SS&C Technologies - Mon, 03/06/2023 - 14:17

2023 Insurance Asset Management Technology and Investment Outlook with SS&C's Scott Kurland


Stewart: We are back. Thanks for joining us for another edition of the podcast. Today's topic is a very important one to insurance companies, and that is technology. And how it can improve things dramatically in the investment operation of an insurance company. We are joined today by Scott Kurland, Managing Director of SS&C Technologies' Insurance Solutions Group. I have learned so much about SS&C and look forward to learning some more. So Scott, welcome.

Scott: Thanks, Stewart. Happy to be here today.

Stewart: All right, so we're going to start this one off like we start them all. What's your hometown? Your first job of any kind? Not the fancy one. And, a fun fact.

Scott: All right, well, my current hometown, as of two years ago is sunny Charleston, South Carolina. I was a New Englander at heart and the COVID Pandemic brought me South with my wife and young daughter. Let's see. My first job was not terribly glamorous. I was scooping ice cream off of Cape Cod during one of the first summers because I wasn't old enough yet to serve alcohol or wait tables. So I had a really strong right arm for most of the summer.

Stewart: That's perfect. And what's a fun fact?

Scott: Fun fact. I almost went to university for music. Piano in particular, but then decided to focus on finance and keep piano as a hobby as opposed to my day job.

Stewart: That's a good decision. I mean, why would you want to be Elton John when you could be in the insurance asset management arena? I mean.

Scott: Well. That, and I can't sing.

Stewart: And there's that and there's that. So one of the things that's happened and SS&C is a platinum member of ours on our platform and very happy to have you on. I got a real eye-opening education about all of the things that SS&C technologies does. I was not well versed, I'm quoting off the top of my head, and correct me where I get it wrong, but you're about a $16 billion market cap, 24,000-employee tech firm that runs a lot of the backbone infrastructure in the financial services industry as a whole. Right. So can you tell us a little bit about SS&C, in kind of the broad brushstrokes? And then specifically, how do you work with insurance companies and investment managers?

Scott: Sure, Stewart. Your numbers aren't too far off. I think depending on the day, we're right around a 15 billion company. We're publicly created on the Nasdaq SS&C. I think we've now got just over 27,000 employees, as of this year. We service over 20,000 financial companies in the marketplace, and that spans quite a few verticals. So it spans hedge fund, private equity, wealth and high net worth, traditional institutional managers, and insurance companies and banks. In short, we are a leading provider of financial technology and services to the financial services community. We've been providing technology and services now going on our 37th year. Couple of fun facts, we're the world's largest fund administrator for private and alternative investments, and have been doing that for probably the last 10 years or so, specifically.

As it pertains to the insurance market. Insurance really was the core of our business starting with Bill Stone's founding of the company back in 1986. So today we support over 500 insurance companies around the globe. We provide a comprehensive suite of front-to-back office cloud-native technology. We offer that on a SaaS, a fully outsourced or co-source basis, and it's backed by a really long-tenured, dedicated team of insurance experts. So we have about 2000 financial accounting CPA, CFA individuals all around the globe that understand the nuances of insurance, investment, accounting, operations, and regulatory and financial reporting.

Stewart: It is amazing the kinds of things that you do and they are essential services to the financial services industry. Right, absolutely. As technology and service providers to the greater insurance community, can you talk a little bit about some of the key trends that you're seeing and have been seeing across the industry? I was fortunate enough to attend your annual conference this year, and one of the things that I found amazing is your deployment of AI and natural language processing to deal with private security documents, for example, which is a real pain point for insurance companies. So can you just talk a little bit about what's the kind of best practices state of the art and some key trends that you're seeing?

