Executive Spotlight: Waymond Harris, Senior Vice President and Treasurer of Blue Cross Blue Shield of Michigan and President of Bricktown Capital

Stewart: Welcome to another edition of the insuranceaum.com podcast. My name's Stewart Foley, I'll be your host. And today we have a CIO spotlight with a very special guest, Waymond Harris, Senior Vice President, and Treasurer of Blue Cross Blue Shield of Michigan. Waymond, thanks for being on, man.

Waymond: Thank you for having me, Stewart.

Stewart: It's going to be fun. We'll start this one like we start them all. What's your hometown, your first job, and a fun fact?

Waymond: Sure. So, hometown. I'm born and raised in Flint, Michigan. I almost did this for a fun fact, but we could talk about this a little later. Most people know Flint, Michigan, if you're our age, Stewart. There was a movie Roger & Me. I'm actually on the cutting room floor of that movie. So, if you go back, my father worked as a UAW employee for the plant of Flint, Michigan. And there was a parade, if you go back to the movie, of all the kids who were children of those employees on BMX bikes. So, I got cut off at the very end. So, that's where I'm from, Flint, Michigan.

Stewart: That's awesome.

Waymond: First job, we talked about this a little bit. So, I didn't have a traditional first job. My mom was a school teacher, so she used to always say, "Your first job is to earn good grades in school." I'll give you two. My true first job, which I didn't last long as, was trying to be a tutor for someone. Realized I didn't have the patience to do that at that time. Don't know if I still have it. So, I think I tutored the person maybe twice and they were like, "You need to find someone else." My true first job, I would argue, was the Army. After I graduated, and we can talk about this later, I went to the United States Military Academy at West Point. That was the first time I earned any sort of paycheck.

Stewart: Good for you. That's a great fun fact. And you're also the president of Bricktown Capital and I want to talk about that. It's a subsidiary of Blue Cross Blue Shield of Michigan. But before we go there, based on current market conditions, I think everybody's saying, “What do you do in these unpredictable markets?” And a year ago, everybody was saying, “How do I get more yield, because yields are flat and really low?” And now that whole conversation has changed as rates have come up dramatically in 2022. The valuation metrics have changed, a lot has gone on. What's your plan here in this market condition?

Waymond: So, I'm actually going to relate this to another fun fact I almost gave you. So, I became a blue belt in Brazilian jiu-jitsu earlier this year. And one of the things you learn in jiu-jitsu is that, oftentimes, the best thing to do is to do nothing at all if you're in a safe position. I would argue that, in uncertain times like we see right now, or particularly this market, the worst thing you can do is to try and really start to rethink all of your allocations or make rash decisions. The way we try to think about it is we try to plan for times like this. And by that I mean you should have been positioning your portfolio. No one could know when we are going to see rates rise or what that path of rates rising would be. But we knew that it would happen at some point.

So, starting about five or six years ago, we really set about a path of trying to diversify our portfolio. If you look at the portfolios we manage for our enterprise, they all have roughly four major buckets. Global fixed income, global equity, a bucket that we term as diversifying strategies, which we can talk about in real assets. Five years ago, you didn't see a lot in diversifying strategies or real assets. So, that had been our focus for the past five years. And this year, we have seen it really come to fruition, particularly in diversifying strategies, because I've listened to your podcast and I know other insurers will talk about it, but typically an insurance portfolio, by nature, is going to be short volatility. It's going to be a portfolio where when you see markets start to be volatile, and especially like we've seen this year where every market you're in is volatile, you really need some asset class in your portfolio or some manager that's long volatility to offset that. And we've been able to add that aspect to our portfolio through external managers and through internal managers as well. So, the way we think about it is we did all of this work early on so that in a market like this, we think our portfolio is set.

Stewart: I love that. And I mean, insurance companies are always talking about liquidity, and certainly volatility. And so how do you think about liquidity and volatility? And I think this is right, is I think that insurers view this differently than asset managers do. Is that fair?

Waymond: I think it's fair, but I actually might state it a different way. I think asset managers typically think of just market volatility. When you're managing an insurance portfolio, we think about volatility for a couple of different buckets. There's obviously market volatility, the market value is flowing in to our financial statements. But we also think about the volatility we see on our income statement. We are gap filers and statutory accounting filers. And then we also think about the volatility that the portfolio is instituting into our statutory capital. Well, one of the things that I always tell my team is the fact that the portfolio is here to service the business, not the business to service the portfolio. So, first and foremost, we need to make sure that we're providing stable income so that the insurance companies that we are actually managing the money for can go out and do what they do best, which is write business.

