By Alton Cogert | firstname.lastname@example.org
The past: With very calm financial markets and interest rates still hovering at historically low levels, there is no reason to attend an investment conference. We all know insurers are in business to write insurance and therefore a lot less attention needs to be focused on investments. As long as we are ‘conservative’ in our investments, all will be well.
Where we are today: Every few weeks brings a new challenge to our insurance clients.
If it’s not AM Best’s BCAR and Rating Methodology changes, it’s a new Federal tax bill that can make tax-exempt investments less attractive. A new Fed Chair changing from QE to QT means slower money supply growth and, with it, pressure on investments. Rising interest rates may be here, but slow rises are what insurers have wanted for the last decade, even with the attendant poor fixed income total returns. The credit cycle has not been repealed, so rising rates and QT may see rising credit risk. And, by the way, who can forget about equity market volatility with the news incessantly crying about thousand plus point swings in the Dow?
Those of you who have attended our Insurer Investment Forum know that we try to address the most current and most interesting investment issues for insurers, while providing an opportunity to share ideas with your peers in a relaxed environment (or as relaxed as one can be nowadays).
So Why Bother? What’s In It For You?
Forum XVIII is fast approaching. So, here is a brief overview. Just because we are meeting at Walt Disney World, doesn’t mean we are just wishing on a star for better days. We want to work together to get there.
That is one reason why we start the Forum with Case Studies. We are currently finalizing our ideas on this popular session. Since our role playing case studies have been so well received, you can expect it to return, but with a different twist than in the past. What better way to ‘break the ice’ with your insurance company peers while tackling a not so easy problem?
Of course, investment managers and consultants try to make asset allocation decisions look easy by utilizing their proprietary models. However, we all know that ‘all models are wrong, but some are useful.’
It is in that spirit that my fellow Principals, Dan Smereck and John Mohr, will discuss what is inside the black box of many of those models. Why they are wrong, in various ways, and how you can confidently approach your most important investment decision – asset allocation.
As complexity continues its march through the investment marketplace, we have seen a similar trend in how rating agencies view insurer investments. Where the rating agency used to say, “As long as you have no troubled bonds, we are OK with your portfolio?’ they now want to know a lot more. And, much of this spills over into Enterprise Risk Management, where atleast one agency will gladly give you on rating tick up for an excellent process and as many as three rating ticks down for a poor one. How this and other expected changes will impact your investment process will be part of our discussion with Andrew Edelsberg, KBRA and Michael Cohen, Columbia University. But, we won’t let them give us standard answers, as I will have a list of questions that may induce discomfort, but we shall see.
Do you think that investment manager fees are too high and that there must be a better way to invest in a cheaper, more efficient manner? That is what a few large investment managers are hoping. In a freewheeling session, Marc Mercurio, State Street and Kelly Sweppenhiser, Vanguard, will be interviewed by our moderator and by our attendees about Fixed Income ETFs. Interest is growing in this sector, as the NAIC has approved treating these ETF’s in a manner similar to bonds for accounting and other purposes. Could this be part of your future portfolio strategy?
Each year, we invite interesting speakers to discuss an overall ‘hot’ topic. Although volatility seems to be the topic d’jour, we believe a larger yet related topic is the Fed’s move from QE to QT. And, who could be a better, unfettered speaker on this than Vincent Reinhart, Chief Economist at Standish Mellon. Vincent spent over two decades at the Fed. When I asked him about new Fed Chair Jerome Powell, he said he worked with ‘Jay’ on some important initiatives at the Fed. OK. Jay it is. We all will be interested to hear what Vincent thinks of how Jay’s term at the Fed will go. But, remember, first names only…
QT will bring with it many challenges, but which market sectors will benefit and which will be pressured? I continue to be concerned with the impact of rising rates on corporate bond defaults, as corporates tend to be the largest fixed income asset sector for insurers. NEAM (a subsidiary of GenRe and Berkshire Hathaway) brings us Sean Conaghan to provide his thoughts. Of course, that will not stop our insurer attendees from peppering him with questions on how they might reposition their own portfolios.
Our first full day is completed with David Withrow, President, Clear Arc Capital, discussing correlations between asset classes. Yes, those correlations do seem to go towards one, in a market crisis. But, even in ordinary times, how stable are those correlations? To say this question is important is a huge understatement, as much of the results from ‘efficient frontier’ asset allocation recommendations are due to correlation effects. Get those correlations wrong and you may have a lot less ‘efficient’ portfolio than you think.
On the next day, we invite all of our Government Risk Pool clients to a special Investment Seminar. Consider it a very condensed version of the prior days of the Forum, but focused solely on the concerns of government risk pools. What a terrific opportunity to compare notes with your fellow risk pools!
The last time the Forum was in Florida…
As you can tell, Insurer Investment Forum XVIII will not be ‘just another investment conference.’
It is a special opportunity to meet fellow insurer friends, old and new, and consider ideas about investing in this changing environment. The last time the Forum was in Florida, two of our speakers predicted that a recession was coming that might be as bad as the Great Depression. Both speakers in March, 2008, were exactly correct.
What will our speakers and guests tell us next month?