attribute that is also overlooked is operational excellence, she says, which she considers essential to the overall strategy.
“You can have a robust investment process and innovation, but if the manager cannot do the basics or has operational issues, that can be a massive distraction for the investment team. It is often overlooked, but it's actually a very important component of a manager’s capability to make sure we get it right.”
What do you expect from your managers?