Scott: Sure. Well, I think to tackle your first question may be to hit on three or four key trends we're seeing across the industry. The first is, there's been accelerated convergence I think between the insurance vertical, specifically, I think life and annuity insurers and the private equity and alternatives side of the business. And it makes a lot of sense if you look at some of the key trends and macroeconomic conditions that are going on. You've got insurance companies, life companies that have sort of a steady stable source of capital and inflow of capital from premiums that are paid by their insured members. And you've got private equity firms that are trying to deploy and raise capital to put them into unique and specified deals, that can offer higher returns. And in today's market where with rising interest rates and inflation, cash is particularly expensive, probably more expensive than we've seen in the last couple of decades.

The marriage of those two businesses makes a lot of sense. If you can marry a stable source of long-term capital with deals that tend to maybe have little less liquidity and longer tails on them, with firms that are trying to raise capital in an expensive market, it makes a lot of sense. So that's the first thing. The second thing that we're seeing is, there's an increasing rate of adoption of outsourcing and co-sourcing partnerships and operating models among financial services companies, in particular insurers and some of the alternative managers. Why? I think in today's market it's more challenging than ever to both acquire and retain talent in-house. And secondly, the required expertise to deal in alternative investments or private credit or derivatives is significantly different than it is for maintaining a publicly traded or exchange traded core fixed income or equity portfolio. And so it's a combination of the need for the expertise and the challenge of finding and retaining talent that we're seeing an increasing trend towards leveraging outsourcing partners, that have both that expertise and the talent at hand.

The next two trends I think to mention, there is an obvious migration to cloud-native technologies with increased workflow interoperability and flexible data architecture. Marrying different data sets or having systems that are interoperable and compatible with both on-prem systems and other cloud systems is key. And just being able to upgrade and maintain technology and in a cloud environment, especially when you've got a hybrid workforce and remote work, and things like that going on. There's definitely been a trend there. And then the last thing I think is there's an increased focus on ESG and regulatory compliance and reporting controls. Specifically in the insurance space in light of greater market volatility and uncertainty. So bigger focus on risk and reporting than maybe there was over the last couple of years. And part of that is driven by the complexity and the need for heightened transparency as insurers get more and more involved in more opaque investment opportunities.

So I think those are some of the trends. And if you think about all of those trends, they all come back to your earlier point. Which is, as soon as you move away from a plain vanilla investment portfolio into non-exchange traded, non-publicly traded or listed securities, there are a host of challenges that come up around non-standardization. You have documentation and deals that have different forms of data, different forms of paperwork, different ways information is delivered by external managers, limited partners, general partners, banks, agent banks, that need to be brought in, reviewed, processed, accounted for, and reported on in a very efficient, scalable manner.

And the traditional world didn't lend itself nicely to that. At least at the pace of which funds are flowing into the private market sector. So that is really where AI, I think, and in particular natural language processing, optical character recognition, machine learning, and intelligent workflow automation or digitization, comes into play. Where you can take hundreds of those types of bespoke notices and documents and turn them into a more efficient process and digitize them for consumption across your client base in a more efficient manner so that that yield isn't lost and you don't increase operational complexity, cost and risk.

Stewart: And just one of my roles, Scott, on these podcasts is to be the dumb guy in the room. And so I'm going to ask you to unpack a couple of things that you said. You said cloud-native, and then you said on-prem. So can you explain what those two terms mean, just in case anybody else is as naive as I am at these terms?

Scott: Sure. So when I say cloud-native, it's technology systems and platforms that were born and built specifically to live within a cloud environment. And a cloud being either a private cloud, which SS&C has their own secure private cloud environments. Or a public cloud like AWS or something like that. But they're designed to live within a hosted data center and delivered on a software as a service basis, which doesn't require hardware or software installation at the client's site. In other words, you can access it through a standard commercially available web or mobile-based browser. So there's no heavy technology lift. On-prem is the traditional way. If you looked 5+ years back, a lot of financial firms would take technology, bring it in-house, install it within their own data centers and architectures and manage that technology stack within their own private environment.

