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Over a dozen Chief Investment Officers and other financial, treasury, and investment professionals from some of the biggest and most innovative P&C, life, run-off, and other insurance companies in the US, Bermuda, and Canada have taken part in the inaugural meetings of the Insurance Investor advisory board.
The body, designed to be an anonymous sounding board for those in the industry to share thought leadership and discuss day-to-day issues in granular detail, convened for the first time in Q1 2024, with separate meetings for those in the UK and those in Europe.
The discussions covered three main questions:
The consensus, unsurprisingly, was that the current situation was dominated by the interest rate environment and the causes and effect it had had on the wider financial system.
“Rate levels are helping compared to two years ago. However, tighter spreads are not helping,” said one participant – who added that, partly for this reason, they were looking to invest in long-duration assets.
The participant added that they were an active user of derivatives, “but the accounting volatility that comes with that is often hard to get right in accounting and collateral requirements,” which “gives you a lot to think about”.
“Those yields look attractive on an all-in basis, but I’m not excited
by what the spreads are earning."
“Everything feels like it’s priced to perfection,” said the board member, discussing how prices were prone to sizeable movement based on “any nugget of information and potential outsized swings”. This also meant they were seeing “a lot of fragility” currently.
There were also prevalent worries that there could be an event or a correction where prices moved to a new level. In the longer-term, they were, however, “looking forward to that correction” – but didn’t know “what it [would] go to.”
The idea of going longer on investment was common amongst several participants who spoke about matching long-dated liabilities. They also looked at the state of long-dated corporate bonds, and what could be done with them. For example, “how many can you buy with very tight spreads?” was a question that arose.
“Those yields look attractive on an all-in basis, but I’m not excited by what the spreads are earning,” said a board member. Others said they were looking at high-quality assets, but “the spread is being pushed.”
“In private markets there’s not a lot to invest in, but the fundamentals of the opportunity are good,” added another participant.
An investment manager at a life insurer’s asset management arm said that, for them, the yield environment meant they were able to harness income for the future due to higher rates. “For life companies, [it’s about] interest rate considerations and budget losses appropriately as rates come down and being buyers as money moves back towards risk assets,” said the investment manager.
She added that the biggest challenge in Q1 2024 was the spreads seen recently, which were originally noted in public markets and now in private markets. Rotation opportunities were constrained, she continued, and were “hit on a more immediate basis” – but these two aspects made it a much better investment environment.
“Solvency requirements across regions and continents
are making huge changes."
Looking at the macro markets, there is a lot of concern on pockets of vulnerability; as a result, private credit was a major focus due to leverage, especially as it comes to a period of refinancing and repositioning. “There’s no one size fits all for insurers,” said a board member.
The Head of Treasury and Investment at a P&C insurer said the current state of the market meant they were allowed to take on more risk – particularly in derivatives and short duration – and ability to earn income. “Solvency requirements across regions and continents are making huge changes,” he said.
He added that his company was struggling to hire young professionals who were interested in and understood investment – particularly in derivatives – especially when rates weren’t at zero. “We’re having to look into other skill-based areas for hires, like actuarial,” he explained.
Almost all participants also mentioned the upcoming US election. While they stuck to the sentiment that it would have little effect day-to-day on markets, they also agreed that swings in regulations and taxes would likely have a mid-to-long-term impact.
“There are many uncertainties – geopolitical uncertainty, the US election, for example,” said a Chief Investment Officer from a reinsurer. “We’re waiting to see what happens with the election, as it is the most bizarre we have seen in a long time.”
“The potential election impact [could be] if pensions had exposure to equity markets – for example, if there was a sudden drop in the equity markets,” said a participant from a life insurer.
Others also discussed the ESG issue – specifically how it had been politicised in the US environment and what changes and challenges it faced to be made more mainstream and gain widespread acceptance. “We’re in the infancy stages of sustainability,” said a Chief Investment Officer at a life insurer. “We’re feeling the backlash.”
A separate investment figure, from a P&C insurer, said that they had changed their terminology – partly due to the backlash around ESG but for a mixture of other reasons as well. One was that the new terminology fit their ethos better.
They also put more restrictions in place on what they could invest in. “We have a big theme around responsible investing,” they said. “Especially given changes happening in Europe, [we’re] very targeted and active in this area and we’re aiming to reduce carbon emissions in our portfolio by 25% by the end of this year.”
