Executive Spotlight: TC Wilson of The Doctors Company

Stewart: Welcome to another edition of the InsuranceAUM.com podcast. Today we are on a CIO spotlight with T.C. Wilson of The Doctors Company. T.C., thanks for being on.

T.C.: It's great to be here, Stew. Thanks for having me.

Stewart: Hey man, let's start it off like we start them all. What's your hometown? What's your first job? And a fun fact.

T.C.: Oh, sure. So my hometown is Richmond, Virginia. I grew up in Richmond, worked most of my jobs in Richmond and still live here today.

Stewart: What was your first job? Now don't give me the fancy job. Give me the first one. My first job was at McDonald's. It was ugly.

T.C.: Yeah, well mine wasn't much prettier. I worked construction.

Stewart: Oh, okay. All right.

T.C.: Yeah. I started when I was 15. My mother was a secretary at a local construction company. So in my summers, I went up there and I worked. Not surprisingly, I drew the short straw on most of the grunt work.

Stewart: Yeah. Of course, of course.

T.C.: But I didn't care. It was a job, I was getting paid. And the Virginia heat and humidity…

Stewart: Oh, in the summer.

T.C.: It's just brutal.

Stewart: Oh yeah. Yeah. How about a fun fact?

T.C.: Oh, a fun fact…

Stewart: Well, you played a lot of football, right? You played in college?

T.C.: I did. I played all four years in college. I don't know if that's a fun fact, I had a fun time doing it. But I certainly loved playing sports, and football was one of the things that I loved, but I didn't want to commit my whole college career to a sport. So I was recruited by a Division 1 AA school, which they still go year-round, I mean they still have you, but ended up playing in Division 3. It was basically an extension of high school. You practiced and played from August to November, and then you had the rest of the time off until next season. So I loved it. We had a lot of great athletes on the team. It was basically guys who just, hey, didn't want to commit their whole college career to athletics. It was a lot of fun.

Stewart: Yeah. I was a professor at a D3 school, and some of my very best students were athletes. You've got to be able to manage your time. There's a real commitment there, but it's not a full-time job like a D1 athlete has. I mean it's a tremendous commitment in D1, for sure.

T.C.: Oh yes, for sure.

Stewart: So your background. We've been friends for a long time, and we were talking right before I hit the record button about some of our history, and your history includes a pretty big stint as a consultant. Now you're the CIO of The Doctors Company. Maybe to start, can you give us a little bit - The Doctors Company is a kind of unique firm and maybe we could just start there.

T.C.: Sure. Yeah, so The Doctors Company was founded back in 1976. So we're the nation's largest physician-owned medical malpractice insurer, and we protect over 90,000 physicians and surgeons nationwide. We've also expanded into multiple strategic business units over the past couple years. So we not only provide medical malpractice, we also provide comprehensive risk solutions for large groups, healthcare systems, and hospitals. We have about $6.5 billion in assets. It's about $2.7 billion in surplus. So it's a very large company.

Stewart: Yeah, it's a big company and I've known of it for years. We have some mutual friends that were on the board years ago and so forth. And actually one of your board members has done a podcast with us. So kind of a small world there, but…

T.C.: Right.

Stewart: Your background, you were an investment consultant for insurance companies, and now sitting inside of one. I kind of went at it the other way. I was at an insurance company and then went to the asset management side. The thing that I found different was I didn't feel like I was nearly as close to the liabilities when I was a third-party manager as I was when I was internal to the firm. What do you see as some of the big differences of being an external consultant for a company versus being in the CIO seat?

T.C.: Yeah, that's a good question, and one that... There are a lot of differences, Stew, that I've experienced. And it took me a while once I came in... Well, let me back up a step. So consulting, we worked through the CFO or we worked through the treasurer or controller with all of my accounts. Nobody had a chief investment officer. So it took a little bit of time when we'd come in with recommendations, whether it was on asset allocation shifts, whether it was on changing managers, but everything was investment related. And as you just stated, from the outside, we really couldn't see what was going on internally. Not only on the liability side, but what else is going on in other areas of the company that investments have an impact on. So once I got in, I basically rebuilt the consulting practice inside of The Doctors Company.

There's a team of three. I have Wilma Uribe; she is a senior investment analyst and my treasury manager. So all of a sudden I've got day-to-day coverage of the cash management program of our company. And I'm not just talking about cash coming from operations, I'm talking about how much we have in our banks versus how much we have in our general account and making sure we're minimizing the bank exposure. So we're constantly tracking our cash and cash needs. When I got inside, I saw that our cash levels at our banks were extraordinarily high, were very conservative. We wanted to make sure that we had enough cash in the banks to provide coverage if we needed it, but it was way too much. And I said, look, we need to do a better job at managing cash. Let's get it over to the investment portfolio. Let's start earning something on that versus nothing that the bank was generating. So I think that was a big part of it, and Wilma does an excellent job staying on top of that for me.

