What’s on the Minds of Insurance CIOs with Invesco’s Pete Miller

Rob: Welcome to Compound Insights, a podcast by CFA Society New York. I'm your host, Rob Rowan. I'm glad to welcome a repeat offender here at CFA Society New York Compound Insights podcast, Peter Miller. He is a CFA. He is Head of Institutional Client Solutions for the Invesco Solutions team, which develops and manages asset allocation strategies and portfolio solutions across institutional and private clients. And today where we're going to be speaking mostly about is insurance company allocations. Prior to joining Invesco, he served as a Senior Vice President with PIMCO's financial institutions group where he focused on general account investments and risk managed fund solutions for their insurance clients. And, before that, he spent nine years in variable annuity hedging and risk management as well as insurance portfolio management and pension liability investing with The Hartford. So Pete, welcome back to the podcast.

Pete Miller: Thanks a lot, Rob. It's great to be here.

Rob: Since you were on the podcast almost a year ago, we've had an awful lot of things change. We want to drill into a few of them later, but how would you say the allocations have shifted for insurance CIOs over the last year?

Pete Miller: Well, you're definitely right. A lot has changed in the last 12 months, no doubt about that. If you think about the broader market backdrop, lots of movement in interest rates. Just looking interestingly, the 10-year Treasury is actually very close to where it was 12 months ago about 4.40.1 But a lot of movement around that. Some of that is kind of economic conditions and developments, but a lot of it, especially the last couple of weeks, has been around the election. Of course that's a big event here in the US. And I think with Trump being reelected, there are certainly expectations that his tariff policy could drive some more inflation. Tax cuts and fiscal deficits could also drive more inflation. And so we saw an initial, major increase in rates. It's since then kind of ebbed a little bit. Certainly that's I think the number one story of late. 

In terms of allocations you mentioned with insurance companies. The interesting thing is I haven't necessarily seen a lot of major changes. I know we'll get into some specific asset classes shortly, but I think it just speaks to the long-term mindset for really most, if not all, insurance companies. And generally not reactionary to kind of near-term market changes, but more, on the margins, making adjustments with their portfolios in light of current conditions. That that's certainly what we've seen historically and it's been the same story over the last 12 months.

Rob: I do think this makes this sub sector of the asset in our world, if you will, exceptionally interesting to watch because the only organizations that have longer time horizons than insurance companies are endowments, which are probably comparable, and single family offices. That's it. So it's a wild old thing. And by the way, we are recording this – in case anyone's listening to this after the fact – on November 14th, 2025. So God knows where we're going from rates here. But now one of the things I do want to speak with you about, that's also been – well, it's started being hot. I think we did talk about this in the last podcast was private credit, the real hit. How are insurance companies allocated given their longer term view that we're just talking about?

Pete Miller: Yeah, you're spot on. Private credit has been a huge theme for insurance and I think for institutional clients broadly speaking, but certainly for insurance. And as you noted, some of that demand is because private credit tends to be longer term in nature. Oftentimes it's accessed through, LP fund structures where the capital may be locked up for a period of years. For most insurance companies that's perfectly fine because as you noted, they have very long time horizons typically. 

But I would say that the new developments of late has been there's been a continued demand for corporate credit and private corporate exposure, whether that be through kind of middle market or larger direct lending strategies, even syndicated bank loans. What we've seen very notably over the last year or so is a very meaningful increase in demand for non-corporate private credit. So you know asset based lending, private strategy specialty finance, you know things where insurance clients and other institutional investors are in many cases they're trying to get closer to or maybe even do direct origination themselves to sort of cut out a lot of the intermediation you typically see with traditional mortgage bonds or ABS bonds. And by doing that, the idea is to capture and retain more of the spread that you get in those private credit exposures and ideally not take on more credit risk. 

So generally speaking, we're talking investment grade exposure, but that incremental spread that the investor, and insurance investor in our case here, the incremental spread that they're able to capture is really a function of more complexity, maybe more structuring work that needs to be done, but it's really not just a matter of going down in credit quality and taking on more risk to get that incremental return. 

So that that's been a very notable theme in our insurance conversations over the last year and you've certainly seen a lot of activity. You've seen a lot of interest. I think it will continue to see a lot of interest. Many managers are really working hard to deliver that exposure for their clients and it's such a huge opportunity set. It's a massive market that encompasses so many different types of exposure that I think there's no shortage of opportunities. So I think it is a secular trend that's going to continue for many years.

Rob: Right, non corporate, private credit is enormous. Are they looking at any particular sub sector on that side?

