Ahead of Insurance Asset Risk's annual Americas event, Nick Martowski, chief investment officer (CIO) at MagMutual, reflects on the H1 2020 turbulence and what's in store for USA insurers in the year ahead.
Martowski will take part in the event, this year held virtually, on the CIO panel.
How prepared do you feel insurers' investment functions were to weather the kind of turbulence we witnessed in H1 of 2020?
Generally well prepared from an investment risk standpoint but less prepared for other features of the downturn. For example, the combination of business liability and investment risk rising quickly together was unusual and made for a more complex decision chain around appropriate reactions to balance business and portfolio needs. Also, the speed of the market downturn and dysfunction across areas of the investment grade and short-term funding markets meant raising cash was costly for insurers that determined they needed to raise liquidity or cut risk.
Are you rethinking allocation on the back of the H1 market turbulences? If so how? And if not, why not?
Yes, with limited scope. Despite the global economic recovery underway, there is opportunity to trade off some potential return upside in exchange for more portfolio stability and income. This can occur through trimming public equity gains from the past few years and rotating into select public and private credit strategies if investors have been underweight. The alternatives universe has also become more attractive for new capital given increasing defaults, downgrades, business stress, and uneven impacts and uncertainty in many markets related to COVID-19.
Many predict a deep and long recession on the back of the pandemic. As a long term investor what is the best strategy to adopt to navigate those troubled waters?
Recessions and volatility create opportunity to increase returns for long-term investors. The best defensive strategy is to selectively buy dislocations and rotate out of safer, less impacted assets when those periods occur. Provided we get a multi-year period of market upheaval, buying the price dips on fundamentally-secure assets will be a clear way to add value. Aside from the "buying discounts" approach, the other strategy to keep in mind is to add to growth-oriented strategies. Regardless of the economic environment, growth will continue to occur in various industries and types of companies, and recessions can provide an excellent entry point into growth strategies because valuations compress, underlying growth drivers temporarily slow, and most investors are seeking less volatile investments at that time.
Beyond COVID-19, what are the current trends in the US market impacting insurers, and what will your message be to the event's audience?
Three key topics impacting insurers are low bond yields, Fed intervention, and managing portfolios for the wide range of potential scenarios possible over the next few years. On bond yields, the ever-tightening level of yield and spread is clearly back in focus after a brief respite earlier this year. If investment grade yields stay near these levels for the next few years, the key question is how are insurers going to replace income? The answer for a while has been forms of less liquid credit and that likely will continue as insurers want more yield and issuance continues to ramp up in semi-liquid and private HY and IG markets. On Fed intervention, insurers need to consider the implications of the Fed being either a longer-term or repeat participant in non-government bond markets. Even as a small participant, the fact the Fed is now active and willing to jump in at its discretion may lead to new lows on credit spreads for healthy issuers. On managing portfolios through the current environment, having a well-developed playbook for various market scenarios and a keen understanding of downside risk will help insurers to prepare for and capitalize on whichever environment occurs. The investing environment is too dynamic to position for just one outcome.