The storm before the calm

Investors have been challenged throughout the year with “regime change”: from the COVID-19 pandemic to the emerging endemic phase of the disease in the West; from fiscal expansion to fading thrust; from uber-expansionary monetary policy to a tightening and methodical withdrawal of liquidity; from stable inflation to more structural global inflation unleashed; and the emergence of greater geopolitical aggression seeking to redefine the existing world order.

The confluence has heightened uncertainty, produced unprecedented volatility, and increased the probability of more extreme dislocations in the global markets. We seem to be in the storm before the calm, with the skew of risk uncomfortably biased to the downside. The challenge becomes the proper assessment of risk and the tactical management of that risk while at the same time identifying longer-term more strategic opportunities and attractive entry points.

Given the challenges mentioned above, confirming the value-added proposition of investment managers across the spectrum of risk and opportunity has rarely been more evident.

1. A continuation of a layered approach to the effective management of risk, including the heightened sensitivity to enterprise risk management across the parent/captive relationship; the assessed correlation of cash flows across assets and liabilities; and the affirmation or redefinition of portfolio risk budgets.
2. A reassessment of the strategic asset allocation decision as regime change brings challenges to the historical correlation of assets over time. With that, the decision for more frequent tactical asset allocations must be determined.
3. A reaffirmation of the necessity for high-quality, low-volatility fixed-income portfolios as the primary sourcing of income and return for a captive’s liquidity and reserve pools of risk. In the current cycle, dislocations are creating longer-term opportunities to enhance yield and risk-adjusted returns.
4. An evaluation of the potential application of “alternatives” as a risk-mitigator within a broadly diversified portfolio of risk. This would be allocated to the surplus pool of risk and potentially include private equity, private credit, real estate, and hedge funds.
5. A realisation that the application of environmental, social, and corporate governance (ESG) factor analysis is not a passing fad, but an undeniable wave embraced by regulators, reinsurers, and stakeholders across the entire value chain. Even partial integration can produce significant benefits from more robust enterprise risk management to more attractive risk-adjusted returns.

Our strengths

At Sage we have a number of advantages. First, our disciplined, repeatable, and time-tested investment process which has led to consistent returns over complete market cycles. Second, our specialisation in core/reserve fixed-income portfolio management coupled with our actively managed, income-enhancing ETF strategies.

Third, our willingness to build highly customised portfolios consistent with the unique risk profile of each captive, in turn, uniquely defined by the life cycle of that captive. Fourth, our deep and ongoing engagement with the industry across captive associations, regulators, and rating agencies. Finally, our insurance-dedicated, high-touch service model just makes insurance company portfolio management fun.

We are deeply engaged and immersed in the world of alternative risk transfer. As a matter of fact, our first client at our inception in 1996 was a risk-bearing entity within the captive insurance space. Since then, we have been knee-deep in liability-driven investing for the captive industry. Today, we are fully engaged with the industry across multiple domiciles, both domestic and offshore, and actively support multiple associations, serving on select committees, sponsoring numerous events and speaking with great frequency.

With this, we clearly understand the unique and nuanced demands of the management of investment portfolios for captives.

This entails a more holistic or enterprise-wide approach to the management of parent/captive relationships, lines of coverage, business/growth objectives, evolving liability structures, programme management initiatives and determined pools of risk (liquidity, reserves, surplus). With so many moving parts across the ecosystem of a captive, we understand and complement well the shared responsibility of effectively managing the enterprise.

Next-gen needs

We also understand the talent challenges that lie ahead for the market. Stereotypically (and sadly in reality), the traditional side of the insurance industry is known for its legacy technologies, aversion to change and lack of diversity—not a skippy package that attracts a younger and talented workforce.

This comes in the face of ever-increasing job postings—a trend that will only be exacerbated by the “retirement cliff” predicted to produce more than 400,000 industry vacancies over the next 10 years. Behind this, the traditional side will also be running up against competition from the emerging insurtech industry—a far more entrepreneurial, innovative, and diverse wave (very much akin to the captive industry and the world of alternative risk transfer).

What should the next generation be looking for? First, identify those companies that are actively embracing (or at a minimum, clearly aware of) technology as a gamechanger via artificial intelligence, cloud-based technologies, the internet of things, automation, virtualisation, blockchain, and cybersecurity.

Second, make sure that ESG and social diversity (DEI) initiatives are in place (or at a minimum, openly discussed). Third, do not go anywhere where the options for a more attractive work-life balance are not clearly visible. Remote and/or hybrid work is a must.