CIO Viewpoint: Nico Santini of ProSight Specialty Insurance

Stewart: Welcome to another edition of the Insurance AUM Journal podcast. My name is Stewart Foley and I'll be your host standing with you at the corner of insurance and asset management with an old friend of mine, Nico Santini, CIO at ProSight. Welcome, Nico.

Nico: How you doing, Stewart?

Stewart: I'm good.

Nico: Great to connect again.

Stewart: Yeah, thank you. It's good. We've gotten through some audio issues and we're all up to speed. We've got weather in Nico's area in Connecticut and bright and sunny here in Chicago. Nico and I full disclosure to our audience, Nico and I have known each other for a really long time and we both run money for insurance companies for a long time. And so I want to talk a little bit about how we first met at your former firm, New England Asset Management. You were a portfolio manager, you worked your way up, as a junior guy, kind of as a backup, you became a senior guy, you became running some of the firm's most important relationships and recently you've switched sides and become a chief investment officer. Can you talk a little bit about how that transition has been and how your background lends itself to what you're doing today?

Nico:Yeah, that's a great question, Stew. And first and foremost, I'm happy we're able to connect. We haven't been able to talk for a while. It's good to see across from the mic, so to speak, video wise. Always great to be here, but a good starting point would be, because you bring up a good point about when you're in the third party asset management business, it's very different from being a CIO. You're talking about managing clients' assets from afar and not doing it internally. And the point I was going to make is that if you think about kind of what my career has really developed from, from New England Asset Management, all the way over to ProSight is that if I think about New England Asset Management, you hit it on the head. They were able to provide that kind of that learning experience and culture that was able to build up my credentials to not only be in front of board of directors, but also senior management and also be able to communicate messages.

Nico: And when you think about the transition, in fact it's been pretty easy, it's been pretty seamless. And the reason being is that the credentials that I built up over time about first leading from trading securities, then going into research and then going into portfolio management, it really builds kind of the stepping stones to eventually I think become a chief investment officer and really build up that knowledge base. But credentials really can flow through in a dynamic way. And the step for me has been seamless. After managing money on a third party basis and working with between 10 and 15 clients every day and almost close to $10 billion, it's an easier step to make, because as you mentioned, you're focusing on not only one client now, which is ProSight, which is fantastic, is now I get the capability to fully build out the product and the philosophy and the strategy, tactical asset allocation, but it's really bringing it into fuller focus. And I wouldn't necessarily say that it's easier to be in a CIO role rather than managing multiple clients.

Stewart: I would. I would. The whole thing about, that whole make more money, work less thing. I think it's a
good trade. Let's be honest.

Nico: No, well said. But here's one of the things to think about is that what was easier, I would say with working as a third party manager with 15 clients, was that you only had a conduit into one person. You manage one portfolio and you always talk to the CFO or a CIO or the treasurer. And the beauty of that was when you can use them as a screening mechanism. You ask them a question and they can you give you a yes or no on a solution that I'm putting in front of you? And they will come back and say yes or no. Whereas now what the beauty of, and I think the challenge as well at ProSight is that, I'm the one answering those questions. And by the way, in order to answer the question, I need to go to the CFO, head of finance, the treasurer, my investment accounting folks, my tax folks and I need to gather the herd together to have the conversation before I can actually come up with an answer of yes or no.

Nico: It is a little bit more challenging from that facet. Whereas before I would argue to say it was actually easier because you have that one conduit. That's been a little bit of a change that I'm starting to acclimate to. And frankly, extremely challenging, but the beauty is that you were able to really integrate yourself with the organization. You're able to understand how all the parts move and how they all fit together. And it's really been able to allow me to build up some credentials internally with the firm. As Joe and others in our communication area could ascribe to, it's been a great learning experience over the last eight months and it's been a great way to really acclimate myself to the organization.

