“We’re not paid to chase the next shiny toy.”
That was one of the key takeaways from the opening panel discussion at Insurance Investor Live | Spring 2024, last Thursday in Chicago, as several senior industry figures took questions on the big trends they are seeing in the market right now.
“The prediction for multiple rate cuts was a little excessive."
This discussion, titled “Macro views: Touch-and-go, soft landing, or something more severe? Chief Investment Officer (CIO) approaches to asset allocation, stress-testing, and the buffering of investment portfolios”, was moderated by Greg Cobb, Director of Insurance Solutions, Sage Advisory Services, and featured Robert Cataldo, former Chief Investment Officer, United Fire Group Insurance, Angie Cantillon, Vice President, Investments and Corporate Treasury, The Wawanesa Mutual Insurance Company, Nizida Arriaga, Head of Fixed Income Investments, The Auto Club Group, as well as a representative from TIAA.
Unsurprisingly, with the current environment, much of the discussion hedged around the anxious wait for rate cuts and what the industry made of the way the inflation event of the past few years has been handled by central banks and regulators. There was also discussion around the rise of artificial intelligence (AI) as a help or hindrance to investment operations.
“The prediction for multiple rate cuts was a little excessive,” said Bob Cataldo, when asked for his thoughts on what was happening in the market and where he saw 2024 panning out. Upwards of five or six rate cuts had been predicted over the course of this year from the US Federal Reserve (Fed) by many commentators; however, now in May, there has yet to be one. Many therefore point toward ‘sticky’ inflation and a tight labour market, which is still driving up wages and products to level that the Fed is uncomfortable with. In the first week of May, Fed Chair Jerome Powell was quoted by Bloomberg saying that cuts “weren’t coming anytime soon”.
Instead of waiting on rate cuts, Cataldo said he had “made sure [we] had the right duration on book and balancing out credit risk,” as his key concerns were to balance the ‘higher for longer’ environment with what the portfolio needed.
Cantillon, who is based in Chicago but works for Canadian insurer Wawanesa, said she keeps her eyes on the state of the two countries’ rate conditions, and has previously warned that Canada’s mortgage rates could see a crisis unfold – which, in turn, was influencing her decisions.
Arriaga said she saw very volatile fixed income numbers and the “relative value of fixed income is different in historical periods”. It was important, she continued, to review those valuations and look at today’s market through a long-term historical lens. She also noted that she had reviewed historical asset allocation. Because of this, she had “reduced equity exposure and divided that between high yielding fixed income asset classes”.
“The goal is to preserve the surplus and the balance sheet."
Arriaga added that reinvestment risk is top of her mind at the moment. However, when discussing her forward-looking ideas on what the market conditions were doing to her long-term decisions, she reminded the panel that “valuations can be temporary” – which ultimately meant that “Strategic Asset Allocation (SAA) doesn’t change all that much”. “It’s more tactical,” she added.
Cantillon agreed on this aspect of SAA – that it needed to be a long-term project. She added she was “waiting for the dust to settle” in certain asset classes before making any larger moves.
Cataldo, who made the comment on shiny toys, was even more reticent to get involved with current market volatility and said that preservation of good financial standing was more important than any risky short-term gains.
“The goal is to preserve the surplus and the balance sheet,” he said. “The tactic of relative value is more of a day-to-day thing, and it’s hard for long-term investors to make seismic tactical shifts as they need to preserve downside.”
Cobb asked the panellists for their views on risk in today’s market – particularly, what areas of capital were they willing to put at risk? His own view was that the key word in this area was “constraint”.
The answers were varied and focused on a variety of areas, such as how the high cost of living and inflation had swamped consumers’ household budgets, and whether this could see defaults and credit risks exacerbated – and how that would flow from the retail side to commercial.
“Our surplus portfolio is very precious because an insurance company
is not an investment company.”
Cantillon, who has previously said she has focused heavily on infrastructure in this volatile market, said that climate risk was the area she was looking at most closely. “Reinsurance costs are going up, so any re-evaluation of what reinsurance looks like means what does the strategy team need of the surplus portfolio to accommodate growth?”
On top of this, she added, natural catastrophe perils and how they were increasing was another key risk. She also said she was getting increasingly concerned about consumers. For example, there was more work that needed to be done to see and assess customers payments to credit cards – and any reliance on credit should be concerning “given the leverage state of the consumer”.
She added she had a “laundry list of concerns about surplus and liability matching”, as well.
“Our surplus portfolio is very precious,” said Cataldo, "because an insurance company is not an investment company.” He added that his team needed to be “very careful” given trade duration risk. “Talking about and/or trading the illiquidity bucket needs to be very transparent with the management team,” Cataldo said, especially around “return expectations and time frame” as a result. The question was: how do you achieve organic growth?
Cobb’s final question was on whether the AI revolution underway would help with risk management capabilities. Was it, he asked, being used in strategies at all. or was it still too new and untested to be allowed in?
“Data is important,” said Arriaga. “We have systems in the public and private side. There is a lot to come – and once you bring fixed income structured products and private assets into that, the data is really imperfect.”
She added that, on top of that, “it’s always easier to model equity” – which had unsurprisingly now become the best data area at her own company.
Others were more reticent on the topic of AI – with Cataldo acknowledging that there were promising signs, but saying things needed to be monitored by humans to make sure errors were caught as the systems learned. However, he added, certain industry bodies and regulators were developing frameworks to help insurers “cut through the noise”. He urged for more education and communication on this subject from an industry-wide perspective to help achieve better results.
For AI, Cantillon returned to her previous point about natural catastrophe and climate change risk. AI could be a great tool in helping to model effects and changes, she said. It could vastly improve analysis for insurance companies in the future. The trick was getting there.
The panellists all agreed that updating risk management capabilities was the main goal for insurance investment professionals over the next few years, as market volatility continued to hound them. As Cantillon mentioned, one massive risk is that natural catastrophe and risk modelling in the changing natural environment is still largely underdeveloped, and the eastern US remains increasingly vulnerable to Atlantic Hurricanes as populations increase and more expensive infrastructure is built in area.
Elsewhere, with the Fed unlikely to make sizeable rate cuts until H2 2024 at the earliest and the US gearing up for election season, it means it's likely that risk management will continue to be of incredible importance going forward.
These risks mean that a holistic views of a portfolio’s strengths and weaknesses has never been more important.