She also tracks our capital commitments. So we have a lot, and we'll maybe get into this a little bit later, but we do have a lot of private investments, or LPs, that do have capital calls. So we need to know when those capital calls are coming, where we're going to get the cash flow, make sure we have enough and so forth. She's on top of that. So she's great. Cash management, investment, research.

My other member is a fellow by the name of Harlan Schaedig. He's based out of our East Lansing office. Harlan is also a senior investment analyst, but he is also an investment accountant by background. So it's very important, and I knew this from the outside, but I didn't realize how important accounting was within the insurance company until I got inside.

Stewart: Yeah.

T.C.: Harlan is remarkable with regards to that. Staying on top of OTTI on a monthly basis. Staying on top of our compliance, not only with our policy, which basically falls on me, we need to make sure we're compliant, and we always are, but our state codes as well. I mean we write in all 50 states, so it's important. We've got multiple portfolios, multiple state exposure. It is a daunting task to stay on top of that, and Harlan does that for us as well. So I've got a very well-rounded team.

So I think the biggest part was, for me moving out from outside to inside, was, one, rebuilding the team and being more attached to the things that I just went through that my team provides. But two, the efficiency of actually making portfolio moves is much quicker now. So I don't have to work through an intermediary anymore. We can make moves within our investment policy inter-quarter if we need to. We're not active, we're not making tactical bets, but if we have a lot of cash come in and we need to invest it, we can actually make that without going to the committee or the board as long as it fits within the parameters of our guidelines. So I think the efficiency part of investing has made a tremendous difference to us and our results show it. And I'm very proud of the results that we've done and the team that we've built.

Stewart: Yeah, I mean one of the things to talk about is, when we look at results, and we're talking about some companies are more focused on book income and some are more focused on total return, is there a secular shift in your mind between booked income and total return at this point?

T.C.: I think it's undoubtedly a secular shift. So historically, as you know, well-capitalized companies, like The Doctors Company, can afford to take on a little bit more risk as defined by anything that's mark to market. So let's just use equity for it, let's just stick with equity. So yeah, we can take on more risk. Long tail business, a well-capitalized company. In the last couple years it's been really hard, from a book yield and booked income perspective, for all the reasons that you know, with rates lower for longer, a lot longer than we expected. But given the changes in rate moves this year, we are actually entertaining the idea of taking less risk on our equity exposure and kind of locking in these juicy book yields that we're seeing and haven't seen for, I don't know, 10 or 15 years.

Stewart: Yeah.

T.C.: It's hard to turn that down.

And so the question, again, was booked income versus total return. We're not giving up on total return. 40% of our surplus is still in assets that are mark to market. We've been as high as 70%. But if we can stay at 40%, so we still have exposure to equity, but move some of our cash or some of our other maturities or proceeds into these higher-yielding credits now, we're considering that.

Let me give you an example. Back in 2019, I was in my second year, third year internal, we got concerned about rates being lower for longer and got concerned about inflation and got concerned about volatility. So what we did is we added a couple asset classes in there. We increased, we increased our real estate, we increased our infrastructure, and we set up a short-term liquidity portfolio through an outside manager. Anyway, it went sideways for about two years, sideways meaning no income, no yield, because rates didn't move.

Fast forward to 2022, our book yield now has increased by 100 basis points in just under 11 months. And we are projecting to come in, in this year, about 50% higher in actual booked income dollars than what we projected at the beginning of the year. And the reason I say that, and the reason I gave it a little bit of background, 'cause all those strategies we put in place three years ago came back in spades for us when it comes to income. So now my board's looking at these income numbers, and I am too, because you can compound those actual dollars coming into our portfolio, saying, "Hey, maybe it's time to consider even investing in even more income-generating type investments." So anyway, long answer. We like booked income more than we liked total return a year ago and that might stick for a little while.

Stewart: That's interesting. And I think one of the things that you're mentioning here is, and we had a podcast with Aaron Diefenthaler at RLI who said, "When I look out at the treasury market, I can buy treasuries and increase my book yield versus a year ago where that was completely impossible." So one of the things that we kind of touch on sometimes is the importance of stress testing investments. And as you know very well, insurance companies run these investment portfolios inside the belly of an operating entity. Can you talk a little bit about the importance of stress testing investments versus the operation?

