Fixed Income Mgmt.: Fee Comparison

Insurer Investment Forum

As a resource for insurers, we've compared fixed income investment management fees, across various portfolio sizes, among managers in the insurance space.

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Transcript: 2023 Year-End Recap & Early 2024 Expectations
for Insurers & Risk Pools

Alton Cogert, CFA, CPA, CAIA, FDP, CGMA, President & CEO, Strategic Asset Alliance

Dan Smereck, Managing Director & Principal, Strategic Asset Alliance

Alton and Dan take a look back at the highlights and challenges insurers faced in the financial markets to close 2023, while also sharing some of their 2024 expectations that may help insurers & risk pools navigate the markets, as they look to achieve their financial & investment goals.

This transcript has been edited for space, content, & clarity

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Capital Markets Performance

SAA: 2023 was quite a ride for all of us, and as we wrapped up the year, we got to see the markets gyrate once again as the markets moved away from the rising rates; that we've hit peak rates and that expectations are rates to decline.

There's a lot of different moving parts. If you look at this exhibit, you'll see in red what happened through October, and then things dramatically changed in November/December and rallied sharply both for bonds and equities.

More importantly, if you look trailing 2-year or 3-year, we're still recovering from the sharp rate hikes from the policy change from the Fed and that's still working its way through the system in the bond portfolios. But every day that marches on, we continue to improve on that front.

UST Treasury Curve & Expectations

SAA: I'll focus on the investment-grade bond market, our largest investment across our insurance and risk pool clients. It's hard to believe, a little less more than two years ago, the yield in the investment-grade bond market on average was less than 2%. There was 1.75% and at the end of '23 it was 4.5%. That's up 2.8% percentage points over the last two+ years, which is a multiple of where yields were you think about multiples, you think about the equity markets well, we're applying them to fixed income here today.

Things are just materially better for reinvestment across all of our clients, no matter where you are and that's going to continue to build up net investment income on the margin for all of our clients and all of you out there with portfolios that continue to reinvest bonds that were purchased before 2021.

The other thing to think about is where are we today just broadly. You get a sense on where the opportunities today and so investment managers in the fixed income space are actually smiling today because they can reinvest yields - 4.5%, 5%, sometimes 6% - as compared to where we were again going back a little over two years ago. People were doing the happy dance when you could get north of 2%; Those days are dramatically different.

The Fed & Interest Rates

SAA: This was as of January 5th and these are constantly changing, but the direction is showing you the probability of rates either staying the same as of that meeting or going up/down after their next meeting.

Most people expect that rates are going to be unchanged, with a slight bias to have perhaps a downward rate cut, and then it really starts to progress from there on. And this is what in our view, caught the market up on the latter part of 2023. Expectations, depending on the day are 5%,6%,7% rate cuts and in our view that's a little bit oversold given the data that's coming in (and the Fed keeps talking about being data dependent).

Odds are rates probably will go down sometime this year, but we're saying not at the pace that the market is currently projecting is our view right now.

Expectations & Impacts of Economic Risks for 2024

SAA: You could pick a number of risks, but if we take a look at the overall top three in our view, first would be that it's an election year, not just for us, but for it's for roughly over 2 billion of in the world's democracies.

But more broadly, people are still spending and going against the US consumers not been a good bet over the over the long term, but we could certainly see some short-term issues as people continue to adapt to the rate hikes in '22 that are still rolling through the system. The last one I think has been a burried issue, but major cyber attack on the US infrastructure or globally on what that could mean and we think about the transition to EVs in this country and how that already puts a strain on our grid.

The market right now in our view, hasn't turned any of its attention towards the US election. However, we figure by the early summer or once the final candidates are determined, then things will pick up in the volatility, which in our view will start to hit the marketplace.

Long-Term Perspective: Patience Pays

SAA: This exhibit just continues to show that with patients and a strategic allocation that's tied to your enterprise, you'll be able to mitigate and navigate the downsides in the short periods of time for the benefit of these longer term returns (with very little downside). As we look ahead, we have to look at the investment program and how it supports what's going on with your organization.

And, as your organization changes, with upcoming reinsurance renewals, property cash flow changes in healthcare utilization with pools, etc., how investments support those changes are always paramount.

Disclaimer: The information contained herein has been obtained from sources believed to be reliable, but the accuracy of information cannot be guaranteed.