Diversification in detail
The evolution of Helvetia’s giant bond portfolio
The evolution of Helvetia’s giant bond portfolio
How the insurance group diversified its fixed income holdings.

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Helvetia delivered a CHF 1.8bn investment result from financial assets and property in 2021, over double 2020’s figure of CHF 840.6m.

It did so despite a -2% return from CHF 34.5bn in interest-bearing securities, which make up 63.3% of its CHF 54.4bn portfolio.  

CIO and executive management member André Keller explained to Citywire Switzerland how Helvetia has balanced its considerable bond allocation with the low interest rate environment.

The core of his portfolio is assets which generate cash flow which the company needs to hedge liabilities. This is made up primarily of bonds, high-quality loans and real estate.

It then has a smaller return-seeking part of the portfolio, featuring equity and private debt, amongst other asset classes. This article examines how Helvetia’s bond portfolio has changed in recent years, and what some of the bonds have been replaced with.

The giant debt portfolio

While the 2020 majority acquisition of Spanish insurer Caser increased the bond portion of the portfolio, Keller said that Helvetia had been decreasing its bond allocations.

‘We had started to diversify slightly away from bonds into real estate and other kinds of fixed income, such as direct lending, private debt, infrastructure debt and senior secured loans,’ he said.

He expects Helvetia’s bond allocation to slightly decrease going forwards.

In addition, the company’s investments in mortgages decreased to CHF 4.1bn from CHF 4.6bn throughout 2021.

In June, the Swiss National Bank hiked interest rates for the first time in 15 years. However, rising interest rates were already depressing the value of Helvetia’s interest-bearing securities, which led to the company’s investment volume declining by CHF 1.3bn in 2021.

This does not mean that Helvetia has to make drastic changes, according to Keller.

‘Our bonds are asset liability matched on an economic basis. If interest rates or inflation rise, that doesn’t mean our economic situation is impacted. We are currently pretty matched on an ALM basis, or even slightly short duration.’

Still, the coronavirus pandemic demonstrates that Helvetia sometimes needs to tweak its portfolio in response to economic developments.

‘It was March 2020, and many of the maturities of derivatives transactions were happening at the end of the quarter. This provided an insight into how much you should spread your overlay programme, for example, over the year to different maturities.’

The bonds are changing

While the types of bonds that Helvetia is buying have changed, high yield has not been the main beneficiary.

‘We would be open to increasing allocation to the high yield segment if we saw a more attractive valuation. We have increased allocation to senior secured loans and direct lending to middle market companies. Most of these transactions are equivalent to a B or BB rated bond.’

Helvetia’s bonds are mainly allocated to Switzerland and Keller said that its exposure to emerging market countries remains small. However, it has been diversifying across developed markets.

‘We have increased diversification across different countries over the last 10 years through acquisitions and evolution in the Swiss franc space. We have diversified more into the US dollar, and also to the US, European Union and the UK to some extent.’

The Helvetia Group has entered the green bond market, both as an issuer and purchaser.

‘As Helvetia insurance company, we have issued a green bond, where the proceedings will be invested into environmentally friendly buildings. On the investment side, we have started to invest in green bonds too and will continue doing so in the future.’

Private debt has risen to around 2% of total investment volumes but was almost zero five years ago.

‘It will increase by approximately 1% over the next few years,’ said Keller.

This increase has required the company to bolster its expertise.

‘We have not hired staff to directly underwrite these structures, we work there together with external asset managers. We have increased our capabilities in selecting and monitoring these managers.’

It spreads its private debt exposure to around 20 managers. Keller said that this gives exposure to hundreds of single loans, which he views as broadly diversified.

While he cannot name individuals, he said that Helvetia focuses on top quartile managers from the best-known names in private debt.

Helvetia started increasing its allocation to infrastructure debt three to four years ago. While it has increased across the board in its European balance sheets, it is still under 1% of the portfolio.

‘There are two driving factors. Firstly, this is the underlying cash flow process derived from real assets. We believe in this monetary regime a real asset allocation and infrastructure as an economic sector make a lot of sense.

‘In addition, due to evolution in the regulation concerning solvency, it has become more attractive. As an insurance company, we are obliged to hold capital against our investments.’

Property and equity driving returns

As bond yields languished, Helvetia’s returns came from equity and property.

CHF 2.9m of the portfolio, or 5%, is made up of equity, which delivered 18.7% returns in 2021. Its holdings are primarily large cap, and a core part of that is Swiss equity. It has rotated away from technology stocks as inflation has picked up.

Following strong performances from equity markets in recent years, Helvetia has realised gains, which contribute to its cash flow.

In tandem, the insurer’s investments in property have risen to 15% of the investment structure, totalling CHF 8bn.

CHF 6.7bn of that is in Switzerland, and Helvetia owns the buildings directly. Most of Helvetia’s property holdings are residential.

‘Even if higher interest rates limit some of the increase, I believe that in Switzerland, we will still have immigration and demand for residential and, to some extent, commercial real estate.

‘On the supply side, while there is a lot of building going on, the number of permits has not increased in the last year. I do not expect a property crash.’

It has also been making use of this expertise by launching Helvetia Asset Management, a subsidiary which manages a Swiss property fund.

In its 2021 annual report, Helvetia said it would sell CHF 297.8m worth of real estate to this fund.

‘The return-seeking part of our portfolio, which is equities and the likes of private debt, has always been a small part. It has been a valuable part over the last decade,’ Keller said.

Helvetia’s total exposure to investment funds rose from CHF 5bn to CHF 6bn in 2021. While they make up an important part of the portfolio, Keller believes he has a different mentality from them.

‘Fund managers could learn from insurance’s long-term thinking because I do not need to beat a benchmark every day. I believe this is valuable when constructing a portfolio to be resilient through periods of volatility.’

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