T.C.: Sure, can do that. And just back, what you mentioned about Aaron, to close the loop there. We came in 2022 with a bunch of cash, we're just sitting in a conservative cash position. We actually transitioned that to a treasury ladder in the middle of 2022. And it was a short-term ladder, for the reasons that Aaron apparently went through as well. And so we benefited from that. So I wanted to close the loop on that since you brought that up.

So back to stress testing. This is an interesting analysis, and of course we stress test our portfolio every year and we put in different assumptions. In December of 2021, Stew, the assumptions were 20% equity market decline, 100 basis point rise in US treasuries, high yield spreads gaping 100 basis points, and investment spreads winding 30 basis points. So, this is what I showed my board. While our meetings are not recorded, I'm pretty sure I told my committee, "Don't worry, all of these will not happen at the same time."

Stewart: Of course not. No, why would they?

T.C.: They never have, right? But I said, look, let's just stress it, let's assume they all happen at the same time. And good thing we did, and we do it every year. And of course they don't always happen. So we did take a look at the impact on our current holdings. Actually drilled down to the individual holdings that we held at the end of 2021. Anyway, it turned out the stress testing was spot on, as it should have been. That's what you hope to see. And many of the strategies that we started to favor in 2019, 2020 that I mentioned before, were positioned to benefit from these downside events. Real assets, inflation hedging, short-term liquidity, and then a dedicated short term US treasury portfolio, provided some very good downside protection this year, and has not put us close to any kind of strain on meeting our obligations. So good thing we did the stress test and good thing that, even though they all came true, we're still in a very strong position - our RBC is 700%. So we're in a very good position right now.

Stewart: Yeah, that's terrific. And it's great when your risk management methodology pans out. Even though it was a stress scenario, you’ve got to feel good about the fact that the scenarios that you put forward were realistic and that it came in the way that it did. Just to crank the lens out a little bit wider, where do you see finding return over the next... pick your period, 5 years, decade? It is a challenging environment right now by any measure. Where do you see the opportunities?

T.C.: Yeah, that's a good question, and one that we are going to be addressing at my board meeting next week. And we project 5 years out, when my CFO does his projections. And so if you ask me over the next 5 to 7 years where we think we're going to get return, we do like fixed income. Again, locking in book yields that we haven't seen for quite some time. Hell, they might even get up to 6.5% or 7% this time next year, which is just crazy, right? I mean, when's the last time we've had that? It's been 20+ years ago. So we do like the fact that we can maybe lock in some yield and get the return from there.

We're less positive on public equities. We still think there's some overvaluation there. With the recession risks and all the geopolitical risks going on in the markets right now, we just don't see public equities generating the return that they did over the past decade, which was, what, I don't know, upper teens, somewhere around that.

Stewart: Yeah.

T.C.: So we're less positive on equity, so we're going to stay underweight on equity. We do like infrastructure debt and equity. The Inflation Reduction Act actually is very good for infrastructure. We built up a heavy exposure back in... Not heavy, we increased our exposure significantly back in 2019 and 2020 to infrastructure debt and equity. So there we're going to be clipping coupon that are very strong and we're going to have exposure to areas that should benefit from the Inflation Reduction Act that was recently passed.

Finally, believe it or not, I never thought I'd be saying this even though I'm a believer in it long-term, illiquid investments we think are going to provide a good return opportunity for us. Again, being a well-capitalized company, we can afford to take on a little bit more risk in investing in illiquids, private equity, private credit illiquid. Venture capital has entered the discussion recently as well. Those are ones that we are taking a look at. And of course we're limited by states on how much we can put into schedule BA assets. But we do like the illiquid markets and are considering putting some into those and generating returns, I don't know, low to the mid-teens, over the next 5 to 7 years, if not longer.

Stewart: And you talked a little bit about this. It seems, from other conversations I've had, that the wind has blown in the favor of public assets, and folks are adding some liquidity back into portfolios as rates have increased in 2022. And it sounds like you're kind of in that camp, at least in the near term. How do you see the opportunities in private markets versus publics? You mentioned your interest in illiquids’ longer run. So you and every other insurance company is a regulated entity, right? You've got lots and lots of things to consider outside of purely an investment focus. So how are you working with regulators at The Doctors Company, maybe that is similar to other companies and maybe some things that are specific to The Doctors?