Stewart: Well, it's interesting. It's interesting I know that you'll be probably traveling less, I guess we all are, but once we're able to travel more freely, I'm thinking that you might be traveling a little less. Differences, you talked about internal versus external and it always gets down to if you look at the insurance industry, seven trillion bucks in total assets. Over two of that is outsourced. People talk about the CAGR on outsourced assets, that number was a trillion dollars less, not that long ago. What do you think about managing money internally versus externally? And why would you go external if you do?

Nico: Right. Right. That's something I've thought about for a long time and the baseline for that is let's face it, I worked for a third party asset manager. And what I saw from that angle is that offering competitive product at a very competitive price is a no brainer for a lot of insurance companies. What I always struggled with is that, so let's conversely think about my role as a CIO. Do I build it? Do I buy it? Do I rent it? And from a CIO level, with a company of our size, we have about two and a half billion dollars and we're growing, I can't see us really doing things internally when you have the likes of the PIMCOs of the world, the GSAMs, the New England Asset Managements and other firms who do a spectacular job of core management.

Nico: Now, one thing that I've been thinking about and I've been having conversations with internally here is that it's highly cost effective to outsource. There's no ifs ands or buts about that, especially for core assets. Now, if you think about specialty assets, oftentimes you think about these specialty managers out there who do really good things within their slices of the market. Instead of building it internally, there are certainly managers out there who you can hire at competitive fees and get you some really
good risk adjusted returns. One thing I've been thinking about internally is that not building it, but nonetheless, when you're investing in these third party managers, look to potentially not only just give them assets, but also potentially buy an equity stake in them. Now, the reason why I bring that up is because that's kind of a crossover from direct internal and direct outsourcing.

Nico: I think there could be this mechanical nature of the market, where we've seen this from a couple of firms over the years who have put a lot of money with certain asset managers and then have taken an equity stake. And the beauty of that is you're really upping your risk adjusted returns because not only are you getting returns on the assets they're investing, but also you're getting an equity component, which is equity upside with the growth. I truly do think that internal management is becoming less apparent at firms. As you mentioned, third party asset management is growing. I think that's going to continue and the trend's going to continue. And in fact, the trend's going to continue because firms have gotten better at it too. They're providing very good effective cost solutions and they're actually providing more service and they're providing more product at better competitive pricing. I think the wave is still going, and coming on shore in terms of that third party asset management taking place and continually forming over the upcoming years.

Stewart: I think it's a really good point. Outsourcing assets, it is, and you and I have both seen the behind the scenes only at one firm. In my own seat today, I see it from a number of different firms but the level of resources that insurance asset management firms can bring to bear is significant and it's cost prohibitive, it's resource prohibitive to do that internally without a tremendous amount of scale. And at least that's one person's opinion. You mentioned something a little different about internal versus external, just in terms of your perspective. And strategic versus tactical plans. One of the things about you being the person that says yes or no is you own that decision and you own it for a long time potentially. How do you work in your strategic and tactical plans? And, oh, by the way, I don't envy you in any way of trying to having to manage money in this environment. With that big mess of a question, take it away.

Nico: Yeah. Thanks for that Stew, I would hope that you wouldn't have asked that question.

Stewart: That's a Gordian knot of insurance asset management questions right there.

Nico: It is. I guess if you have another hour and a half, I could probably extrude you through my philosophy and thought process. But simplistically said, and as simplistically as I can say it is that the strategic asset allocation that we employ, is a philosophy that really leverages off of each one of our core managers. Because as I mentioned, core managers, you can get them at a very effective cost and also they've got a lot of services out there that they can help you with. The way that I've always thought about it is that why would I want to build a strategic asset allocation model? Why would you ever want to build it internally when you have folks that have been doing it for 10, 20, 30 years and they're really good at it? You're not going to be able to build a model that's any better. I can guarantee you that because they have more resources and I'm not going to hire two people to do it because it's going to cost me a million dollars.