“It’s not about predicative returns, it’s about the long term – and great returns set expectations,” said a P&C insurer. “Risk names have done exceptionally well, which shows an expectation of a Republican presidency as economic policies align more closely with stimulus measures.”
A life insurer's Chief investment Officer said that setting expectations at the board level whilst rates went down in fixed income was important. “[Make them] understand what the process means and how it works [and] have a sensitivity analysis,” she added.
She recommended moving away from predictability analysis to assess data based on the sensitivity of assets held, to ensure that they continually update forecasts and only rebalance when absolutely necessary.
For the second question, which focused on macro themes emerging, the US Federal Reserve’s (Fed’s) moves over the course of 2024 was of key consideration. One participant said the timing of Fed rate cuts was key in understanding how to position portfolios in 2024 and 2025 – and especially the upcoming trajectory of private equity and private credit.
“Thinking where yields were in 2019, 2020, and 2021, [they] had to ramp up in 2023, before coming back down. There’s been a lot of re-positioning around inflation and what the Fed plans to do,” he said. “The market was ahead of itself when it came to rate cuts.”
He added that when it “finally” does come to rate cuts, those who “park money in the short end” will be “concerned about ultra-low-rate environment”.
Many others were watching geopolitical themes closely – both from major investors that operated on a global level and for investors that were solely US-based or smaller.
Private credit and bank disintermediation were also raised by the panel. “Private credit portfolio management – to do it well means having to work with the right managers. On top of this, what are the opportunities – i.e., how can we continue to get quality in privates given where public markets are?” one investment officer from a life insurer asked.
“On the riskier side of things, what’s happening with private equity and in real estate with valuations [is one area to watch],” said a Chief Investment Officer.
“Many companies and properties were bought at a time when people were searching for return, so a reckoning is happening, but it happens slowly as working with lenders,” another board member said. He added that funds have flexibility to extend by investors, like insurers and other asset owners], “but conversations are getting more intense, and investors want money back”.
“In most LP/GP contracts it’s favourable to GPs, so LPs don’t have leverage – will we see more secondaries as a way to get liquidity?” was another question that was posed.
The US regulatory pipeline was also something that most participants were carefully monitoring.
On this front, “more activity is going on than [we have] have ever seen,” said one participant. This included several divergent regulatory areas, such as accounting rule changes – including those that affect interest maintenance reserve (IMR) – as well aligning investment risk and capital.
“This should measure the risk of investment and hold capital accordingly, but when you take it down a level, it’s about how to measure risk – statutory risk, economic risk, etc – and I worry that in effort to get something done, that regulators have come up with broad assumptions,” he said.
This CIO added that the fundamental principles of investment risk and capital were “meaty topics” that required deep knowledge and delicate handling.
They were worried, they said, that industry regulators were trying to tackle too much and asked if the insurance industry would be “better served to tackle fewer things and done in a consistent manner?”.
On this topic, recurring issues such as outsourcing were brought up as well as newer issues such as artificial intelligence (AI).
“We need to have quantitative skills and get into spreadsheets and how
to get the most out of data and technology."
One investment manager from a life insurer said that area of general skills was about “running a business that generates results – whether that be in products, asset and loss, regulatory, accounting – and not in a manner that changes on a whim, or that can be sold on the market for a good return on any [given] day”.
This participant added that they wanted to look at automation to cut out repetitive tasks to free up time that could be spent on more important matters. “We need to have quantitative skills and get into spreadsheets and how to get the most out of data and technology,” they said. “This means having flexible thinking across functions.”
Away from technology, others said the future needed to have different skills – and a more strategic mindset – for those working within investment. One recommended “hiring and having a team that’s vastly different and giving responsibility and updates,” and that the current changes pointed to an “evolution of management concept”.
Another said they were emphasising coding amongst new skills and training for their team.
On the topic of outsourcing, one participant said that they were “almost entirely outsourcing” – and were at a stage where they were able to work with third parties and could “see where we’re doing things properly”. Tying it back to recruitment and retention, they needed staff who could work within this model.
The advisory board members highlighted a plethora of issues for investment teams at insurers to worry about, from regulation to geopolitics. However, they also showed a resilient and innovative industry that was fully-equipped to deal with continuing change.
Whilst the challenges of the past few years had been eye-opening in terms of potential risks on the horizon, they had also led to higher profitability in some areas and a bigger war chest for others to continue a path in diversification and supporting new portfolio management strategies.