T.C.: Yeah, so I am very involved with our regulators, and I'm not so sure that that was the case prior to my coming on board. There was a relationship, but I don't think it was as involved as it is now. And what I mean by that, so I am on the advisory board of COIN, which is the California Organized Investment Network. If you're not familiar with COIN, basically COIN is a department within the DOI that reports to Commissioner Lara. It's really a collaborative effort between the DOI, insurance companies, affordable housing agencies, economic development organizations, and community advocates. So it's a collaboration of all of these. Insurance companies are the ones that are providing the capital to support these different areas. It was started over 25 years ago and most of the previous... and this is years ago, most of the initial COIN investments were in municipal bonds that helped fund areas in underserved communities or areas that were impacted by climate change or so forth.

So it's a very mission-driven organization, and we're a mission-driven company as well, so we support what COIN is trying to do. What that does as far as working with regulators, it gives The Doctors Company access to some of the thinking that they're doing. They're still going to do what they're doing, they're still going to regulate, they're going to do everything that they've done historically. But from an investment perspective, it helps me do what's best for The Doctors Company by accessing a qualified list of investment that COIN has available for us. And again, it's mostly ESG-related type investments, and we're big supporters of that.

So I think it's good to have a strong relationship with your regulator. I'm the CIO, so I'm not the CFO or the chairman or our head legal guy. But from an investment perspective, my relationship has helped, because I'm able to do things now and work with the DOI to make sure that what we're doing is in the best interests of our shareholders.

And then one example of the benefits of having this relationship, and me being on the advisory board, and I'm on there with two other CIOs in California, one example is the leeway clause. So, in California, the leeway clause basically says you can only put 5% of admitted assets, or 50% of surplus, whichever is the lower of the two, on schedule BA assets. So most everything that COIN offers falls on BA, except for community bonds that I mentioned earlier. So I went to them and said, "Look, we're already capped out at 5%. I want to add to COIN investments, but I don't have that capability." Fast forward to today, it went to general assembly, a new law was passed, with our input, that said you can go above 5% now, as long as anything above 5% goes into COIN qualified. So it wasn't exactly what I was looking for, but it was somewhere, it was a compromise. It just made my ability as CIO a lot easier to pick complimentary, low correlated assets that we believe can perform, but also can serve... that money's going into areas that COIN's mission is designed to serve.

Stewart: And that collaboration has got to be helpful for them too. The regulator has got to value being able to have that dialogue with you and other CIOs I would think.

T.C.: Yeah, it's a two-way street, and I work with them. So they're basically doing manager research in the COIN group. Manager research, trying to find these good strategies that they can make available to insurers. So they call on me frequently, whether a call or an email and say, "Hey, we're looking at this type of investment, given your background, here's some of the things we see. What do you think?" I love doing that. That's my background. And I've been told by them, "T.C., you're one of the few that actually respond to us." And that blows my mind, Stew. How is that possible? Again, it's a two-way street, collaborative effort. If we can help them, obviously they can help us, and we all benefit at the end of the day.

Stewart: Absolutely. And you're mentioning sustainable investing, and the NAIC has been out loud talking about measurement. There's data problems around finding out impact of various asset classes depending upon what they are. Questions about how you get measured. You'd mentioned that The Doctors Company is mission-driven in that regard. Can you talk a little bit about how you see sustainable investing panning out?

T.C.: Yeah, I mean I still obviously think it's up in the air with how it's going to pan out. Every manager that we deal with, and every manager that we look at, say that they have a sustainable overlay to their strategy now. And they say they practice these things internally with running their organization, and I call BS on that, and we do. But everyone's saying it because it's the right thing to say right now. We think sustainability, sustainable investing, is here to stay and we are committed to it. In fact, a little over a year ago we added to our investment policy a section dedicated to our commitment to sustainability investing. So it goes through the process, the things we look for, and why we support these types of investments. Most of them come through COIN, again because COIN is there for underserved communities, areas that have impacted by climate change, or small businesses that have been impacted by external factors like COVID and the closing down that we went through there.

And so we're very involved with that, and we're supportive. The question going forward is, that's great, we're big supporters of that, but how are we going to measure it? I don't have an answer to that right now, and I've asked that question on many panels I've sat on recently. I've asked that question to people who work for S&P, to people who work for AM Best, and everything is still kind of up in the air. So while we're committed to the concept of sustainability, actually measuring it and what that really means is something we just don't know yet.

Stewart: Yeah, I think that's-

T.C.: I think we're ahead of the game, Stew, again, with that policy that we did. And then if you go on our website, we actually have an annual report that's dedicated solely to TDC's mission and support for sustainability investing. And it goes beyond just investing. It's investing in our people as well. It's our foundation and the work we do there. It's all aspects of our company, and I'm really proud to be a part of that.