Stewart: That helps. And I mean, we were having a conversation at our symposium with somebody who had, I don't want to name names, but very large insurance company investor. Who said basically, the opportunity in private assets is large enough that they are effectively throwing bodies at it. But to your point, that is a direct haircut of the yield enhancement or increased expected return. And the use of this technology allows an investor to gain the advantages of those asset classes without incurring the increase in their operating expenses, which is effectively a reduction in their yield. Is that a fair assessment?

Scott: It is. And if you have to back up for a second too and think about that to deploy these types of AI technologies, you need a couple of key ingredients. The first is you need a lot of volume of data and documentation to train the models. If it's not a significant enough data set, the automation, that yield that you're going to get out of it, is not going to be meaningful. The second is, you need expertise to validate that the data that's being extracted from these models and processed is correct and is complete. And you need a haptic feedback loop to continuously train these models and plug the holes in the dam, if you will. Or correct errors that it sees in pulling the data out. The other thing to think about, when you think about scale, is that we're now seeing more and more firms, whether they be insurance companies or hedge funds or what have you, that are participating in the same deal.

So you could have five different insurers participating in the same large bank loan. And the nice thing with AI, and, if you have the infrastructure right, what we're doing now is we're taking in that event notice from an agent bank once. We're using AI and ML to process it. And then we're distributing that notice to all of the parties that we work with on the deal once, through a messaging bus. Which means all of the systems get that notice at the same time and then we can process an account for that investment simultaneously. As opposed to having to wait for each member of the deal to receive their notice from the bank. You could take the same thing from a limited partner, a cap call or distribution notice. It's the same process.

Stewart: I think one of the things that your firm does very well is you remove pain points. Those are big challenges for investors and it's a very cool solution. So as we look into 2023 here, hard to believe we're in the middle of February already, but what are some of the top investment opportunities you see for insurers and managers? And why do you think they're opportunities?

Scott: That's a great question and there's a lot of focus on where do the portfolios go next. And I'll call out three or four in particular. There's probably more, but there's three or four that are top of mind based on what we're seeing. The first that I would call out, would be real estate and real asset investments. And for insurers in particular. Why? There's a few reasons. One, real estate tends to be a great hedge against inflation, which we've been facing for the last year, year and a half. Two, there are opportunities to capture yield in real estate investments through increasing rent, through mortgage loans as interest rates rise. So the rise in interest rates has offered increased yield. And the third that's interesting, is the regulatory environment for insurers. In particular, the risk-based capital or RBC requirements or factors have recently been changed by the NAIC and reduced for certain types of real estate investments.

Okay. So for example, if you invest in real estate through a partnership like a scheduled BA asset as an insurer would classify it, the factors have been reduced from between 18% and 23% to 13%. What does that mean? It means that an insurer for let's say a $1 million investment, simple example, has to keep, instead of $230,000 in cash reserve on hand, to offset the risk, they only now need to keep $130,000. So it either frees up cash for them when cash is expensive. Or that same $230 that they have today can go much further. So instead of that allowing them to make a $1 million investment, they can make a $1.75 million investment on that same cash reserve. So real estate's a big one that we're seeing.

The second opportunity we're seeing is in high-yield bank loans. Because we're finding that they tend to offer a higher Sharpe ratio than below investment grade high-yield bonds. In particular high-yield bank loans allow the insurer to capture the rising interest rate trend as these loans reset and roll. And if they're floating in particular, they'll just ride with the interest rate hikes. The second is they tend to carry a higher seniority in the debt structure. And they tend to be secured by underlying collateral and assets to wherever you're lending the money. So we're seeing an increase in bank loan activity. Commercial and residential lending. So CLOs, CMOs residential and commercial mortgage-backed securities. Again, ability to capitalize on refinancing higher interest rates and the management of things like credit default risk.

And then the last thing is, for some of the mid to larger insurers, we're seeing an interesting opportunity to use short-term pool structures. Which basically just allow them to take idle cash or cash that they have in surplus, and leverage that. As opposed to going out to public or private markets to borrow. And putting that money to use in short-term investment structures to capture higher yield. So I think those are three or four key areas that we're seeing increased diversification in the insurance world, and in terms of the investment portfolios.

