What’s Shaping Insurance Asset Allocations in 2026 and Beyond

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Gary (00:00): Welcome to Compound Insights, a podcast by CFA Society in New York. I'm your host Gary Farber. Today, we're very fortunate to have with us Peter Miller of Invesco. Peter is the Head of Client Investment Solutions for North America. His focus is on asset allocation strategies and comprehensive portfolio solutions across institutional and private clients. Prior to joining Invesco, Peter was a Senior Vice President with PIMCO's Financials Institutions Group. You'll also be moderating our upcoming Insurance Investment Officers Roundtable event on December 4th, which will include investment professionals from Principal Financial, Genworth Financial, Alliance Bernstein, Apollo Global, and Neuberger Berman. Peter, welcome to the podcast.

Peter (00:41): Thanks a lot, Gary. It's great to be with you.

Gary (00:44): Currently, when you're interacting with clients, what are some of the top of mind topics that come up as far as investment challenges regarding their strategies?

Peter (00:54): A lot of the clients that we work with now, the continued trend is ever more private market exposure and really looking to find additional return wherever they can – of course in a risk managed way – and really trying to underwrite everything that they're doing.

It's just really fascinating, watching markets evolve over the last several years, and I don't really see that stopping. I think that's just going to continue and a big part of that, again, is just sourcing private market exposure and diversifying and complementing a lot of traditional exposures that they still have, especially when we're talking about institutional clients. As part of that, the technology and analytics that go around that are a big part of that. So, I think it's both sourcing the exposure that our clients want and then quantifying, monitoring, risk managing, all of it goes hand in hand with that.

Gary (02:00): Are you seeing an increasing shift towards outsourcing from the insurance companies and their decision making?

Peter (02:07): Yes, I would say specifically for insurance companies, there's definitely a long history of managing a lot of their portfolios in house with their own in-house investment teams. That is still very prevalent. But, there's no doubt that outsourcing has been an increasing trend, really since the crisis and that has not stopped. Even the most sophisticated and largest insurers out there, who have significant resources, significant ability to manage a lot of their portfolio exposures internally, even they are outsourcing more and more. That may not be half of their assets and maybe a relatively small percentage, but that percentage continues to increase. And, it kind of ties back to the first question around private markets and ever more specialized, ever more esoteric exposures, where it really makes the most sense to work with an outside partner who may specialize in that particular area of the market. So, that outsourcing does continue, and I think it will only increase over time.

Gary (03:24): Once that outsourcing decision is made, what's the process of determining the optimal asset allocation for a client in the insurance sector? What are the key considerations and how does that translate into the proper mix between equities, fixed income and alternative assets?

Peter (03:40): The framework and the process there, that's something that really hasn't changed – at least it hasn't changed in any fundamental way. That's been consistent for many years. It's always been a multifaceted or multivariable kind of process where insurance companies start with the economic risk-return considerations and examining the trade-offs and making sure that, on the one hand, they're seeking return. They want to get paid an attractive return on their assets. But, of course, want to be mindful of the risk they're taking and ensure that they're not exposing their balance sheets to any undue risk.

For an insurance company, once you consider the economic profile of any allocation, you certainly have to consider a lot of other things such as risk based capital: how much of your capital do you have to set aside to cover potential unexpected risk, to cover a potential loss – that's a regulatory thing. There's also a rating agency element to that. And then there are oftentimes accounting considerations as well, whether it's GAAP for international carriers or IFRS, even tax considerations. So, there's just so many additional variables that insurance companies have to consider when they're making these portfolio allocation decisions that go beyond just the economic risk and return. So, that’s what I mean when I say that fundamentally hasn't changed. 

I think what's changed is there are now so many ways to invest. This is going to be a recurring theme, but private markets, things that aren't traded on a screen, things that are sourced maybe in a bilateral private relationship driven kind of construct. Examining the risk, understanding the risk, being able to quantify what's under the hood and then track that over time. And then how that looks through regulatory risk based capital lens or how that looks through different accounting lenses, that's what's going to continue to evolve. But, I consider that to be on the edges and really that fundamental multivariable framework that's something that's been around forever, and I think will continue for a long time. 

Gary (06:15): How do you determine what's the right mix between public and private market exposure? What are some of the variables that go into that?

Peter (06:23): That's always a tough one because I don't know that I would necessarily characterize it as there being a single optimal solution. A couple of key things come to mind that everyone has to consider when they're evaluating public versus private market allocations. One of them, of course, is liquidity. A lot of people rightfully associate private markets as being relatively less with liquid than public market exposures. Oftentimes, your money is locked up for a period of time or, even if it's not locked up, it's just harder to unwind, harder to exit positions. So, there's a liquidity consideration there for sure. 

