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“An insurance portfolio is a unique thing. The goal of any insurance portfolio is to match investment cash flows with its product liabilities—it’s necessary to maintain strong credit ratings. Corporate pension funds have started to focus on this more, but, from the start, this has really been an insurance portfolio’s goal. This is why insurance companies are usually so well funded—and, with some obvious exceptions, why insurance companies (and their pension plans) fared relatively well during the downturn when many other financial institutions did not. A result of this focus is a unique portfolio. Equities—the meat of many institutional portfolios— hurt us with insurance regulators, because they can be so volatile. Equities might be good for a capital pool in a vacuum, but we work within a larger, company-based scenario. At Prudential, our business mix is heavily retirement and 401(k)-based, so there are lots of equities there. We have a large equity exposure in a holistic sense—so why should we invest in equities with the general account? Add to this the fact that volatility is not good for an insurance company, and it makes sense that we adjust our allocations accordingly. So, stemming from this, we need a good return, but we don’t want to be heavily into equities, in this case, I go to alternatives any strategy that is not heavily correlated with fixed-income and equities. And we actually like to run most strategies in-house. There has been a move to outsource investment management at a number of insurance companies, even with fixed-income investments, which really should be an insurance company core competency. At Prudential, if we see an asset class and we like what we see, we usually want to build that capability internally. With core bonds, we have strong capabilities. But—should we build hedge fund or private equity capabilities internally? It would cost a lot, and our appetite might prove to be episodic, so probably not. But do we have a place for modest hedge fund exposures within the portfolio? We have some long-term tail risk, so yes, we want access to those markets—and, so far, have and plan to continue to use third parties to access them. Ah, regulation. We have 50 state regulators, with seven or eight regional leaders in terms of where larger insurance firms are located. Now, we have a new national insurance regulator—the Office of National Insurance, or ONI—and it will help us work with foreign bodies in a regulatory sense. Europe, the United States, Asia—they’re not all on the same song sheet, historically. Working in a multinational sense, there are disparate capital charges, and this has caused hardships for various business lines. So, overall, ONI should be a positive. The industry learned a few lessons coming out of 2008. The first big one: watch your real estate exposures. If you tracked insurance company portfolio holdings, for real estate you can see that the industry helped underwrite some of the problems. Here, at Prudential, we learned this lesson in the 1990s. We saw some losses in our office real estate portfolio then, and so we went light in offices after that. It doesn’t mean we avoided other problems in 2008, though. We had some residential real estate, in the form of AAA and AA rated RMBS tranches. We were disciplined about buying only the senior-most tranches—but we still felt some pain. On a relative basis, we were lighter in financials than almost any other group—but we still saw some losses. On this point: we’re still somewhat light on financials because we’re a financial ourselves, it’s a holistic view.”
aiCIO Editorial Staff