Stewart: That's really helpful. And just to follow along there, along with these investment opportunities, what do you see as some of the biggest challenges or barriers to entry or expansion there?

Scott: Yep. And I know we covered a couple of them earlier in the conversation, but to highlight them. Anytime you're moving into private credit or private equity investing, there are a number of nuances that you have to face operationally in terms of... If you think about, we started with data and document collection. So in a real estate investment, you've got to get appraisals and mark to markets. You've got to get all the rents and fees and things associated with it. Or if you're doing it through a partnership as opposed to a direct real estate investment, you've got to get those partnership statements. The movement of cash and capital, the allocation changes or even purchases and sales within the partnership. You have to track that for tax reasons and other reasons. Pricing and valuation. You need to come up with what your pricing and valuation policies and the frequency of those policies are going to be around those private investments.

Regulatory reporting. As an insurer, you've got to make sure that you're classifying those investments properly, that if it's a direct real estate, it's going on schedule A. If it's a partner, schedule BA. If it's a mortgage loan, it's going on B. You've got to make sure that it's reported on the right schedules, that you're taking it into account RBC and ALM calculations. You've got liquidity and risk management. So you have to look into what's the liquidity in private market investments, both on the equity and the debt side. As well as credit default risk. What's the likelihood that a commercial or residential loan is going to face default in the current environment or in face of a recession? Or things like increased interest rates if it's a variable rate loan.

And then I think the last two are pipeline access. So to deals, you need to carefully vet manager's selection and expertise to know, do you have the right folks evaluating those deals and opportunities, and can put the money to work. And then operationally, you need the infrastructure to be able to do that at scale. Either through your own technology or through an outsourcing or co-sourcing relationship, where somebody could go in and process the nuances of those deals efficiently, let you manage the risk and let you continue to go about business as usual. And make sure you meet your regulatory and filing obligations on time.

Stewart: You know, and having managed money in the past, I've seen the accounting tail wag the investment dog. And the opportunities in some of these asset classes, as you pointed out, or being able to alleviate those pain points is critical for investment departments. I've been in this business a long time and I've never been in a situation when somebody didn't say, "Well, it's a tough market environment." It's always a tough market environment. CIOs and investment teams face a myriad of challenges trying to not only manage money in an increasingly complex capital market environment, but also all of the insurance regulation and accounting reporting, rating agency considerations, not to mention the operating environment in which their company is writing business.

So really good points, I mean. So in what areas do you see increased... By the way, AI, fascinated by ChatGPT. I think I'm just going to have it write all my emails. It writes much better than I do. We talk about AI and all of a sudden it's here, right? It's here and it's in my hot little hand. In what areas do you see increased use cases and/or adoption for AI-driven technologies in the insurance asset management sector?

Scott: It's a great question. And then if maybe we break AI, because it's a pretty broad panacea term into a couple of subcategories when you think about AI. So the first I think we did talk about, which is natural language processing and optical character recognition, OCR and NLP. That is being heavily leveraged at least within SS&C today to do that digitization of non-standardized documents and data, right? Scraping PDFs, faxes, word documents, things like that to pull out metadata and data labels and tags and information, effective dates, paydown amounts, facility IDs. Things like that, that are necessary in order to process those type of events and notices at scale in as electronic and digitized manner as possible. So that's a big one. I think we're going to see increasing use of that even further downstream as we get into things like loan servicing and origination with lenders. Real estate property managers, using that to take in fee notices and expenses and rent roles and things like that.