Nico: I think from a strategic asset allocation level, leveraging off the systems, the capabilities, the manpower that these outsourced managers have, I think is incredible utilization of resources and it creates efficiencies that you can never gain internally. And that's my firm belief. Now, what I would say is that from a tactical asset allocation belief is that philosophically, I think that we can do things from a tactical basis, meaning I could direct managers to do certain things, within my core assets. I can give certain
managers who do alternative channels of assets, some additional money. That's more tactical and I can do it pretty quickly and fluidly. But one thing that, and we could talk about this later is that what COVID and the GFC taught me, and I've known this for a while, is that you need to be highly tactical.

Nico: You set up your strategic goals, you set up your directional output, you know where you can go, you know where you have your capacity, but really where you can make really good money and do well as from a tactical basis. And what I'm learning, in what we just instituted, is that we're using ETFs. We're starting to use ETFs much more readily. We've got a capacity of X, whereas we had a capacity of zero, compared to a couple quarters ago. And I think that by using ETFs and using them very fluidly within various segments of the fixed income market and equity markets, is that you can pick up extra alpha. You could do it from a let's say a group of one, which I am. I'm a CIO that doesn't have anyone else working with me and it can be very methodical. And it really parlays nicely into a strategic approach in bringing it down to a tactical level because then you could really attribute the alpha very quickly to your portfolio as you make these trades through these efficient products.

Nico: And I like that. And it's one thing that I never used to like ETFs up until this year for the very reason that I was never in the seat and never seen how quickly the markets have reacted. And snapped back. They certainly didn't in the GFC. This time it did. And I wished that I had the tool set at the time. The ETF strategy has really been parlayed into a nice, what I would call a philosophical approach from my end, in what we've been talking to the board about to actually initiate.

Stewart: I think it's a really interesting point because we've heard from some other folks about how the change in liquidity in the market during the COVID draw down, that ETFs did pretty well in that environment. It's interesting, we hadn't talked about that before this call, but it's interesting that you're taking advantage of that. From an investor, it makes a lot of sense. It makes a lot of sense to me, but I'm not implementing it. You are implementing it so I think that's really interesting.

Nico: Well one other thing, Stew, is that we're a public company so when you're implementing an ETF strategy, they get treated as equities. Doesn't matter if it's fixed income, they get treated as equities on our income statement so it does create some volatility. But the way that I look at it is that as long as you just partition off a small part of your portfolio for the ETF strategy, it will be enhancing to your after tax returns and investment income potentially and it won't create a lot of volatility. Now that being said, the reason why, which really catalyzed that whole ETF strategy was that, and I know a lot of managers and a lot of CIOs have this issue is that we had core managers who are very good at what they do. I've got three of them, very top of the line folks. They do a great job.

Nico: The problem is they couldn't find enough bonds. I said, "Go out and buy me a 100 million of non-agency RMBS." Guess what? They can only buy 25 million. Okay. Go out and buy corporate triple Bs. Well, guess what? They couldn't find enough. It was so competitive. And actually the market reacted so quickly. The way I thought about it is, we were missing out and they were only able to enact about 25% of my strategy. Whereas if I just let them go to buy bonds individually in each one of those markets and say, "Go for it. That's where I think the alpha is." They go and do that and then for the 75%, I utilize ETFs. I can do that instantaneously.

Stewart: Yeah. It's a great point.

Nico: There's a little give and take there because they could buy, I'm not just buying the general market, but they buy the specific bonds, which probably have less volatility. I think the combination of the two really does enhance a portfolio's diversification, by overlaying a tactical asset allocation.

Stewart: How do you see markets trending volatility? Are you building dry powder? Private, public? What do you see at 50,000 feet?

Nico: Yeah, I think, my thought process about the markets are probably not going to be dissimilar to many folks out there. If you talk to and survey 10 CIOs or investment managers out there, they're going to say, "The markets are going to be choppy." For a variety of reasons. One of which is sitting right in front of us, which is the election. Two is that the interplay between the US and China and the relations we have, how is that going to gin out over the course of the next few years? And then obviously COVID and all the implications there and the fiscal policy, monetary policy, all of these things are really going to create some form of volatility. Now, I can't say directly, is it going to be equity volatility or a fixed income volatility? Is it going to be down the stack or up the stack?Public privates?

