Interview with Neeti Bhalla, Executive VP & CIO of Liberty Mutual Insurance

Guest Q&A With Neeti Bhalla Johnson

We are very fortunate to have Neeti Bhalla Johnson as The Interview this quarter. As many of you know, Neeti is highly regarded as one of the global leaders in insurance asset management. While she is as brilliant and forward-thinking as you would expect, she is also funny, genuine and warm. As an example, our call began with us laughing about the trials and tribulations of Boston’s morning traffic. Neeti, I want to thank you personally for taking the time to talk with me. I had a great time doing this interview and wrote as feverishly as I could.

IAUM: What are the most critical issues currently impacting Liberty Mutual’s core business that need to be recognized in portfolio design?

JOHNSON: As we are all keenly aware, both the insurance and asset management industries are undergoing significant operating model changes that present both opportunities and challenges. Technology driven change, shifts in customer preferences and low returns are all examples of issues currently impacting our industry. The increasing frequency of severe CAT events also creates more volatility. It’s incredible that four of the highest annual insured loss years have occurred in the past ten years. The global nature of Liberty Mutual’s business also raises the complexity that comes with multiple regulatory and accounting regimes. Another trend that I am particularly focused on is the amount of excess, potentially correlated, capital that is pressuring returns and could create imbalances on both sides of the balance sheet.

From a portfolio design standpoint, I believe it is absolutely critical to have deep connectivity and collaboration between the asset and liability side of the business. Given the shifting nature of risks, we cannot afford to operate in silos and optimize independently for siloed outcomes. Clarity on what the objectives of the Investment portfolio are and regular dialog on how these align with the aspirations of Liberty Mutual Insurance Group is critical. We are building our organization to be uniquely connected with the Insurance business. Given the emerging overlap between insurance and financial market players and risks, interesting opportunities can be identified through communication and sharing of expertise across the entire firm.

IAUM: This issue is dedicated to Women in Insurance. I know that you have been actively involved supporting both the IWIN (Insurance Women’s Investment Network) and WE@liberty organizations. What do you think the most important issues are for women in finance and investments?

JOHNSON: I actually think about this a lot, partly because I have two daughters who thus far are showing no interest at all in this area and particularly because it’s so hard to find good, diverse talent. As an industry, we seem to have no trouble attracting new talent but have a hard time retaining it. I don’t have a good answer for why, but some guesses include a lack of senior role models and/or the culture ingrained in this highly competitive field.

The most important issue for any of us is whether we get to do impactful work and get recognized for it. Going forward, I actually think that women may have a competitive advantage. Given the expected expansion of data, AI and machine learning, there will be more value placed on skills associated with recognition of customers’ needs, relationship building, holistic problem solving, multi-tasking – skills that I believe women excel at. The question is whether companies will start to recognize the value of these qualities and harness the power of what women bring to our industry. Will performance evaluations start to measure and reward these skills?

IAUM: What are the best and worst investments for outsourcing?

JOHNSON: Scale, complexity and control are three important considerations in evaluating the decision on insourcing vs. outsourcing. We in-source as much as possible with these considerations in mind – that’s a conscious choice. We focus a lot on developing and attracting talent. It is important for us to cross train talent given how industries and markets are evolving. We then deploy that investment expertise to evaluate opportunities and risks across the platform. The ability to support our customers from both sides of the balance sheet could be a competitive advantage and you can only do this if you have talent that is trained to think cross-business, cross-asset.

IAUM: How do you think investing for insurance companies will be different five years from now?

JOHNSON: Focusing on the P&C side, it seems to me there is a false choice that companies are making between maximizing return on investments vs. maximizing return on insurance.

Not having grown up in the Insurance investing industry, I have spent a lot of time studying the players. Currently, the insurance and investment operations operate in silos.

But that creates an opportunity, too. Insurance companies that can build a holistic, integrated, dynamic capital allocation process to evaluate where their capital is being treated better are more likely to outperform over the long term.

Scale will also matter here due to the ability to innovate and access differentiated sources of risk/return. In addition to scale and diversification of business, Liberty has the advantage of a mutual ownership structure which allows us to take a long-term perspective rather than solve for quarterly results.

IAUM: Based on this outlook, how will the skills and expertise of high- performing CIOs change?

JOHNSON: CIOs need to become partners in thinking about capital and risk allocation across the entire organization. Most importantly, to get rid of the silos and operate under a “one portfolio, one team” approach.

If you look at the challenges that the world faces today – climate change, shortage of sustainable infrastructure, cybersecurity etc. – insurance and capital can be part of the solution. CIOs will need to get their organizations ready to partner with the core business to create innovative solutions. These are also more likely to be more correlated with investment portfolios than was common wisdom in the past. CIOs will need to be smarter about technology and data analytics.

IAUM: Insurers have turned to alternatives and private markets in response to low yields. Have they been adequately compensated for the risk, or have they contributed to these risks being over-priced?

JOHNSON: We have been investing in Private Equity since the 1980s, and in some other private asset classes for about two decades. We don’t invest in hedge funds. We have been compensated well for the illiquidity risk over this long horizon.

Private assets play an important role in overall portfolio construction and the sizing of these asset classes depends on the objectives of the portfolio. But, using them as a source of purely yield enhancement in a low yield environment is a terrible idea in my humble opinion.

There is no question that private markets – both equity and credit have grown substantially and that the level of compensation they offer is lower today. I don’t believe that insurers are the marginal buyer, however, and therefore don’t think that they have contributed in a major way to the return compression. Pension funds, sovereign wealth funds and endowments and foundations are much bigger players in this arena.

IAUM: Last question: What would you tell your 21-year-old self?

JOHNSON: That it will all work out. Initially I thought I would go into politics in Kenya. At that point, I hadn’t heard of investment banking or Goldman Sachs – none of that sort of thing. But instead I applied to PWC and then failed the entrance exam. I hadn’t failed a test in my life up to that point – I cried for four days. And then went to work for the Nairobi Stock Exchange – as an intern! I learned of the Rhodes Scholars program through a newspaper ad and applied. I went to Oxford University where I got both of my masters’ degrees and met my husband. Now I am in the insurance industry. I would tell her that it will all work out.