Insurers make money two ways: through the insurance products and services they sell, and by harnessing what Warren Buffett calls “the float” – their assets. Insurance companies faced investment portfolio challenges in 2022 including market volatility and inflation reaching levels not seen since the 1980s.
Joe Pursley, head of insurance for Nuveen, moderated the “New Year, New Perspective” roundtable in Bermuda on January 5th, hosted in partnership with Insider Engage. Nuveen is the asset management arm of retirement services provider TIAA, managing $321 billion of insurance assets globally across over 125 clients, including the TIAA general account (as of September 30, 2022).
Pursley asked a panel of insurance investment leaders what they were most excited for, and most worried about, for the coming year ahead.
Aurora Swithenbank, chief financial officer, Vantage Risk Ltd., said she’s worried the volatility of 2022 will continue through in 2023, even though as a new specialty insurer and reinsurer launched in 2020, the company has kept a conservative asset management approach to balance underwriting risk.
“We had a lot of market volatility in 2022, which because of our conservative positioning, largely did not impact us or did not impact as much as the average insurer,” she said.
“I worry that 2023 is going to be pretty darn volatile,” Swithenbank to the gathering, which was hosted by Insider Engage in partnership with Nuveen, the asset management arm of TIAA.
While the market seems to be expecting a soft landing, and some people think the economy “will be back to the races, I just don’t believe it,” Swithenbank said. She said there’s a meaningful risk of a significant recession.
“And then you’ve got geopolitical pressures, whether it’s what’s going on in China as they’re coming out of Covid lockdown, whether it’s Russia and Ukraine… I worry about what that means – not only for our investment portfolio, but how it impacts the political risk and credit insurance markets,” Swithenbank said.
On the positive side, having a 5% new money investment yield – compared to less than 1% when the company launched – “feels pretty awesome,” she said. “We are an underwriting shop, we make our money on underwriting and we’re not going to rely on investment income. But having a little cushion in the investment portfolio feels pretty good.”
Kevin Hovi, president & CFO, Kuvare Life Re, said he’s also concerned about the global economic environment.
“There’s been a lot to absorb in the last three years – COVID, Russia, Ukraine,” Hovi said.
Founded in 2016, Kuvare Life Re is the Bermuda-based reinsurance arm of the Kuvare Group, which was established to serve US middle-income consumers by focusing on the growing demand for retirement products and particularly annuities.
“We don’t have the Fed actively supporting the bottom of the market anymore,” Hovi said. “We have inflation again. If you’ve been on the desk for the last 10 years, these are all things you haven’t seen. There’s just no playbook for what we’ve seen in the last few years.”
“I worry we are one mistake away from a deep recession,” Hovi said.
Hovi said the last global financial crisis left out the middle class. “So my hope is in this recession that it’s relatively light. That it doesn’t impact a lot of jobs. And ultimately, my hope is that the consumer gets their power back, which is ultimately going to drive a better economy for everyone.”
Ken Kencel, president and CEO, Churchill Asset Management, said his biggest concern is around the timing of a recession.
“The duration of a recession is almost as important as whether it occurs in the first place,” Kencel said. A brief recession that lasts a few quarters could be seen as a positive if it puts a damper on inflation and results in an economic reset, he added.
“A recession, even a relatively severe one, could potentially have a silver lining. In my view, the primary concern is if it goes on for eight or 12 quarters,” Kencel said.
Much of the damage from the global financial crisis in 2008 was a result of its length, he said, noting it was 2010 before the economy emerged to stable ground. “Those last six to 12 months were very detrimental,” Kencel said. “Strong companies in non-cyclical sectors can be quite resilient. We saw that with COVID, which led to a sharp economic decline but quick revival. As a result, there wasn’t much severe damage to the underlying economy because of the Fed’s actions.
“I believe if a potential recession goes on for eight or more quarters, it could be more damaging than a sharp but short one,” he said.
On the positive side, he said it’s a “good time to be a conservative lender.”
Churchill was founded by Kencel 17 years ago and is a majority owned affiliate of Nuveen, managing all of their middle market private capital investments. With $46 billion in committed capital, the Firm provides private debt and private equity solutions, including investing in private equity funds.
Because of rising interest rates, the company has seen its return on loans nearly double in the last year, Kencel said. “But we are big proponents of taking a highly disciplined and conservative investment approach, particularly given today’s economic outlook.”
Mitch Blaser, co-CEO and founder of Mosaic Insurance, asked how Kencel viewed insurance as a lender.
“Pretty good, we’re active in lending to the insurance industry,” Kencel said. “Brokerage we love – the stability of cash flow is very attractive. “
Pursley concluded the event by summing up the overall mood of the roundtable: “While it’s clear there is a lot of uncertainty ahead in 2023, it sounds like there is also some optimism amid the uncertainty which is encouraging.”