So, when we think about when we're dealing with our asset managers, we know that that market volatility is going to come through. But the best example would be how you've seen a big push into alternative investments or GPLP structures. And people do that because they're looking to lower that volatility you're seeing to the income statement. I would argue that we do that somewhat, but we also want to make sure that while we may not see that volatility in the income statement this year, we are forecasting and understanding that, just because they have a reporting lag, you're still going to see that volatility coming through your income statement. So, we have to manage what we're doing on the liquid side of the portfolio and on the private side to ensure we're not instituting too much of that volatility into our income statement. Generally, that's going to affect our statutory capital.

And then the second part of your question, liquidity. I don't think we think about this different than other insurers. Our hope would be that we should be providers of liquidity when you see a market of uncertainty. We have a few different lines of insurance throughout the enterprise, but in general, when you see uncertainty in the markets, people are still paying their insurance policies. So, we continue to get funds into the portfolio. So, that should allow us opportunities when managers... And we've actually seen this happen with some of our alternative managers. When they're still fundraising and they need people to help them reach their targets, we should be able to be there to help them with those targets and hopefully we can help them drive better economics for ourselves, really be able to take a chance and look at new and interesting strategies, or even get into some funds that maybe we hadn't been able to get into before.

Stewart: And you talked about the alternatives and I think that you built an alternatives... I mean, you're a very innovative CIO, right? You're a very innovative insurance investor, and we were introduced by Conrad Black, and I really appreciate that because I think that you've done some innovative things, and one of them is an alternatives program that you've built from scratch. And we talked about, you just mentioned, that the portfolio's there to support the operation. So, a couple of things. What do you think the role of an alts portfolio is in an insurance company? And how do you get the non-investment professionals on board with an allocation that they may not understand or may not be entirely comfortable with? Even if it's the right thing to do.

Waymond: So, we'll start with the first one. So, how do we go about this, let's start with the education part first. So, actually, I believe that this is an old Peter Lynch quote that if you can't say your investment thesis within three sentences, then you can't state your investment thesis really. So, I think the first thing that goes on is education. I mean, not only education for us, but education for the external stakeholders within the enterprise to understand what we are doing. That really drives the whole process from the beginning. To me, if I can't go to an internal stakeholder and explain very simply... And I will use my wife as a test case. If I can't go and explain to my wife what an investment we are making, particularly if it's an alternative, in terms she can understand. She is a well-educated, college-educated person but not deeply involved with alts like I am, then I know I can't explain it to an external professional. So any investment that we have in our portfolio, I guarantee you that either myself or someone on our team can explain it to you so that you can understand in a simple and understandable manner.

The second thing about building the alts program, I think, is that team. So, as you think about it, we have now probably over 20 different external managers, both in alt and in some liquid alt investments. And as we think about it, I need a team that's able to have proper oversight to understand the controls they have so that they're falling into our controls and are able to look at new and innovative ideas. So, when we started building our alts program, we also started hiring a team, and we're going to talk about diversity later, but part of that was building a team that has a diverse background. On our team, we have people who have backgrounds and options traders both on the floor of options or at asset managers.

We have people who have backgrounds like me who worked in equity or fixed income research at a couple of Wall Street firms. We have people who are non-investment professionals but may have very good or, I would argue, even better than me, quantitative backgrounds, whether it's in actuary or engineering. And then we have people who have come up through the traditional asset allocation route, working for different pension funds or foundations. When you combine a team like that, you're able to go out and truly build an alternatives program that I would argue may not be a true foundation model. But what it does is it helps us with that diversification that we are talking about. So, we're able to get exposure to different factors that can offset what the primary risk factors are that you're going to have in any insurance portfolio, which is going to be your duration risk, because you're going to have to hold a lot of fixed income, and your equity risk. So, yeah, I guess I answered both questions and why I have the alts program - but then the keys to building it.

Stewart: And sort of on the back of that, can you talk a little bit about the tools and processes that you use to support your investment decision-making?