There's also a consideration around data availability and insight into what the underlying exposure is in the fund or in the portfolio for a private market allocation. So, when insurers or any investors are trying to evaluate what's the right mix between public and private exposure, you really need to consider all of those elements. It's not to say that adding or increasing private market exposure or less liquid exposure is wrong. It just means you need to really go into that with eyes wide open and really have a good understanding of where things can go wrong, where things may get stressed, what types of scenarios are you going to have to really prepare for and be conscious of going in. And if you do your homework, if you do that right, then there certainly is nothing inherently wrong with tilting ever more towards that private market or less liquid allocation.

Gary (08:12): You just touched on it, doing your homework. How much has technology as it's evolved been helpful in figuring out the right mix? And particularly AI, is that much of the equation at this point or is it still sort of early using AI to do some work in this area?

Peter (08:26): Technology no doubt has been hugely beneficial when talking about portfolio construction, when talking about combining public and private market exposures. A big thing, something that we do a lot here, is think about modeling and quantifying private market risk and private market exposure and thinking about things less in terms of asset class labels and more in terms of risk factor exposure. So, what types of investments are exposed to interest rates and credit spreads, Or different equity factor exposures. I think it's helpful to think about exposures or portfolio allocations in that way because it does lend itself to being a little bit agnostic to what the label is, whether it's public or private. So, technology has been hugely beneficial along those lines because there's so much data out there where you can quantify public and private exposure to those different types of factors. 

I think on the AI side of the technology question, that one is certainly newer and certainly early days. We haven't really seen widespread adoption of AI in a way that has really fundamentally changed what our clients are doing or what we're doing on behalf of our clients when it comes to portfolio allocations, asset allocation. I think very early days. But, there's no doubt that AI, when used properly, could be a massive asset and a really helpful tool just to make things much more efficient for users who know how to deploy it, who know how to get the most out of it and take a lot of the time consuming, kind of manual aspect of their jobs and automate that and leave it to AI to synthesize information on their behalf and then use their time and their energy where it's most beneficial. I think there's no doubt that AI is going to help along those lines, but it's going to take time. It's going to take probably years before it becomes really ingrained and used in a really widespread way, I would say.

Gary (11:03): Some of the outlooks for these insurance companies, how they manage their portfolios, I'd assume it's sort of longer term in nature, but how does the macro environment factor into when you're making decisions in the shorter term? How important is that?

Peter (11:16): Well, it is very important. You're right that most insurance companies, certainly for life insurance companies, they’re generally dealing with fairly long-term obligations, long-term liabilities. You could certainly frame it as they have the luxury of thinking over a longer time horizon than maybe some other investors. Property and casualty insurers and even health insurers have relative to life typically a shorter time horizon or shorter liability profile.

But, I think regardless, even for life companies with longer term liabilities, there's just no question that you have to be mindful of what's happening on a day-to-day, month-to-month, quarter-to-quarter basis. You can't take your eye off the ball and ignore what's going on around you in the near term because a series of short time horizons becomes the long term, right? And so, you have to kind of think about sequencing. You have to think about the progression of shorter time horizons and what that might mean over a multiyear time horizon. So, whether that's interest rates – which are probably the single biggest variable affecting insurance portfolios given the heavy allocation to fixed income – inflation, the broader macro-economic growth outlook that certainly has implications for risk asset performance.

Even if you have a very long-term horizon in general, in the short term, you could be presented with some very real opportunities. You could get find yourself in situations where maybe there's a market dislocation and you have the ability to buy attractive assets on the cheap that wasn't in your long-term plan. Or, conversely you could have a near term drawdown or risk off move where maybe you do need to consciously take some action in the short term, even though it may not necessarily fit perfectly with your long-term view.

So, the short answer to your question, Gary, is while insurance companies are typically long term investors – that's true. The short term is still very consequential to their portfolios, to their investment decisions, and there's no insurance CIO out there who is not very closely monitoring what's going on every day, every week, because they all recognize that there's risks to manage and there's opportunities that they may want to pounce on when the market presents that opportunity.

Gary (14:06): You mentioned earlier, back on the private assets, I'm assuming stress testing, scenario analysis are a significant part in constructing a portfolio. How has that changed that process? Has it had much impact?

Peter (14:19): I think stress testing and scenario analysis have been around for a really long time, but it does kind of dovetail with our earlier topic around technology. The ability to, for example let's say Monte Carlo Simulation, where you can model something over thousands, tens of thousands of scenarios to get a really good handle on not just what is my base case or my central tendency or my central expectation, but really look at what are the tails? What are the extreme outcomes that are unlikely but plausible? And getting a feel for what's the distribution of outcomes or thinking about things in probabilistic terms rather than very discrete finite terms. It's been around for a number of years, but certainly didn't necessarily exist, and wasn't so readily accessible when I started my career, at least. So that's something that's been relatively recent. 

