Spotlight on Insurance
This year, Allocator Intel will be spotlighting insurance industry leaders. Brian Curran, Enstar Group’s U.S. Regional Chief Investment Officer, has been in the industry since 2010. He joined Enstar in March 2020 and helps to oversee Enstar’s $20 billion investment portfolio. Prior to joining Enstar, Brian spent 10 years at Sompo International (formerly Endurance). The views, information, or opinions expressed during this interview are solely his and do not necessarily represent or reflect those of Enstar Group.
The following is edited for length and clarity.
Let’s begin with an overview and what went favorably for Enstar in 2022
2022 was a challenging year: There were not many places to turn to make money. Fixed income markets were down significantly with many bond indices having their worst year on record. The Bloomberg US Agg lost more than 13% – so for insurance and reinsurance companies, which typically have large fixed income portfolios, it was a difficult year. Equity markets didn’t fare any better with the S&P 500 down almost 20% for the year. In terms of what went most favorably for Enstar’s investment portfolio, it was probably the increase we saw in our net investment income as a result of rising interest rates. As of year-end 2022, 15% of our portfolio was invested in floating rates securities which benefited from the rise in Libor throughout the year.
Give us a breakdown of the allocation, how is this managed?
Enstar’s total investable assets were roughly $20 billion as of the end of 2022, and as is the case with most (re)insurance companies, we have a large allocation to fixed income. Approximately 75% of the portfolio is allocated to fixed income securities, funds held, and/or cash. The fixed income portfolio has an average credit quality of A+ and a duration of 4.4 years. The remaining 25% of the portfolio is diversified across a range of non-fixed income assets including public and private equity, private credit, real estate, hedge funds, and infrastructure. The investment portfolio is almost exclusively externally managed.
Tell us about your investment platform
We have a global business with primary operations in Bermuda, UK, continental Europe and Australia. The investment portfolio is largely aligned with this, we have portfolios in each of these local regions.
What differentiates us is the fragmented nature of the investment portfolio within each of those regions. A significant portion of the assets are restricted in one form or another, either being held in trust accounts or held directly on a reinsured companies’ balance sheet. As of last year, we had close to $10 billion in restricted assets and funds held on reinsured companies’ balance sheets, this is across more than 20 legal entities and over 60 different trusts – so although we think of it as a $20 billion portfolio, it is made up of many separate portfolios with unique investment guidelines.
How are you managing investment risk amidst a challenging economy?
We evaluate the portfolio on a daily basis, constantly running stress tests and scenario analysis to make sure we understand the potential impact various market events can have on the portfolio. Managing these risks is paramount to us, especially in the current market environment where we have seen how quickly economic conditions and sentiment can change and the impact this can have. The most recent example of this is the banking sector and how quickly certain issuers came under pressure in a very short period of time. This is why we spend so much time building a diversified portfolio and understanding all the underlying exposures because you do not know where the next source of volatility is coming from.
Another way we manage risk is through the structuring of our portfolio. We try to structure the duration of our investments in a manner that recognizes our liquidity needs to satisfy future liabilities. This reduces our need to be forced sellers in a stressed market environment.
What do you think will happen with inflation?
I expect inflation to remain above the Fed’s target for a while which will likely force the Fed to leave rates elevated. In this scenario we will continue to benefit from our floating rate exposure. I also expect there will be opportunities to put new capital to work at these higher levels which will help offset some of the higher inflationary prices.
In the near-term, de-globalization will almost certainly be inflationary. There has been such a significant growth in globalization over the past few decades, companies have benefitted from being able allocate resources across borders to access the cheapest labor, capital, and resources. All of which has been deflationary and helped contribute to the low levels of inflation we have seen in most developed nations up until recently. Now as companies bring more of that production back on shore, it requires many of them to spend additional capital on labor and resources. These higher operating costs will be passed onto the consumer and put upwards pressure on inflation.
What are your views on the sustainable investment?
ESG is a big priority at Enstar. Sustainable investing is one of the three pillars of Enstar’s ESG Strategy, alongside Climate Change and Human Capital, so it’s a key area of focus for us. We’ve dedicated a lot of human and financial resources across the company to further our ESG efforts. Specifically, on the investment side, we have incorporated a responsible investment policy into our broader investment guidelines and monitor our portfolio’s ESG rating as well as greenhouse gas emissions.
As for sustainable investing, we continue to evaluate these opportunities, as we do all investment opportunities, and will make allocations where we feel they make economic sense. We also track the percentage of our managers that are UN PRI signatories and implemented manager scoring for all of our external managers based on their ESG adoption which we update on an annual basis.
How are you looking at policy in 2023?
The biggest thing that has changed is the yield we can achieve in fixed income and cash. It has been a long time since investment grade fixed income has looked as attractive as it does now from an absolute yield standpoint. Within investment grade specifically, we have been finding the most attractive opportunities in securitized credit, including ABS, CLOs, and select CMBS and RMBS. It is a little harder to source and get cash deployed in these asset classes, but the pickup over similarly rated corporates is meaningful.
There are also attractive opportunities in private credit right now. Most of the underlying loans in the asset class are floating rate so they have benefited from the rise in Libor and have historically carried less mark to market volatility than comparable public markets. You can also make the argument that the lending standards are tighter, and you get better protections in the private markets relative to the broadly syndicated market which is important as we potentially head into a recessionary period.
What are some of the challenges you anticipate for 2023?
I expect there to be continued volatility in public markets as investors grapple with continued higher inflation, slowing economic activity, and geopolitical risks. The Fed will likely be forced to keep rates high to lower inflation and fixed income spreads have plenty of room to widen if we do enter a recessionary period. The combination of these will be challenging for the insurance industry which, as we discussed before, tends to have a material allocation to fixed income.
Insurance companies must carefully manage their portfolios in an environment like this. Between the rise in rates, we saw last year and the potential of what I laid out for 2023 a lot of fixed income holdings may be in an unrealized loss position. This gives insurers the opportunity to rotate the portfolio to increase their book yield but realizing those losses can impact your capital particularly for US companies where high-grade fixed income is carried at book value.
Any closing comments?
Thank you for having me today, I enjoyed the conversation. Institutional Investor already does so much for the allocator community, and I think this new series is a great forum to share ideas and themes that are impacting the industry. I look forward to reading future spotlights.
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