Waymond: Sure. So, when we think about tools, I would argue there's really two sides we have to think about. One is the tools for helping us analyze and search for different investments. And the other is to help us actually report that out again and what would be one of our core principles at Blue Cross Blue Shield of Michigan, which is clear and simple. So, as far as software, we use Bloomberg like everyone, but we also use BlackRock's Aladdin platform that helps us with our internal trading, but also we use that for a lot of our factor-based modeling. We have Informer's Zephyr system, which helps us with some of our manager searches and more of the normal liquid long sectors. So, we also have Efront and Frequent to help us with our alternative searches. So, all of those different software packages, we're able to use not only to use our searches, but then I might also argue particularly with Aladdin and with Zephyr, we use a lot of that with our modeling of the efficient frontier and creating clear and simple presentations that we can present internally.

And then when you think about process, I would argue that we're always in a continual improvement process. But one of the things that we instituted maybe three or four years ago that's not uncommon, I think, in a lot of places is a pre-mortem process. So, I know a lot of people will use a devil's advocate. So, when you come to the table with an idea, you want somebody to be a particular devil's advocate. Instead of doing that, when we're looking at a new idea or a new asset class, we'll send it out to our whole division. Traders who may not be looking at alternatives, people who are looking at alternatives, people who may be working in operations. And it'll be a shortened version of our write-up that will say, "This is what we're thinking of doing, this is the asset class, this is why this may be the manager that we're looking at." And we give everyone 5 or 10 days to poke at it and come up with a very good reason. And we'll take a look at all of the puts and takes of why we may want to look at it or why we may not, and then we'll go back, re-research, and bring it back to the table. One of the reasons I'd say we don't move that fast, but when we do move and we go into an asset class or a manager, we can move with conviction.

Stewart: And I will argue too, Waymond, that process seems to me that the operations side can be kind of thankless, right? And they've got to feel valued when you're asking their opinion and you're asking the opinion of a lot of people that you value their opinion has got to help with the cohesiveness of the team. Do you see that?

Waymond: If you look, as we think about the team, and this isn't just the treasury group, but throughout Blue Cross Blue Shield of Michigan, we have a lot of longevity in our team. And part of that is that we do value everyone. And I don't think it's unique just to treasury, but part of that is I have an operations team. We are our own book of records. So, my operations team needs to be able not only to do everything we need from booking trades to updating our financial statements, they are our first line of defense if we see something wrong in the data. And how can you notice something wrong in the data if you don't understand what the data should look like or understand that investment coming through. So, every job in treasury, from me all the way down to our most junior analysts, is important and we try to value that opinion.

Stewart: I love that. And so I've talked to other senior insurance investment professionals about this and it gets into recruiting talent. And I was fortunate enough to moderate a panel in New York at New York CFA Roundtable, and I really get on my soapbox about this. Managing insurance assets is the most complicated, most complex institutional category. I don't think that professionals like you get nearly the credit you deserve. I think insurance companies sometimes get painted with this, oh, they own a bunch of bonds and whatever. It's like people don't understand why that is, right? So, you're managing money inside the belly of an operating entity and your results can impact that operating entity's ability to write business, as you pointed out earlier. And so all this background leads me to we need the best and brightest talent available inside insurance company investment teams, and we need diversity in every form, right? I didn't know anything about this industry. I don't know if you did or not. But how do we attract the best and brightest folks to see the opportunity in the insurance asset management arena?

Waymond: Stewart, you and I could probably talk about this for an hour. So, like you, I had no clue about the industry. As I mentioned, we're Blue Cross Blue Shield of Michigan. For people listening to the podcast who may know, I'm based in the suburbs of Detroit. As I mentioned, I'm from Flint, but I had been working in New York for different investment banks and hedge funds for 10 years before I moved back. I moved back for personal reasons, and as I was looking for an opportunity, I found Blue Cross Blue Shield of Michigan and learned about this industry. And I think, like a lot of people who hear that we have a large asset manager in Michigan managing well over $10 billion, they're like, "I can go there and I can apply my trade like I did on Wall Street." And then you get into us or into any other insurer and you realize, as you mentioned, this is a lot more complicated.

When we look to recruit, I think we do have some advantages and disadvantages, like any other insurer. Some people might say that Michigan moving out of New York or one of the big metropolitan areas is a disadvantage. I would say, look at the universities we have here. We have a ripe recruiting ground, we have University of Michigan, we have Michigan State, we have Wayne State. So, when we're starting to look at bringing in young professionals, we have a wealth of places within Michigan, central Michigan, western Michigan, where we can go and start to recruit. So, the big thing is to educate and make sure that those students coming out understand that this is a very viable profession. If you're interested in investing in the market, Blue Cross Blue Shield of Michigan is a place that you probably want to consider. You mentioned we look for the best and brightest, but Blue Cross Blue Shield of Michigan is a not-for-profit mutual company with a mission.