And then thinking about stress testing, it used to be the case that maybe you would look at a small handful of historical scenarios and look at, ‘OK, what if my portfolio were to experience this repeat of this scenario, whether it was a ‘94 rate hike or you know 2008-9 financial crisis.’ Now technology allows you to look at really an infinite number of historical scenarios. Or you could create your own hypothetical what if scenarios and kind of stress some of those things that we talked about earlier, some of those variables like rates like credit spreads, like equity markets, inflation, you can stress test a lot of variables at once, kind of look at the interaction of those things. So, I think that's where stress testing or scenario testing has really evolved and where technology has really helped just make that super accessible really fast and really customizable. So, it just allows insurers to be creative and think about, not just what's happened in the past, but even kind of dream up a lot of hypothetical what ifs that maybe haven't happened, but it's a good thought exercise to think through.

Gary (16:46): Peter, what about climate risk, which I would think would fit into that category a little bit? Stress testing because we've got hurricanes, wildfires, just severe weather events. How is that affecting the insurance industry? It seems like it's more prevalent now. And how is that being integrated into risk modeling?

Peter (17:03): That's a great question. Think about hurricanes, it's something that this industry has gotten very, very good at modeling. There's some amazing technology centered around modeling for that type of risk and quantifying likelihood and risk and again thinking about probabilistic frameworks. I think that's something that's been around and always continues to get better and better. But, maybe some other types of climate risk, to your point, are a little bit newer or maybe a lot more prevalent in the coming 10-20 years than they have been in the past 10-20 or even more years.

I think again, that's something where AI, to tie back to that, could be incredibly powerful. Just taking loads and loads of data and synthesizing that and then modeling potential outcomes and adjusting as experience unfolds, then adjusting and incorporating that experience. I think that's going to continue in prevalence.

But, I think, again, hurricanes is probably the single best example that I could think of in terms of climate-related events that have been around for a long time. There is a wealth of data and a wealth of modeling already out there. The industry has really done a very good job of capturing that, which is more of the liability side of the house, an underwriting consideration. But then of course that has knock on implications for investment decisions and portfolio allocations and how you allocate money, how you invest in light of those underwriting risks. So, the investing side, to kind of bring it back to that, it certainly is important. But, I think it starts on the liability side. It really starts on the underwriting side and then it kind of enables asset allocators to then invest accordingly.

Gary (19:24): And shifting to their regulatory environment, which is I would think another key aspect of this. Where does this stand currently and is there anything significant on the horizon that bears watching for insurers?

Peter (19:35): On the regulatory side, there are a lot of things that they're monitoring. When we think about US insurers, the NAIC, of course, is the body that really drives a lot of the regulation. The states work with NAIC closely, implementing their own regulatory policy. Nowadays, if not number one on the list, certainly very high on the priority list, and something I think is going to continue getting a lot of attention, there's a couple of elements of private markets investing. One is the increasing prevalence of private asset managers, alternative asset managers, who own or have a lot of influence over insurance companies. That is certainly a big topic of conversation. Whether it's from the other side, looking at insurance companies who are increasing their allocations to alternative investments. And from the regulatory perspective, questions around are they being risk managed properly, is there enough risk based capital being set aside for those? Should that framework change? Should the way that the regulator examines that change? I think there's a lot of work to do. I think what's almost certain, in my view at least, is that there will be a lot of increased disclosure, a lot of increased reporting that happens. Whether that follows through with increased capital requirements or greater limits on certain allocations or certain types of investment activity, I think that's too early to say. But, I certainly think around disclosure that's very likely to happen.

And then a topic we've talked about a couple times: AI, things around cybersecurity. On the underwriting side, for insurance companies who are underwriting risk and taking on risk from their policyholders, what kinds of exposure are insurers opening themselves up to when it comes to these very new, nascent technologies? And again, I think it's early days. I think it’s too early to draw any real conclusions. But, I suspect that regulators are going to be very attentive and very focused on watching that unfold too. So, I think there's no shortage of things that regulators are going to be paying a lot of attention to in call it the next 5-10 years. And, there's been a lot of changes just in the last few years. But, I think the things we're talking about going forward, those are very wide-ranging and very far reaching and that's why it's going to be a multiyear kind of journey.