Nico: But what I can tell you this volatility will certainly be much more present in the marketplace than we've ever seen. And we've already started to see it spike up. Now, that being said, when I think about our portfolio, what we've been focusing on and wholeheartedly focusing on is, public markets are just (they're even those spreads are wide right now) they're still just, they are liquid. You can find some opportunities, but there's not a lot of opportunities out there. One. Two is that you're not being compensated. The risk adjusted returns they're just not there. What we're doing in our portfolios, we're again, kind of similar to a lot of folks. And I hate to say that, because you never want to follow the pack, but we are moving away from public markets, going into private markets because you are picking up a incremental investment income in yield, even with the expense overlay of hiring a manager to do so.

Nico: And I really like that trade because we're not a life company, we're a PNC company, but I'm still looking for the additive incremental investment income and yield to my portfolio. Very few places to do that. The only place to really do that is in private markets. And so we have facilitated a sleeve of our portfolio in the private markets and it's not just corporate privates. I really like the structured securities private market and ABS privates. And I also like infrastructure. And I think the combination of all three of those within privates are going to be a nice, what I would call one, diversification element to our portfolio. Two, downside protection. And then three, which is kind of a trifecta is not only you get diversification and income, but you also can get ESG benefits. Because the infrastructure, solar, whatever it might be is going to give me some ESG.

Nico: And there are also some other nuances around there. We hired two private managers who are going to be implementing a bit of ESG on that. I like that what I call the trifecta of investing, which is again, diversification, income or total return and ESG. I think if you could find assets in that part of the markets, I think you do it. I don't necessarily think you do it aggressively, but I think that you do it to a degree which is noticeable and you can convey a message to the board, investment committee and also rating agencies and others out in the marketplace. That's where I see the opportunity for the most part. I do not see opportunity in public corporate bonds. We're moving away. We had a very high allocation and started the whole process of moving that down pretty dramatically because of where we were in the economic cycle.

Nico: But also similar to what I just mentioned is that we just don't think there's a lot of value there. And in fact, a lot of our peers already have lower corporate bond positions and we're moving down towards it. Not that the peers are right, but I think for our business in how our liquidity profile is forming and our liabilities that even out in these private securities with illiquid tendencies, is still a fit for us. And I think that a lot of insurance companies are finding that out. They're pursuing it and they're executing on those strategies.

Stewart: It's interesting that you bring up ESG because we just became UNPRI signatories just this week. And part of what we're doing is partnering with them to increase participation by insurance companies. I've talked to other CIOs who also have ESG at the top of their priority list as well. Here comes a knuckleball at you that we haven't talked about and I ask all of our guests this question. You have kids that are nearing college age and I teach. I've taught as a professor full-time for the last couple of years and I teach now as an adjunct and the job market went from going great guns, where students had multiple offers and then it went dark. And a lot of folks had their internships pulled. A lot of people had their offers pulled. I get conversations from students, emails from students saying, "What do I do? I'm looking for this, I'm looking for that." What I'd like you to do is take yourself back to when you walked across the stage at your college graduation and you now could talk to you then, what would you tell your 21 year old self?

Nico: That's I'm trying to remember, did I walk or crawl across the stage? I couldn't remember.

Stewart: We're not talking GPA. We're just talking that you made the trip.

Nico: We certainly don't want to go down that path. Let's stick to the topic. I've thought about this a lot actually. And the reason why is because I've been hyper-engaged to my alma mater, Bryant University. Hyper-engaged with them. I'm on the alumni council. I'm among the Wall Street council. I'm on the board that manages the fixed income endowment portion of the portfolio that's managed by the students. I thought I've had many, many conversations and I've thought about it a lot. What I would say is that the ability to interact with alumni and potential employers, I would say is arguably at the highest level it's ever been. You have the opportunity through Zoom, through conference calls, to interact with alumni because in fact, I'd argue to say that alumni are much more interactive with the communities that are out there.