And one of the first things we do when we interview people is making sure that they are going to be on board with that mission. We're not like any typical bank or you could argue hedge fund where we're just trying to gather high returns. The portfolio is here to serve the business. BCBSM has a mission. We're committed to our members. We want to be a trusted partner to provide affordable and innovative products to improve their care and help. That's what the portfolio is here to do, to support that mission. And when you start to get people in who buy into the mission, and they are educated, have a desire to actually want to learn more, I don't know if you looked at my background, but I worked at Bear Stearns, so I still tend to like people, as we used to call them, the PSDs. Let me find people who are poor, smart, and a deep desire to be rich. I may not be able to give you a deep desire to be rich here at Blue Cross Blue Shield of Michigan, but I can have you a deep desire to want to have the best portfolio results that can help support that mission. And I think when we get those people in, they tend to stay with us.

Stewart: I love that. And one of the things... I'm not a sports guy at all, but I'll go down this path. Whenever you watch an NFL game and there's the lineup and they state their name and where they went to school. And it's like there's some schools that people playing the NFL, I never heard of that school. And yet there they are. And so what I think, and I taught at a small liberal arts school, and I had some really, really solid students. And I think sometimes, like you mentioned Wayne State, are you able to find talent in some places where not everybody is looking? Is that a key to building a diverse workforce? I mean, I had stellar talent at a Northeastern Illinois University, NEIU. I had wonderful students. They didn't know a thing about this business, they'd never heard of it, they 
didn't know it existed. And it's like how do we connect with those folks to get not only the best and the brightest, but a diverse talent pool as well?

Waymond: I think you've hit the nail on the head. So, part of it is on people like me and you, Stewart, actually getting to those campuses in addition to our day job, and making sure that we are letting the students know that this is an opportunity. I think I would say that actually part of getting a diverse workforce means that you have to go to these schools, whether it's a lane state, whether it's a historically black college. All these schools that maybe the top banks who still want to go with your top 5 or 10 out of US News or World Report aren't going to, you're still getting a great education at all of these schools and there are students that are being overlooked. And we can get them in, we're still going to compensate them fairly, and I believe that, generally, those students will actually tend to have the longevity because you've given them the opportunity. They're still learning a lot, you're on a dynamic team, a team of people who tend to think the same, and we're driven by a mission. So, that's how we try to build the team.

Stewart: And here's the other thing, I mean, your shop and a whole bunch of other shops, insurance company shops, it's smart money. I think that people sometimes feel like, "Oh, I work for an insurance..." It's like, look around, man. There's some smart people that I have not met a CIO or somebody that has a comparable role that's not a pretty savvy investor.

Waymond: I agree.

Stewart: And I am on my soapbox big time on that. I mentioned kind of earlier that you're the president of Bricktown Capital. What can you tell us about Bricktown Capital and why did you decide to do it? And it's a pretty innovative thing that you've done, and I know it was not an easy lift. I really applaud it. And so what was the background there?

Waymond: Sure. So, you're right, it was a pretty heavy lift. You can see that my beard is gray now. And that all happened during the setup and registering with the SEC.

Stewart: Waymond, I can relate, man, believe me. I can relate.

Waymond: Bricktown Capital if anyone wants, I believe the website is live now. You can go to www.bricktowncapital.com and see all of our information. But we set up a registered investment advisory entity that's a subsidiary of Blue Cross Blue Shield of Michigan. This goes back to our point of we're here to service the business. Blue Cross Blue Shield of Michigan, what some people don't know, actually has several different insurance companies and subsidiaries. Not only do we have the healthcare subsidiary, the healthcare company, we have an HMO subsidiary, we have a property and casualty subsidiary, we have a captive insurance company subsidiary, and we also have several joint ventures, which we managed the money for. As our senior leadership looked at the growth of the enterprise and things we're going to do on the business side, we determined that the best path forward for the treasury team to be able to continue to manage those assets would be to actually institute all of the compliance and controls that goes with being an RAA.

