By Hamlin Lovell, NordicInvestor

This article is a part of our 2021 Nordic Insurance Report. The full report can be found here

NordicInvestor interviewed SEB Life and Pensions´ Group Chief Investment Officer, Pontus Bergekrans (pictured above), and Mikael Nyberg, Head of Fixed Income (pictured below). SEB Life and Pension manages around SEK 300 billion (affiliates such as Gamla Liv, and other companies in the Baltics and Ireland, manage assets separately).

A Lower for Longer World and Strategic Asset Allocation

–  Moving from fixed income and liquid credits to alternatives and illiquid credits

“The low interest rate environment of the past five years has increased our allocations to alternatives and illiquid assets, to earn illiquidity premia. We already have a high proportion in alternative assets, with some portfolios as high as 40% in illiquids, including a broad spectrum of exposures, but are not at this point increasing the allocation much more to this area. Our focus now is diversifying by asset classes and risk premiums,” says Bergekrans.

This includes quite a wide range of return targets. For instance, “our return target for private debt is roughly between 4% and 10% depending on underlying risk, maturity and strategy,” says Nyberg.

“We are somewhat increasing private equity, venture capital, infrastructure, distressed debt and real estate, especially assets and managers with a clear sustainability angle, and we are somewhat decreasing classic fixed income and credit such as senior secured loans because credit spreads have come down so much. But the changes overall are quite limited,” says Bergekrans.

For instance, there is still exposure to more traditional fixed income: “covered bonds can offer some yield pickup over government securities, with a slightly higher Solvency II charge,” says Nyberg. 

Corporate Credit Risk

“We are not sure on the outlook for defaults and downgrades. If we get recovery and economic normalisation, there may not be a material change. However, the market may be too optimistic, so we are allocating more to distressed debt, which may benefit from scars in some sectors,” says Bergekrans.

Inflation risk

Going forward, the question is whether the macroeconomic climate will see a regime change: “Our biggest challenges are understanding the path to economic recovery and normalisation at macro and micro level; working out whether monetary and fiscal policies will lead to actual inflation or just inflation expectations,” says Bergekrans.

Active versus Passive Management

“We use mainly active management and have found very few passive options in alternatives. We use some passive index tracking approaches for classic equities and bonds in areas such as broad global indices, or strategies close to indices. But we are increasingly investing in sustainability focused indices. Most indices are externally managed though we do have a few in house,” says Bergekrans.

In house versus external management

“Strategic and tactical asset allocation, risk management and interest rate overlays are managed in house, but external managers are used throughout. We use many ways to get exposure, such as mandates, funds and derivatives, to build optimal portfolios.”

ESG – priorities

“Sustainability could be the new lower for longer trend. Sustainability is one of our biggest challenges, both in terms of fulfilling new regulations and investing in the right places to connect to the trends,” says Bergekrans.

ESG – coverage

“ESG applies across all allocations, but levels of transparency do vary amongst managers around the world. It also varies by asset class. It is easier to get ESG data for equities and corporate bonds because it can be easier to measure companies’ carbon footprints. It is more difficult to apply ESG to some asset classes, such as government bonds, because it is harder to pinpoint how sustainable they are. This is improving as Sweden’s Government has issued green bonds and we would welcome more ESG transparency from sovereigns. Green bonds are part of the portfolio,” says Bergekrans.

“ESG is not specifically applied to currencies, but we mainly hedge currencies back to SEK anyway. Some legacy private equity strategies that we invested in many years ago would not meet our current ESG ambitions, and these are now in run off mode,” says Bergekrans.

ESG – client reporting

“As a leading player in the market we have a high ambition on ESG, including new EU policies. We have labelled our traditional insurance and unit linked products as category 8 (“light green”) under SFDR. We are also providing transparent reporting to clients in response to their demands. Our ESG reporting is both internally to the board and externally to clients. We are waiting for more regulatory clarity on the EU taxonomy,” says Bergekrans.

Solvency II Framework and Reforms

“Many of our ambitions are longer term, and many of our strategies such as infrastructure and also products are also longer term – we do not provide daily liquidity on all products,” points out Bergekrans. 

SEB uses the standard Solvency II model and would welcome reforms: “Solvency II capital charges are disproportionate and too short term. They are too low on low risk fixed income (basically zero for government bonds) and too high on higher returning assets, such as equities, or alternatives, such as infrastructure and private equity. These assets are more sensible for a long term investor over 5 years, and the charges should be lower for longer holding periods,” says Mikael Nyberg. “Solvency II risk weightings make it difficult for us to make long term investments in infrastructure. If there was a lower risk weight, we could allocate more to it. This is just one example where Solvency II is too focused on short term risks. We know our assets and clients are very long term and there is a risk for pensions and savings that the industry does not invest enough for the long term,” says Bergekrans.

It is also difficult to provide look through reporting for assets such as infrastructure and private equity, which can be very strong on ESG as well as impact,” says Bergekrans. This situation may be improving in some cases: “Transparency can reduce Solvency II charges. Asset managers are getting better at providing line by line transparency and risk data than they were a couple of years ago. There are different templates for doing this,” says Nyberg.

The Pandemic: Remote Working, Volatility and New Manager Engagement

More frequent meetings are balanced against it being more difficult to get an integrated team spirit and engage with new managers: “The biggest benefit of working from home has been that it is easier to gather the team for a short 15-20 minute update meeting, without having everyone in the same room. This was important at the start of the Covid crisis, and allowed us to make decisions quickly. Higher market volatility in 2020 led us to meet more often, and we made some small changes to allow for remote decision making.  It is also easier to share research and market intelligence. The biggest disadvantage is that it has been harder to integrate new team members, and get a team working feeling in terms of wider group dynamics,” says Bergekrans. “We have deepened our relationship with existing external mangers, but it has been harder to contact new managers and prospects,” he adds.