Inflation: an opportunity to improve the credit quality of portfolios

In recent years, investors have had to take risks to achieve attractive returns against a backdrop of low interest rates. Investing in equities, assuming credit risk, selling options were ways of achieving attractive returns against a backdrop of very low interest rates. The interest rate hikes we have seen by central banks and the upturn in all sections of curves over the past year have seen this situation change drastically. Following the downturn in price registered in 2022, fixed income has returned to the fore.

In the opinion of Javier Lendines, General Manager at MAPFRE AM, now is the time to take advantage of market circumstances and increase returns on investment portfolios, assuming lower risks than those assumed in previous years. This is what he said at the “2nd Conference of CFOs and Investment Directors in the insurance sector”, during his speech at the “Main challenges and opportunities in investments in the insurance sector” session, organized by the ICEA.

“It is much easier to work with interest rates of 3.5% than 0%. It is important to take advantage of the opportunity posed by these interest rates, which we have not seen for years”, he asserted, saying that it was necessary to adjust portfolios to the duration of the liabilities after a few years in which durations may have been quite low.

Lendines emphasized that MAPFRE AM has opted for the "short part of the curves" in recent months with the launch of various products, including the guaranteed fund FONDMAPFRE GARANTÍA V, which guarantees 100% of the invested capital and coupons of 3.2% (3.01% APR).

Higher interest rates also make it possible for investors to reduce the risk of their portfolios without sacrificing profitability. "Now it is not necessary, you can improve the credit quality of the portfolios and take a look at assets such as infrastructures or 'private debt', which now might offer better opportunities for gradually improving the profitability of portfolios", he asserted.

Inflation remains a problem

Although inflation rates have been easing across much of Europe and the United States, they are still well above the target level set by central banks. And the insurance sector is suffering the impact in the income statement.

Faced with this situation, Lendines asserted that it is important to continue working on reducing costs. “The Spanish insurance sector is known for doing things particularly well. It is very competitive and efficient”, he pointed out, going on to specify that the increase in costs does not affect all lines of business equally: the most affected line would be health and motors when compared to life, which is the line where this increase in inflation is being noticed the least.

Sustainable regulation

Regarding the sustainability regulation pursued by the European Union (EU), Lendines mentioned the workload that this entails for the different teams (risks, regulatory compliance, reporting, investment managers, etc.) to ensure compliance with the EU guidelines to this end, in particular on account of the lack of data standardization.

MAPFRE AM has two Article 8 funds, MAPFRE AM Inclusion Fund and MAPFRE AM Capital Responsable, and the idea is to expand on this figure. “We don’t want to get ahead of ourselves”, he concluded.