© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA. Insurer Investment Forum XV Investing for Insurers: Review and Preview March 19, 2015 Alton Cogert, CFA, CPA, CAIA, CGMA President & CEO
Investing for Insurers: Review and Preview 2015
Jul 18, 2015
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© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Insurer Investment Forum XV
Investing for Insurers:Review and PreviewMarch 19, 2015
Alton Cogert, CFA, CPA, CAIA, CGMA
President & CEO
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Q. What is Your Biggest Investment Challenge Going Forward?
Hint: It is not Low Interest Rates.
Question of the Day
2
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Where We Are Today
How Insurers Have Reacted
What’s Next?
How Insurers Should React
Review and Preview
3
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
WHERE WE ARE TODAY
4
5
Key U.S. Economic Indicators
Source: Russell Investments Dashboard
Monthly: Jan ‘90 – Dec ‘14
Monthly: May ‘53 – Dec ‘14
Monthly: Jan ‘54 – Dec ‘14
Monthly: Jan ‘01 – Oct ‘14
Monthly: Jan ‘48 – Nov ‘14
Monthly: Jan ‘48 – Dec ‘14
Quarterly: Jun ‘47 – Sep ‘14
Monthly: Jan ’78 – Dec ‘14
6
Global Interest Rates in One Chart
Source: Russell Investments Dashboard
Did you know?
58% of Developed Nations plus China are experiencing deflation.Only 3 of 19 Euro-area members are not experiencing deflation.US inflation turned negative for only the second time in 60 years.
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HOW HAVE INSURERS REACTED SO FAR
7
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How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
8
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
9
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
10
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have P/C insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
11
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
12
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
13
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
14
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Life insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
15
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
16
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
17
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
18
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
How have Health insurers reacted thus far?
Source: Strategic Asset Alliance, SNL Securities
19
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Equities
o All Capitalization Equity 2
o Dividend Equity 2,3
o Global Active Tax- Advantaged Equity 3
o Large Capitalization Equities 1
o Large Capitalization Growth Equities 1
o Small Capitalization Growth Equities 1
Q3 2014 Non-CFI Searches – US/Canada Insurers
1 – Over $5 Billion Portfolio2 - $1-5 Billion Portfolio3 – Under $1 Billion Portfolio or Undisclosed
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Source: Asset Outsourcing Exchange
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Fixed Income
o Alternative Credit 2
o CMOs/CMBS/CDOs/CLOs 1
o Emerging Market Debt 1
o Global Fixed Income 1,3
o High Yield Bonds 2
o Mezzanine Debt 1
o Opportunistic Structured Products 2
Q3 2014 Non-CFI Searches
1 – Over $5 Billion Portfolio2 - $1-5 Billion Portfolio3 – Under $1 Billion Portfolio or Undisclosed
21
Source: Asset Outsourcing Exchange
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Other
o Commodities 3
o Hedge Fund 2,3
o Multiple Alternative Investments 1
Q3 2014 Non-CFI Searches
1 – Over $5 Billion Portfolio2 - $1-5 Billion Portfolio3 – Under $1 Billion Portfolio or Undisclosed
22
Source: Asset Outsourcing Exchange
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Slow move towards more risk
o Interest rate – Not much
o Credit risk – Yes
o Market Risk – Yes
o Liquidity Risk – A little
What SAA has seen…
23
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Asset classes not noted in Q3 US/Canada Searches that we have seen:
o Bank Loans
o Commercial Mortgage Loans
o High Grade High Yield Bonds
o Private Placements
Also seen, as in Q3 US/Canada Searches:
o Dividend Equity
o Emerging Market Equities
o Various Style Box Equities – US and Non-US – ETFs/Index Funds
What SAA has seen…
24
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Your investor quiz of the day
o (When) will the Fed start raising short term interest rates?
o Will evaporated liquidity in the bond market become a problem?
o Do US equities have further to run, or with Shiller CAPE and a strong dollar catch up with them?
o Will negative interest rates continue to spread globally?
o Will Greece slip out of the Euro?
What’s Next
25
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
(When) will the Fed start raising short term interest rates?
26
Source: Federal Reserve
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Will evaporated liquidity in the bond market become a problem?
27
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
0
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8
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27.851966
Can US equities run more, or will Shiller CAPE and strong dollar be a problem?
28
Source: Robert Shiller
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Can US equities run more, or will Shiller CAPE and strong dollar be a problem?
29
Source: Barchart.com
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Will negative interest rates spread globally?
30
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Would you buy a used car from this man?
Will Greece slip out of the Euro?
31
Source: Reuters
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Most likely
o Rates stay range bound; US equities return to ‘normal’ returns
‘Worst Case’
o Rates fall further or go negative; correlating well with Euro and Japan rates.
o US and non-US equity returns become more volatile
How Insurers Should React: Consider At least Two Major Scenarios
32
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Declare Your Independence from Investment Myopia – white paper
Best approach
o Long term approach tied to supporting the insurer’s lines of business
o Define and refine your company’s risk appetite
o Asset allocation decisions based upon long term (7-10 year) planning horizon
o Review asset allocation annually, along with the overall investment process.
o Stress test all material assumptions.
How Insurers Should React: Proceed with Caution
33
© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA.
Q. What is Your Biggest Investment Challenge Going Forward?
Hint: It is not Low Interest Rates.
A. The Probability of Negative Interest Rates
Question of the Day
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