GOTTA HAVE FAITH

Originally published in Insurance Asset Risk

In part two of this interview by Sarfraz Thind, CIO Anthony Minopoli talks about the issues that confront him day-to-day as well as his concerns for the future of the industry in the low rate environment.

"Ethical investing that places people first not only upholds human dignity and the common good — it is also good business," is the motto stamped on the Knights of Columbus (K of C) website.

In this era of low interest rates this seems an ungodly restriction on what is already a tough environment for insurance chief investment officers (CIO). But combining faith and fortune has not served K of C too badly so far.

K of C Asset Advisors was set up in 2015 to manage the insurance general account of what is the largest Catholic fraternal organisation in the US. It invests according to Catholic principles—broadly speaking these are protecting human life, promoting human dignity, reducing arms production and protecting the environment.

Obviously, there is no investment in companies that produce pornography or contraception but while the list of limitations has a broad scope the number of definite exclusions is surprisingly light. The asset manager's banned names number a mere 60 out of the biggest 4,000 companies in the US.

ETHICS OF INVESTING

There are enough grey areas, though, to keep CIO Anthony Minopoli on his toes. He cites examples of healthcare companies involved in abortifacients and embryonic stem cell research which might breach the religious principles, or a company taking over another company which does not fit the bill.

"Maybe, they're after one particular drug, but they get an entire drug pipeline via an acquisition which could bring them onto our screen list," Minopoli explains. "But oftentimes we will see them divest from the thing we don't like or just not produce it."

Minopoli says he has seen many names come in and out of the portfolio over the years. A more wholesale transition is, however, necessary, given the broader rules set by the US Conference of Catholic Bishops have not been updated since 2003. A review is on the cards in the next couple of years - which may include a view on environmental and social factors and maybe even fossil fuels - though once started the review will take a few years to be finalised, so expect no major shift in the allocation determinants for now.

Despite the exclusions, Minopoli says he has never lacked investment options to keep himself busy. And, indeed, he believes the strictures imposed on him should actually benefit him in future as the finance world gravitates towards the prevalent environmental and social movement of the day.

"I think [ESG] is going to become a part of the investment fabric going forward," he says. "And as it becomes more of the investment fabric, there will be a virtuous loop. The things that are important to investors are going to become important to companies and we'll be able to focus on them."

ASSET ALLOCATION

Drilling down into the nitty gritty, K of C's portfolio is heavily skewed towards fixed income, which makes up $23.3bn of the overall allocation with a further $1bn in equities and $1.3bn in alternatives.

While the company can hold bonds that are downgraded, it is focused on buying investment grade debt and, indeed, over 95% of its portfolio is rated BBB or higher. Most of this is in industrials (27%) and financial corporate debt (22%). It is light in government bonds and agency debt—about 4% of the total is in government bonds— because it can find more yield opportunities in corporate assets, Minopoli says.

K of C is also a big investor in municipal bonds which make up 14% of the portfolio. Munis, long regarded as a safe haven for US insurers are, however, being held up to greater scrutiny these days. In a recent survey on climate change risk by the National Association of Insurance Commissioners (NAIC), the insurer made clear its reticence about investing in high risk munis, singling out the coastal city of New Orleans in Louisiana as "very susceptible to hurricane risk, so we are not long that utility credit".

Minopoli says, by and large, he hasn't avoided states based on hurricane risk or flooding risk yet, but the theme is becoming a concern they will look at.

Given the economic pressures of the pandemic it has also been examining the fiscal situation of individual states more closely.

"We've really been focused on the more fiscally responsible states," Minopoli says. "And we tend to stay away from the general obligation bonds of states where you are seeing worsening pension situations, because there is a potential risk issue there."

Where it does push the boat out is in its alternative investment portfolio where it will be well remunerated for investing in senior secured loans, mezzanine debt, corporate real estate, "as the yields there are definitely higher when you can do a publicly traded high yield or the publicly traded syndicated loan".

BITCOIN

K of C does not invest in currencies as a rule—speculation is off the table. But is there any interest in the hot topic of the day, Bitcoin? Not for now.

"I know a lot of people saw was a huge splash when in a very large insurer recently put $100 million in Bitcoin but if you do the investigation and look at what that represents of their entire general account, it's a rounding error on a rounding error. So, I'm not going to go buy Bitcoin until I consider it stable. We just don't see that yet."

He may look again at Bitcoin if it starts trading in a "much much broader transaction environment", though that may take a while.

THE ERA OF LOW RATES

Minopoli is fully aware of the spectre of low rates on the insurance industry and it is a concern that goes back to the 2008 financial crisis, he says.

Insurers got a raw deal in the push to stabilise the financial industry after that crisis when central banks and monetary authorities piled in to save the banking sector through rate cuts and through keeping the economy afloat with cheap money. Referencing a speech he gave at the American Council on Life Insurance's investment in 2012, where he called out the imbalanced assistance for banks, he says cutting interest rates has simply not helped his own industry, which in turn has implications for the wider economy.

"If you don't have a functioning banking and finance sector it's very difficult to get the economy going but there was not much concern about the life insurance business [then]. Life insurance companies are the ones that will go out and buy a 30-year bond from a utility or corporate, because we have liabilities that extend out up that far. While everyone aptly and correctly focuses on the banking sector, don't forget the banking sector's cousins in insurance because we are the industry who can take on those long duration bonds."

K of C is itself "very well capitalised", at the moment and is finding opportunities which have enabled it to stay in the mix with the big guys, although things are challenging, he admits.

He is concerned that the broader insurance business will face a reckoning if low rates continue and is particularly worried about seeing smaller, less well capitalised insurers being forced to sell up to larger rivals. With the pandemic forcing rates down once more, the likelihood of higher returns for the sector seems way off.

"I'll be 53 this year," Minopoli says. "I keep joking with my team that interest rates are going to go up in 2033 when I turn 65 and consider retirement. So my successor will have a much easier go of it."

And there will come a point at some stage in the future when the low rates become simply too big a burden to be tolerated.

"My concern is that you may see some more M&A activity particularly among some of the smaller, less well capitalised insurers, because their balance sheet doesn't allow them to continue or they may have very large guarantees where they simply aren't going to be able to compete."

Meanwhile, he sees the nascent seeds of inflation having been planted with the pandemic—another worry for the long-term. It is a concerning situation for the future of the industry. The chickens while not quite coming home to roost, are clucking it seems.