Pete Miller: The short answer is yes. But the interesting thing is different insurers will have different views on which sub sectors they like or they're particularly interested in. And it could be a function of their liability profile. Are they looking for the longer dated structures that might align nicely for asset liability management purposes? Or maybe even if it's a somewhat tactical view on something that might be particularly attractive from a near term valuation standpoint? But we're talking about things like in a residential mortgage loans maybe not qualified mortgages that that don't typically go into the traditional bonds packaging, if you will. You could be talking about student loans. You could be talking royal music royalties. You know, different sorts of almost infrastructure type projects. There's almost an infinite number of underlying collateral types that that we've seen. And insurance companies gravitate to, so not one in particular. I think that the different sub sector demand does kind of vary across insurers. But again, I think that's one of the things that makes it a likely long term, secular trend. It's such a broad universe of potential exposure and it's so large that I think it's just going to continue evolving.

Rob: Yeah, I mean, you're talking about a massive difference in the risk profiles of those things. You know, non QM2 mortgages to student loans. They have a lot different things going on with each of them. And you know it's exceptionally interesting and I presume that some of those are connected to macroeconomic things too. So it is pretty interesting. 

Well, the other thing I am curious about is how they're handling the long-term secular changes in rates. Have they shifted their asset allocation to either handle some of the long-term risks to those long-term investments? Or are they kind of keeping everything because rates aren't that much higher than they were or they're sort of historically normalizing, if you will?

Pete Miller: Well, it's a great question because in short, I would say yes they are adjusting on the margin. But as a general rule, we haven't seen a lot of meaningful shifts in terms of duration positioning or expressing interest rate views or bets, for lack of better term. And I think part of that is, as you noted, we've talked about the fact that as we were talking today, longer term, rates have actually stabilized where they were roughly speaking a year ago. But even if we had this conversation a few months ago when rates were even higher, we didn't necessarily see a lot of meaningful shifts in insurance portfolio allocations or duration positioning. And I do think it really comes back to what we talked about a few minutes ago. Most insurers are very long term investors. And they have, generally speaking, a large stock of assets that are already invested with a certain liability profile in mind. And what they're really doing is making adjustments on the margin. So it could be with new business flows coming in. It could be the reinvestment of principal and interest coming off their existing portfolio. But what that means is shifts tend to be gradual. It tends to take time to really see that show up in their broader portfolios and even then it's still by and large a function of liabilities that they're onboarding today. And that's kind of what drives their interest rate positioning and their duration view. So not really a ton of, at least from what we see, not a ton of what I've described as tactical, meaningful shifts or bets on the direction of rates. 

An interesting thing too is higher rates, especially a rapid increase in rates take a lot of investors with fixed income exposure, which is, you know certainly the bulk of investment insurance company portfolio exposure… You tend to think of a sharp increase in rates as negative for portfolios, right, and kind of a shock to asset values when rates go up, bond prices go down, of course. And that's true, but by and large, the insurance industry’s broader exposure to rates, you know, rates rising is actually a good thing and maybe they prefer to see it happen a little more gradually. But it does ease a little bit of the pressure on some minimum guarantees on a lot of life and annuity products. It does allow for a little more headroom that way. And again, if you're the CIO at an insurance company and you're looking at reinvesting principal and interest rolling off of your existing assets or looking at investing new money for new business coming in the door today, higher rates is actually your friend. So, I think the bottom line for all this is it's a very nuanced picture and with that long term view, you don't really see a ton of tactical duration positioning. It's really, kind of the proverbial oil tanker that takes a long time to kind of change course. I think that's a fair way to characterize most insurance portfolios.

Rob: Yeah. Although it is, as you say, easier when one portion of your oil tanker is paying, you know, civil corporate debt is paying in excess of your long run goal. That does give you a little headroom. So those things for sure.

Well, let's shift gears a little bit because life companies were often stalwart, very regular investor in commercial real estate. And that investment level has declined overtime as the risks have risen in commercial office but there are a lot of other sub sectors. So let's talk a little bit of that like that. Would you like to start with office or one of the other sectors?

Pete Miller: Yeah, absolutely. You're exactly right. Real estate, especially real estate debt, is a staple. And many insurance portfolios, especially life insurance portfolios where high quality, low LTV,3 low risk mortgage loans comprise a pretty healthy proportion of a lot of life company portfolios. But even real estate equity is something that has been reasonably popular as part of the alternatives allocation in a lot of insurance portfolios. And you're right, office I think is the poster child for a lot of the stress that we've seen in the real estate market really since COVID. And it's kind of a combination really of higher rates. It's difficult to finance real estate exposure when you’re coming off base rates of virtually zero to call it 5% in relatively short period of time. That is of course a headwind. And then certainly really more COVID driven with so much of the working population either fully remote or hybrid remote working situations where the demand and the need for office space has diminished. And there's still are real questions around what will the long term demand for office property look like or office space look like. We share a lot of our clients’ reluctance to really kind of dive back in in a meaningful way. We're still certainly in a wait and see approach and I think that's true for a lot of our clients. 