Stewart: Yeah, that's fantastic. The last question, I guess, I'm going to go out on a limb here and ask you about investment management fees. There's been pressure on fee levels, and you know this area really well. What do you think the future of investment management fees looks like?

T.C.: Well, it's got to be lower. It's unfortunate with... It's not unfortunate, it's just got to go lower. If you look at core fixed income, I won't share with you what we're paying. It's a very good rate, with $3 billion of our assets and then core fixed income and investment grade assets. But it's got to go 25% to maybe 40% lower than where we are today. I think with the efficiencies of investing and... They just have to go lower, in my opinion.

On the equity side, I get really concerned about SMAs for active management. Those fees need to come lower, because with the growth of the ETFs, with the growth of passive investing through ETFs where needed, I think there's a lot of pressure on these active managers to start addressing fees ahead of time, before we come to them. And a lot of managers aren't going to do that, but the ones that see the light at the end of the tunnel and know that active management... I'm not saying it's dying on the vine, active in equity, but it's starting to lose a little color. And with the explosion of ETFs, which we are huge advocates of, and invest a ton in ETFs, I think that that's going to be a challenge market going forward.

Stewart: Do you see a similar trend in private assets, by comparison? Do you see it comparable, or is it two different things?

T.C.: Yeah, I think it's two different things. Unfortunately, with the fees that we've looked at on the private side, they're very similar to what they were 10, 15, 20 years ago, to 2 and 20 or... Yeah, we'll just go with the 2 and 20 as an example. I keep hearing that today, and I am surprised, to be honest with you, that that fee structure still stands. And it's typically non-negotiable and... Oh it is non-negotiable. That's a tough one to break into.

Stewart: So as we kind of wrap here, let me go where... I'm really interested in your answer to this one. So I'll take you back to your D3 days as a student athlete. I know that you remember graduating in your senior year and all of that, as you came out of school. As you look back, and as you look at the opportunity set, and I'm sure that... And I've always beaten the drum for insurance as a career. What advice would you give a 21-year-old T.C. Wilson walking out of college today?

T.C.: I think the best advice, because I didn't know it then, but I certainly know it now, is to listen to people who have been through different environments and, any advice they give you, really pay attention. So what I mean by that, my football coach in D3, he ended up being my first mentor, and I didn't know it at the time when he was teaching me. And I think it was great. He was very strict. He was a VMI guy, so he went to Virginia Military Institute, played football there, but he was a scrawny guy too. He was little, he wasn't intimidating at all. But he always talked about how important it was to have self-respect, give your effort on every play. He always pushed me to succeed. And one of the things that he said, Stew, and I still use it, and I know it's kind of corny. It's an old adage, but before each game he would say, "If you can look in the mirror after the game and say you gave it 100%, then you have nothing to be ashamed of."

He'd always say it, I'm like, okay, yeah, of course I gave 100%, why wouldn't I? But no one's ever perfect. And then you would look back and say, "Gosh, you know what? I didn't try as hard this play, or I missed this block, or I didn't do exactly what I was supposed to be." And he would point those out in films. So for me, it just became this kind of nit, that he would point out the little things around the periphery that really kind of have shaped me into who I am today. It's always recognizing what you don't know or where you can improve, and we can all improve. But he really instilled that in me in a very indirect way. And I still use that today for many things in my life, not just professionally, but personally as well.

Stewart: That is great advice. I mean, the football coach at where I taught, at Lake Forest College, a guy named Jim Catanzaro, goes by Coach Cat, he is a mentor to a tremendous number of people. I mean, the people graduating from there, those students benefit tremendously from him. They don't know... I don't think, and I think you're kind of echoing this... You don't realize it at the time necessarily, but those are important life lessons.

T.C.: It really is. And when I make my presentations to the board or I sit on panels, when I leave the boardroom, or when I walk off the panel, what am I thinking about? I'm thinking about the things that I didn't say perfectly. I'm thinking about the concept that I didn't explain. Even though the reviews are like, "100%, that was fantastic." I get that all the time. And they don't really pick up on the little things, but in my mind, that's what I'm focused on, because next time I'm going to make sure I don't do that.

Stewart: I love it. That's great advice. T.C. Wilson, thanks for being on man. CIO of The Doctors Company. T.C., Thanks for taking the time.

T.C.: You're welcome, Stew. Any time. Have a great day.

Stewart: Thanks so much. Thanks for listening. If you have ideas for a podcast, please shoot me a note at podcast@insuranceaum.com. My name's Stewart Foley, and this is the InsuranceAUM.com podcast.

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