So, when I first started at Blue Cross Blue Shield of Michigan, like probably you did when you worked at... We didn't monitor everybody's finances. It's kind of the old thing. We manage bonds, you're not going to do anything with that. But now we have true compliance. I have a compliance officer, we monitor people's trades, we have a handbook, we file an ADV, which you can see, so that if we do bring in assets from an affiliated entity, I can give you an ADV and you can understand exactly how we allocate our trades, all of our policies. So, we really thought that when we looked at it that, that this was the best path forward to institutionalize the controls and compliance that we need to support the enterprise as it grows. It was a heavy list, but I think it was the right way to go, as you saw, as you start to reach this critical mass of assets.

Stewart: And just off the top of your head, what's your split internal external?

Waymond: Oh, internal, external. It's about 80% of our assets, 85%, we manage internally. So, at this point, when we've grown that over the past few years, when I started, Blue Cross Blue Shield of Michigan always managed its investment grade fixed income internally. But my vice president of portfolio management and research, Ryder Campbell, he has a background in high yield bond trading and high yield research. So, a couple of years ago, we expanded the team to hire a couple of high yield fixed income managers and analysts. So, we slowly brought those assets in. And a few years ago we started to really move towards passive and factor-based models for our equity trading. I mentioned that I have gentlemen who have a background in options trading. They slowly started to bring more of those assets in as we were able to improve our systems and compliance around equity trading. Most of our internal equity trading is still very factor-based and passive. But we've been able to go from, I would argue, very high-cost external managers in those liquid asset classes, to doing it internally, and we still are able to beat our benchmarks and I'm saving on those fees.

Stewart: I like it. I would say this, I mean, you and I have talked offline about diversity and we've talked a little bit on this podcast. And when people start talking about diversity, folks tend to think about ethnicity and gender, right? But over your left shoulder is a picture what I would assume is your graduation from West Point, right? Which is a very impressive picture.

Waymond: Yes, sir.

Stewart: And veterans are a group that is an important aspect of diversity as well. So, I would ask you to go back to the day that that picture was taken and apply the experience that you've amassed over your career. And I'd ask you, what would you tell that young man in the picture? What advice would you give your 21-year-old self today?

Waymond: First piece of advice I would give my 21-year-old self, and probably to myself, you don't know it all yet. So, as you know, West Point is definitely... It's a challenge. So, when you graduate, we have a saying there, the best view of West Point's out of your rearview mirror. So, when you graduate, you kind of have this sense of, whew, that's behind me. It's going to be all smooth sailing. So, the first thing I would say is, you've only taken one small step and you've got a lot to learn yet. The second thing I would say is be open to opportunities. I actually tell this to a lot of young professionals. I think very early on in my career, a lot of us get on this, okay, I want to get a job at a top investment bank, then I'm going to jump to a top hedge fund or PE fund, then I'll be a billionaire within the next 10 years.

One is that's probably not likely. But two is when you get locked into these very rigid thoughts, so we were talking about trying to recruit, recruit for insurance portfolios, very few people are like, "I'm going to go to B School, then I'm going to go work at Blue Cross Blue Shield of Michigan for an insurance company." But if you're open to those opportunities, had I not been open to an opportunity, I wouldn't have ended up in the seat that I am right now. So, I think you do have to plan. To fail to plan is to plan to fail, but you have to be open. When I was in the Army, I was in the 10th Battalion in the 155th Transportation Unit. We had watercraft and our motto was “Only fluid, flexible is too rigid.” So, I believe that you have to be very flexible and open to opportunities. You plan, but when things hit the battlefield, you've got to be able to shift that plan and move on in another direction if need be. And it's hard for everybody. It's still hard for me, it's hard for everybody. But I think that's one of the pieces of advice that I try to remind myself all the time.

Stewart: Man, that's great advice. Thanks for taking the time. I've really enjoyed talking with you. I've enjoyed getting to know you, and it's just really impressive what you've built and what you're doing there. So, thanks for being on, Waymond, really.

Waymond: No, thank you, Stewart. Thanks for having me on. I appreciate it. My first podcast. So, you're number one.

Stewart: Oh, man, I love that. That's great. We're thrilled. We're thrilled to have you. So, thank you. Waymond Harris, Senior Vice President and Treasurer of Blue Cross Blue Shield of Michigan, and President of Bricktown Capital. Thanks for listening. My name's Stewart Foley, I've been your host. And this is the insuranceaum.com podcast.

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