Gary (22:44): Looking at other issues out there, what would be some of the emerging trends that are top of the list items that you think will affect portfolio construction in the next few years that you're discussing with clients that maybe isn't front and center today, but will be at some point?

Peter (23:00): Something that is probably fair to say more front and center, but I would characterize as maybe an emerging trend is around private asset-based lending. It's been around for a handful of years, depending on how you look at it. It's a relatively recent phenomenon, but I think what it really underscores is insurers are very sophisticated investors. They are constantly on the lookout for ways to diversify their portfolios, which are generally significantly exposed to corporate credit risk, and investment grade corporate credit risk in particular. So, anything they can do to source other types of spread, other types of return and diversify their balance sheet exposures, that's going to continue. 

And so, while private asset-based lending has been around for a few years, and it's maybe not new to a lot of folks per say. The emerging part of it is what other exposures will they start accessing, what other structures, what other types of collateral can you source and structure and compile in a way that provides that diversifying spread, the diversifying source of return for insurance companies. So, things like right now music royalties, aircraft finance, a lot of real asset underlying exposure. There are so many different asset-based lending collateral types out there today. But, who knows what will be new exposures five years from now. That's kind of the emerging part. I would imagine there will very likely be things that we haven't even heard of today that 3,5,7 years’ time could be more prevalent and ultimately reach a point of maturity where it just becomes almost plain vanilla at a certain point. So, that's kind of what I personally think about a lot, what we look at a lot, what we consider. I think that'll just be a constant evolution.

Gary (25:40): Given the volume of potential transactions that you see over time, in your mind, what differentiates insurers that are consistently successful in navigating their environments? What qualities do they have, what insights do they have, what's their point of view that makes them successful?

Peter (25:55): I think the number one thing that comes to my mind is not just a willingness, but almost an eagerness or a very proactive, almost aggressive desire to evolve and change with the times. And, I think those that are successful, certainly when you're talking about successful insurance investors, I think what stands out to me in terms of their approach, their mindset, their framework is the desire to be at the forefront of some of these things. The not only willingness, like I said, but the eagerness, the genuine desire to be on the leading edge, to be out front and uncovering new investment opportunities, And, looking for ways to make something work. Looking for ways to, ‘OK, here's an investment opportunity. It's off the run. It's something that not many people have done. Maybe nobody has done yet. Rather than saying no, we're not going to do that. No, it's not going to work. It's too risky. We’ll look for a way to make it work.’ And, actively seeking out ways to optimize it and frame it, maybe structure it in a way that works for them. That to me is a sign of a very successful insurance investor.

Of course, a very risk management-oriented mindset is critical and that doesn't mean avoiding risk. It doesn't mean you're not taking risk. It just means you're constantly evaluating: am I being paid? Am I being compensated for this risk? Is it an appropriate tradeoff between the return that I can achieve and the risk that I'm taking? I don't think that would take anybody by surprise. We're talking about insurance investors. But, I think those two things: that real desire to evolve and be on the cutting edge and then that real ingrained risk management mindset are the two things that are prevalent across the most successful insurance investors that that we see.

Gary (28:20): You touched on a few of the items here that you know factor into, I would think, the investment style right now sort of interest rates, private assets, climate related issues. When you're advising chief investment officers or portfolio managers navigating that dynamic environment, what's sort of the overall message in just approaching the whole process?

Peter (28:43): If there's one message to draw from that is really you have to be flexible. You have to be willing to not only acknowledge, but embrace the fact that things are just constantly changing. The ground is always shifting under your feet. We talked about regulatory developments. We talked about technology developments in AI. And, we talk about not just regulatory insurance regulation. We talk about broader financial regulation and the indirect impacts that the things happening to two or four retail investors, of indirect implications for institutional investors like insurance companies. 

It's just a constant state of flux. Things are constantly changing. We could be having a conversation with the client today. We could be doing some analysis on their behalf, doing some work, giving them some asset allocation advice or what have you. Something could change in a week, in a month, in a quarter, in a year. Not that you expect that work  be to completely rendered irrelevant. But, when new information arises you have to be ready and willing and able to adapt. I think that's really the number one thing we talked about a lot. We really encourage our clients to, like I said, embrace it, not only accept it, but embrace it. Because if you're able to do that, if you're able to embrace it, you're setting yourself up for success. You're setting yourself up to be ready to act and take advantage of some opportunities ahead of your competitors. So, I think that flexible mindset is really top of mind for us and what we talk to our clients about.

Gary (30:41): Peter, thank you for joining us today and for sharing your perspective and valuable insights. And, to our listeners, thank you for tuning in to the Compound Insights from CFA Society in New York. I'm Gary Farber, and we look forward to bringing you more conversations with leading voices in finance.

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