Issues & Answers Special Advertising Section
September 2019

Issues & Answers: The Long View

William Rotatori, chairman and chief executive officer of NEAM, said mutual insurers tend to have more of a tolerance for volatility and can take a longer-term view than stock companies. “That imparts a longer-term time horizon as they think about their asset allocation and compounding return over time,” he said. The following are excerpts of an interview.

William Rotatori

William Rotatori
Chairman and Chief Executive Officer
NEAM

“Having shared cultures with our insurance partners makes for better relationships, and quite honestly, more effective investment management results.”





What are the unique considerations for managing money for a mutual insurance company?

Mutuals have a couple of considerations that allow for slightly different approaches to their investment portfolio. The first would be the primary accounting basis that they follow. The second would be the level of capital that we see in the mutual insurance industry. With respect to an accounting basis, mutual insurance companies tend to follow statutory accounting as their primary basis, whereas stock insurance companies tend to follow GAAP as their primary basis. As for levels of capital, mutuals tend to have greater levels of capital relative to their invested assets than stock insurance companies. That implies a greater tolerance for volatility in their asset portfolios.

How do stocks and mutuals differ in their portfolio asset allocation?

Mutuals tend to have slightly riskier investment portfolios than stock insurance companies. This takes the form of greater levels of equity allocation and slightly longer duration profiles in their fixed income portfolios. The measure we point to would be VaR (Value-at-Risk), which is the maximum expected loss in a given period of time at a certain confidence interval. The 1 in 200 VaR for mutual insurance companies in the U.S. would be about 7%, whereas for stock companies, it would be about 5%. This means a slightly greater risk in the invested asset portfolio for mutuals relative to stocks. However, due to the higher level of capital cushion, when you look at volatility relative to capital, the level of risk is about the same. Mutuals have a slightly riskier asset portfolio, but relative to their capital, it’s pretty similar.

What’s your best advice for mutuals in today’s capital markets?

Our advice would be four-fold. First, get your asset allocation right. We stress having the optimal amount of risk assets in your portfolio that’s right for your business. Not only that but making sure that you’re being paid for the risk you’re assuming in that portfolio. Second would be find attractive risk adjusted yield opportunities. In a world like today where yields are low and the curve is pretty flat, every basis point counts. Third point would be practice active risk management. There are market sectors where there’s indiscriminate pricing of risk. You can remove risk from your portfolio without sacrificing yield. Those opportunities are out there. Then, the last would be to be prepared to take advantage of market volatility. We think the conditions in fixed income markets over the past decade have changed in terms of the support from the broker dealer community and the role of ETFs. We think in periods of stress we’re going to get more volatility, like we did in the fourth quarter. You need the liquidity profile in your portfolio to take advantage of market volatility.


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