Even one level further down the food chain. But certainly from an accounting and middle office perspective, that's key. If you jump to machine learning. We're seeing use and use cases for machine learning to help automate and streamline reconciliation activities, multi-party reconciliation. So reconciling of data is becoming more and more challenging. If you think about it as an insurer, maybe 5, 10 years ago you were 80%, 90% managed in-house. So core plain vanilla portfolio, you had one custodian. Flash forward to today, you as a mid-size insurer probably have 14 external managers. You might have 15 different custodians between the general account and separately managed accounts or other sleeves of business. You've got your own independent data source. Each of the custodians has their own data source. Your managers have their own way of tagging data. And you've got to reconcile all of that transaction activity, all the event activity, positions, cash flows, cash reconciliation. And you've got to do it quickly, and efficiently so that the managers can start their day every day and make timely investment decisions.

So reconciliation of that data and all of those data points and using machine learning to help identify the counterparties, the tolerance levels, if something's out of whack or within the threshold, can really bring scale and efficiency. And we're starting to see that as well. And then the third area is a little more broadly around intelligent workflow automation. So think about the digital worker. And so SS&C last year acquired a company called Blue Prism, which was a leader in the digital automation and intelligent automation and workflow space. And we're using that both internally to digitize some of our own processes. To where, instead of us having to hire 10 more people, if we can make 3 or 4 of those people digital workers to augment our existing staff, we can do that faster. And those digital workers can be very efficient and they can help bring an increased service levels and response times for our clients and our own processes.

Same thing for our customers. And in insurance we're seeing it on both sides. We're seeing automation tools being used to apply for catastrophic events. For example, if you look at the PNC space, you have a big event like a hurricane, and all of a sudden these claims come in once, like in Florida. How do you manage that huge spike in activity all at once? And being able to digitize that? Or you're issuing a new product and you want to get out there and have a bunch of new subscribers and collect all that data and let them sign up quickly and efficiently. Automation of those workflow processes and doing that at scale is really important. So we're seeing a lot of digital automation efforts as well in that space.

Stewart: That's great. And I've got a fun question for you at the very end, but here's kind of the final question along here. What are your final thoughts or advice that you could offer the insurance investment community as a whole?

Scott: Yeah, I think, the first thing I would say is don't be afraid to challenge your current operating model. And really do your due diligence and talk to providers in the space. Because there are providers, we're one of them, that are heavily investing in technology and service levels to be able to tackle this problem at scale. Not only for you as a company, but for the industry as a whole. So looking at general problems where we can bring scale and efficiency. And you shouldn't let technology or your current operating model be a barrier to where the business needs to go, whether that be on the product side as an insurer, fraud detection side, cybersecurity side. Or in the area we're talking about, which is the investment side. There's some great opportunities for portfolio diversification, risk diversification, and the ability to capture significantly increased yield in the marketplace. Probably now more than ever before with the types of deals, the political environment, the infrastructure opportunities out there.

And you don't have to build it all yourself. You don't have to have all the expertise in-house. But there are partners out there that have the expertise and technology that can get you there faster. And I think the ability to embrace that either on your own or with an industry consultant or analyst that can help guide you through the process, there's a lot of capability out in the market. More than you might think.

Stewart: That's fantastic. All right. Here's my fun question to close. Who would you most like to have lunch with? Alive or dead?

Scott: Yeah, so I'm going to get sentimental on you, which is, it would probably be my grandmother, who passed about four years ago. She was one of the smartest people I ever knew, and she always seemed to have good advice or a good answer no matter what situation I found myself in. And she lived with us growing up since I was born and was one of my closest friends. So I would love an opportunity to have lunch with her again if I could.

Stewart: Man, that's fantastic. That's really kind. Very nice. I got a slogan for you, SS&C Technologies, making hard things easy, right? That's kind of the business that you're in. Yeah, I learned a lot today. I really did, and I appreciate you being on, Scott. Thanks for taking the time.

Scott: Thank you, Stewart. Always a pleasure.

Stewart: We've been joined by Scott Kurland, managing director of SS&C's Insurance Solutions Group. Thanks for listening. Please rate us, review us on Apple Podcast. We certainly appreciate it. My name's Stewart Foley and this is the podcast.

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