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Over a dozen Chief Investment Officers (CIOs) and other financial, treasury, and investment professionals from some of the biggest and most innovative P&C, life, run-off, and other insurance companies across Europe have taken part in the inaugural meetings of the Insurance Investor advisory boards.
The discussions were designed to be an anonymous sounding board for those in the industry to share thought leadership and talk about day-to-day issues in granular detail with like-minded colleagues. They were held in Q2 2024 and, unlike those held in Q1, featured North American and European members mixed together to discuss issues experienced on both sides of the Atlantic.
The discussions covered four major questions:
• What are the top three issues dominating panellists’ thinking today – concerns, aspirations, and hurdles?
• “In 12 months from now, we expect to be investing in… because … and we expect 12 months from now to have reduced our investment or focus on… because …”?
• Which functions, both within an insurance investment team and across the wider insurance business, are you working more closely with, or expect to do so in the future, and why / for what intended aim?
• Insurers as a preferred source of private capital for borrowers: what are the drivers for engaging, hurdles to managing, and most attractive emerging sub-areas – for example, sub-investment grade, asset-backed, social / impact bonds, etc?
Market participants for this question highlighted several key issues. The first was the bifurcation in the market. A US CIO said she had noticed “a lot of companies are doing well, and some things not doing well but when it’s averaged out it looks benign, but this isn’t always the case” – with the market being skewed to the extremely large companies in ‘hot’ industries doing well enough to cover-up losses in less profitable industries.
Examples of this were the technology companies including those involved with Artificial Intelligence (AI), such as Nvidia.
Another key issue was the state of the investment market around financials. A US-based Head of Investment for a global insurer said, “at the risk of being contrary – credit spreads are tight – when you look under the hood there are a lot of constraints,” echoing previous comment on hidden trends below headlines.
“Yes, a few companies are doing well – Silicon valley, AI, etc – and the equities markets are doing well for the next two-to-three years, but on the credit side there are risks,” he said. “Artificial market rallies are pushing some of this.”
Much of the conversation reverted to the much-maligned US office space of commercial real estate. Participants said there had been interesting developments there. Whilst the overarching story was still one of a stretch, as working from home rates meant demand was down overall, it was far more nuanced.
“The office sector is interesting. It’ll require possible municipal/state intervention to bring levels back up – for example, tax incentives."
For instance, several participants said that more eco-friendly offices saw a resurgence in interest and value after being refurbished with ultra-modern environmental facilities that appealed to prestige clients.
Elsewhere, inner-city offices versus suburban offices and business parks occupancy rates were also discussed, with the disparities there showing that offices now had to be ‘destinations’ in themselves to attract workforces back and therefore be seen as worthy investments.
“The office sector is interesting,” said a US CIO. “It’ll require possible municipal/state intervention to bring levels back up – for example, tax incentives. Office space in New York City is still in about the mid-50s in occupancy rate.”
“London is about the same at mid-50s occupancy,” said a UK CIO.
The US CIO said that forcing alignment and underwriting changes could see some pushed out of the market.
Another participant highlighted the differences between big cities and smaller cities as well as differences globally. “Different places have different cultures. My colleagues in Dubai, for instance, tell me that everyone is in the office, and office is doing well as a market.”
On this topic another also mentioned how work-from-home (WFH) was also affecting their team and their wider organisation’s mental health – and how this affected how they thought about this area of investment. They noted that WFH had negatives and positives. Many of the panellists were also adamant that WFH should stay. “Besides,” said one, “the bars next to our office in midtown Manhattan are still packed at 6pm!”
For this question, participants were asked what the next big thing they were looking at was and what it could replace in their portfolio.
“Over the past 12 months we’re going to be lighter on higher yield corporate public bonds. Lower corporate IG I’m looking at. High yield public bonds, I’m going to zero,” said a US CIO.
A CIO from the US Midwest regional insurer added that technology is full of cash flow machines with more cash on hand than anything else. “Regional banks don’t much sense to lend into at the moment.” He said. “We’re building up our own middle market lending structure. There needs to be consolidation in regional banks, and we don’t see material value in investing or lending.”
“We were executing 5% [of potential investments] a few years ago of what we were offered but now we do about 3% so we’re becoming more selective."
“As for middle market lending, we view it as a great access for small businesses. We’ve been there since 2010, and we’re not going anywhere.”
A CIO for a Bermuda-domiciled reinsurer based in London said they were looking to Asia for opportunities over the next while. “We’re focusing heavily on investments there and adding private assets to our portfolio. We started simply and are getting more sophisticated as time goes on,” he said. “We’re focusing on older population markets – Hong Kong, Japan, etc.”
A UK life and annuity Chief Credit Officer said they will focus on credit. “We were executing 5% [of potential investments] a few years ago of what we were offered but now we do about 3% so we’re becoming more selective,” she said. “It’s been a benign cycle and it’s coming to an end. You never know what’s coming next these days.”
For this question, many turned instantly to artificial intelligence (AI) and its place in the ecosystem. Most came down on the side of agnosticism at best. At worst, they said they struggled to find a place for it in their day-to-day business.
“We work in the intellectual property/knowledge industry – so my main thought is ‘who owns the knowledge?'"
“I’m an AI sceptic. It’s a solution looking for a problem. It’s a security risk,” said one US CIO.
A UK-based CIO said, “We’re optimising but not completely changing things.”
A UK-based Head of Financial Risk said that AI “helps make things faster but creates a societal problem”, airing their fears of a backlash against job losses, and that the industry could cause unintended consequences.
A UK run-off insurer’s Head of Investments asked, “We work in the intellectual property/knowledge industry – so my main thought is ‘who owns the knowledge?’"
A US-based pension and annuity VP of ALM said they were also seeing AI integrated into their large company – and that it had been the driving force of interactions with other teams throughout 2024. “We have the most AI exposure in the company and we also work with product. We’re actively developing new products – designing asset allocations for each new product – how do new products affect capital, for example. We also oversee and review everything going into the pricing models, so we’re seeing a lot of crossovers.”
A New Jersey-based Head of Investments said they’d been working also with their tax credit teams as they were offered good tax credits on sustainable/social housing/ESG-compliant residential areas.
Many of the panellists had mixed views on this area – either swearing off of it completely or hesitant to say how much involvement was optimal.
“We have capital to deploy, and the banking industry means that new investment opportunities are coming,” said the UK Chief Credit Officer. “In the US, private credit is there and going to continue so it’s inevitable. Private assets are an asset class we want, but it’s a lot of different aspects around long term liabilities to be considered.”
She added that in Europe, Solvency II reforms make this more viable. “This could mean we help the UK become more productive. It’s a good way for Defined Contribution pensions to be deployed into private markets.”
A UK CIO linked it back to the bifurcation mentioned in question one.
“It’s necessary but not a major concern,” said another.