Nico: One, because they're actually donating a lot more. They're at the age in which they're donating and there's kind of this hump in terms of the retirees. Folks have time on their hands where they're advocating for helping the university and the students. And so things have changed in a better way because you can communicate more fluidly. You can communicate more effectively with potential companies that could hire and people who might have an interest in you. And case in point here. What's happened with me is that I give a good amount of presentations to the Bryant community and work with a couple of these alumni communities within Bryant. And what I've found is that I've been getting pinged through LinkedIn and even Facebook, but not that that's the most appropriate leverage point, but immediately after I have these web calls, people are contacting me and these are students and I love it because they need to understand how to interact effectively.

Nico: And I give students who do that an amazing amount of credit because one, they're being incredibly proactive. Two, they're breaking down the barrier of being shy to have this cold communication point. And when I see kids do that, I give check marks and I say, "Okay, these are kids who I should probably continue the conversation because they're aggressive, they're proactive and they understand how to utilize all the tools." Think about that from an employer standpoint, you want people like that. I think it's gotten, the market yes, it's a challenging market, but I think the tools are there and the communication links are there for students to really reach out, to formulate a strategy, to get in front of people because there are people like me, who I would love to talk to students all the time. I love it and I love when they communicate with me. They should always use those leverage points.

Stewart: It's a point that I try to make with students, which is use your resources. You're on a call, I teach a class, whatever and I'll have two or three students reach out to me on LinkedIn and want to connect and the other 40 won't and you go, "Use your resources." That's one thing. And the other thing that you mentioned is really, really important. And despite being the Joe Rogan of insurance asset management podcasting, I'm not exactly sure how big our reach is. But I am going to call out universities and colleges right now. You said at Bryant that there's a student managed component of the endowment. Here's my in your face, not your face, in the college and university community's face. If you are producing students out of your business schools that you think are good and well prepared to go out into the job market, then let them manage some of your money and put your money where your mouth is.

Stewart: There's plenty of qualified people like you, who are willing to help oversee that process and get those students hands on running money. It's not the same as running a paper portfolio or some sort of esoteric exercise. Let those students run money. They'll be more competitive in the job market, they'll have better set of experiences and it's good for everybody. And I really all sincerity, applaud you for your efforts at Bryant. And I know there are lots of other people who are in senior positions at other insurance companies who do the same kind of work, but I've known you for a long time, you're a good friend and I just really want to applaud your efforts there.

Nico: Yeah. And to that point, Stew, it's very important. I want to pull on one string to you that's kind of hanging there and try to unpack that. One thing you said, which is, it doesn't require a lot of resources for the school to release funds out of the endowment. Let's face it. You don't need much. Start them with 250 thousand, start them with a 100,000. Start them with, we've got a million and change. It's pretty small. But the key component is that one, it gets the students very excited because there are tangentially touching that endowment money and they're learning about that process and they're investing. But also from my perspective is that it's very similar, we set out an IPS and guideline which by the way, they put together. And we just ratify - it's exactly like giving them the bounds.

Nico: They can't really do. Once you have the guidelines, give them the guidelines and man the ship, do what you need to do. And if you need to breach those guidelines and expand your capacity, let's have a conversation. It's exactly the way we talk about it with a board. If I've got additional ideas and solutions I want to give to the board, I talk to them about it, I give them the negatives, the positives, and we work through it and we decide. Exact same thing. It's very easy to do. It's just you do need alumni engagement and you need somebody as a professor to really shepherd that process. And we've been very fortunate to have that.

Stewart: Yeah, it's true. I can't thank you enough for taking time out of your day to speak with us and it's great to catch up and I'm very happy to see you being so successful. I know ProSight's going to benefit from you joining there very much.

Nico: Yeah. Well thank you for having me on. I appreciate it, Stew. And as always, let's keep the connection going and hope to hear from you as soon.

Stewart: Thank you. That concludes this edition of the Insurance AUM Journal podcast. If you like us, follow us. If you have ideas, you can email us at podcast@insuranceaum.com. My name is Stewart Foley. I'm your host and this is the Insurance AUM Journal podcast.