Sectors that we are more constructive on aside from office, things like single family rentals where housing, residential housing, is a still very significant need for the US and really a lot of parts of the world. So we think that the need there, the demand there bodes well for that as a forward-looking real estate allocation. Self storage, certain industrial exposures, think about data centers, ports, areas where there may be a little more insulated and where some of the dynamics affecting office property exposure don't have the same sort of sensitivity in those sorts of sectors. So there are pockets where we are constructive and where we think there are some interesting opportunities going forward in the near term.

Rob: In the office sub sector?

Pete Miller: Right. It's really important to not paint the whole real estate or commercial real estate market with a broad brush. It really is a matter of differentiating based on sectors and themes because there are opportunities to be had. And I think it also bears repeating that debt, real estate debt I think actually is attractive. And we've seen certainly for Invesco, we've seen very real demand from our insurance clients for either increasing or kind of getting back into real estate lending, CRE lending. And I think that's a simple matter of, right now you can get pretty attractive returns on a debt strategy4 where you're by definition, you're higher up in the capital stack. So you kind of get that downside protection with pretty attractive absolute returns.5 So again, it's just important to differentiate and not kind of take real estate as this monolith because there really is a lot of opportunity depending on where you look.

Rob: Yeah, that's actually a message that we're going to be hammering home a little bit over the next 5 weeks on this podcast when we begin commercial real estate month. And I've already recorded a few of those, so I know what they're going to say. We have two people on there who've been doing a lot of shopping in the office space here in New York City. And they have some exceptionally interesting locals, so you can't paint the whole thing. Maybe a week, the office building is in trouble. But there's always a good shot out there to take. So are there any other risks that you've been talking about more recently with your insurance company clients that people in this podcast should hear about?

Pete Miller: I think going back to the very beginning, we talked a little bit about the macro backdrop and expectations around interest rates, inflation and things like that. I think we still have a lot of conversations, a lot of I wouldn't necessarily say concerns from clients, but you know questions around recession risk and is the Fed maybe behind the curve. They've started easing recently and we didn't really talk too much about that. But at this point they've already cut 75 basis points and certainly market expectations for further cuts over the coming months. But a lot of times we'll get questions and maybe some modest concerns from clients around, have they waited too long? Is it likely that high policy rate will be detrimental to economic growth? Could we see a bit of a turn in the credit cycle? Could we see an uptick in defaults or downgrade activity? 

And certainly it's understandable that would be a concern or at least a big question from insurance clients just given how much corporate credit exposure comprises their asset portfolio. But in a word, we don't see a near term, meaningful recession risk. But it is of course important and always prudent to be very vigilant and to be proactive on that front because it's a fact that the public market spreads are relatively tight. And it arguably wouldn't take a lot to see some spread widening there and potentially even an uptick in defaults. And so while we don't expect that's on our base case, we kind of share a lot of our clients focus in terms of just monitoring that and being extra vigilant to kind of be ready to act if you do see a bit of a turn in the cycle.

Rob: Yeah, from the long run perspective, which is where a lot of these folks start thinking about their portfolios, we are very long, so late, late, late in the cycle for all those things that's right. So yeah, it's good to think about. Well, thank you again, Pete. This has been very good stuff to think about.

Pete Miller: Thank you, Rob. It's great being with you.

Rob: And thanks to everyone who listened to this podcast. Until next time. I'm Rob Rowan and this has been Compound Insights.

 

   1 Source: Bloomberg, as of November 14, 2024.  
   2 Qualified Mortgage  
   3 Loan-to-Value  
   4 Source: Invesco Real Estate using data from the Giliberto-Levy High-Yield Real Estate Debt Index (G-L 2). Trailing 10-years of data, last 10 years of quarterly returns annualized 2014Q3-2024Q2, latest data available. Total Return Annualized (%): Private Real Estate Debt, 8.11.  
   5 Source: Invesco Real Estate using data from the following indices: Direct Lending – Cliffwater Direct Lending Index, Private Real Estate Debt – Giliberto-Levy High-Yield Real Estate Debt Index (G-L 2), High Yield – Bloomberg US Corporate High Yield Index, Senior Loans – Morningstar LSTA Leverage Loan 100 Index, Private Real Estate Equity – NCREIF Property Index, Corporate Bonds – Bloomberg U.S. Corporate Total Return Value Unhedged USD Index, CMBS – Bloomberg US CMBS Investment Grade Index, Investment Grade Bonds – Bloomberg U.S. Aggregate Total Return Index, and Treasuries – Bloomberg U.S. Treasury Total Return Unhedged Index. Trailing 10-years of data, last 10 years of quarterly returns annualized 2014Q3-2024Q2, latest data available. Sharpe Ratio: Private Real Estate Debt, 5.36, Direct Lending, 1.88; Private Real Estate Equity, 0.22; Senior Loans, 0.39; US High Yield, 0.16; CMBS, -0.31; Corporate Bonds, -0.18; Investment Grade Bonds, -0.39 and Treasuries, -0.43.

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