Latest / Masters in Business / Swiss Re's Velina Peneva on the Business of Reinsurance

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Swiss Re's Velina Peneva on the Business of Reinsurance · Masters in Business

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Masters in
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Speaker 1: Business with Barry Ritholtz on Bloomberg Radio.
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Speaker 2: On the latest Masters in Business podcast, I have another
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Speaker 2: extra special guest. Billina Penove is Group Chief Investment Officer
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Speaker 2: for insurance giant Swiss Ray. She runs their private internal
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Speaker 2: fund about a one hundred and eight billion dollars that
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Speaker 2: she manages primarily in fixed income, private credit, a variety
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Speaker 2: of other assets. Really a fascinating conversation with someone who
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Speaker 2: is uniquely situated in the investment world. Swiss Ray is
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Speaker 2: a global, very well known insurer and reinsurer. They cover
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Speaker 2: just about everything that's out there. Not only are they
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Speaker 2: the insurance company for insurance company, but they have a
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Speaker 2: variety of lines of business. She has a fascinating career.
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Speaker 2: She helped develop the private equity group for Banning Company
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Speaker 2: in Zurich before heading over to Swiss Ray. I thought
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Speaker 2: this conversation was fascinating and I think you will also
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Speaker 2: with no further ado my discussion with Swiss Reees Velina Pennava.
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Speaker 2: Velena Penava, Welcome to Bloomberg.
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Speaker 3: Thank you Berry. It's a pleasure to be here.
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Speaker 2: Well, it's a pleasure to have you. Let's start out
1:31
Speaker 2: with your background. Bachelors in economics and a BS in
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Speaker 2: computer science from Wellesley in Boston, and then an MBA
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Speaker 2: from Harvard Business School. What were the original career plans?
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Speaker 3: So I was one of the first generations of Eastern
1:49
Speaker 3: Europeans after the Wall came down, who had the opportunity
1:54
Speaker 3: to come to the US. If I had not come
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Speaker 3: to the US, my passion was to become a doctor.
2:01
Speaker 3: And in Bulgaria, where I came from, getting a medical
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Speaker 3: degree meant that after high school you go to medical
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Speaker 3: school for five.
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Speaker 2: Years, no college, high school, real college.
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Speaker 3: And then after five years you can practice. So I
2:16
Speaker 3: arrived at Wellesley with the plan to do pre med.
2:20
Speaker 3: And when I got there, I realized that pre med
2:23
Speaker 3: meant that I study some generic biology in chemistry for
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Speaker 3: four years. Then I have to apply to medical school.
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Speaker 3: Then I have to go to residency, and during that
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Speaker 3: whole time I have to keep on accumulating debt, and
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Speaker 3: at some point in my late twenties I may be
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Speaker 3: able to practice.
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Speaker 2: Right, it's like a twelve year process. It's pretty it's
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Speaker 2: pretty intimidating for and yet all the medical schools seemed
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Speaker 2: to be filled up exactly.
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Speaker 3: But for me, this was not an option. And what
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Speaker 3: I decided to do is just experiment and see what
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Speaker 3: else I could do. And I'm pretty mathematically oriented. I
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Speaker 3: took a lot of math classes. I took a computer
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Speaker 3: science class, which I found super fascinating. I mean, back then,
3:10
Speaker 3: in ninety four it was the early days.
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Speaker 2: Of punch cards. Were you were you still in the
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Speaker 2: punch No, but I was.
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Speaker 3: I started coding in Pascal. Okay, so I think a
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Speaker 3: lot of your listeners probably don't know what that computer
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Speaker 3: language is. So it was Pascal, then C plus plus,
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Speaker 3: and then I took an economics class, and that's when
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Speaker 3: the lights went off because it was a very mathematical
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Speaker 3: field in many ways, but also with a link to
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Speaker 3: the real economy. I couldn't give up math and computer science.
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Speaker 3: So I ended up finishing with two majors and a minor.
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Speaker 3: But business and applying economic concepts and actually going into
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Speaker 3: business was what I decided to do after the second
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Speaker 3: year at Wellesley.
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Speaker 2: That's really interesting, but at some point you spend time
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Speaker 2: within the high speed data division of a company that
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Speaker 2: eventually became part of AT and T. That was in
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Speaker 2: the nineteen nineties. What was that experience like?
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Speaker 3: So when I was a junior in college, I tried
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Speaker 3: to get an internship and I was looking at the
4:17
Speaker 3: typical paths of consulting or banking. It is very difficult
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Speaker 3: to get an internship in junior year. And I had
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Speaker 3: a professor in economics who suggested that I look at
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Speaker 3: this company called Media One in Boston that had recently
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Speaker 3: been acquired by no it was it used to be
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Speaker 3: called Continental Cable Vision. It had been acquired by US West,
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Speaker 3: a Denver based company, and they had rebranded it as
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Speaker 3: Media One. And there I worked in strategy and the
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Speaker 3: strategy focus was on rolling out high speed data through
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Speaker 3: coax cable.
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Speaker 2: And broadband before we really knew broad what broadband was.
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Speaker 3: Absolutely and the tea team actually that did all the
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Speaker 3: technology in Media One ended up being the core technology
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Speaker 3: team for Cisco. So it was really cutting edge at
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Speaker 3: that point.
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Speaker 2: Huh huh. Really interesting. So how did you end up
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Speaker 2: as a consultant in Boston at Bain When did that start?
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Speaker 3: So if the company had stayed in Boston, if Media
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Speaker 3: One had stayed in Boston, I probably would have gone
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Speaker 3: back after I graduated. I had an offer, but they
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Speaker 3: decided to relocate to Denver, and I really wanted to
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Speaker 3: stay on the East Coast. So given I had been
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Speaker 3: doing strategy work and the fact that I wanted to
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Speaker 3: learn as much about business as possible, I thought consulting
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Speaker 3: would be the right next step. So it was similar
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Speaker 3: enough to what I'd been doing, but consulting would allow
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Speaker 3: me to broaden and view.
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Speaker 2: And Baine and Company is one of the biggest consultancies
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Speaker 2: in the United States. What was it like working in
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Speaker 2: Boston at Bain? What sort of projects were you working on?
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Speaker 3: So Boston is the headquarters, biggest office when I joined,
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Speaker 3: and it was a huge variety of projects. So I
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Speaker 3: did a project for MX looking at their credit card
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Speaker 3: solicitation program, how can they can be better competitive with
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Speaker 3: other credit card companies. I worked for Motorola and then
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Speaker 3: I spent quite a bit of time in the emerging
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Speaker 3: private equity practice. So Bain was the pioneer in consulting
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Speaker 3: two private equity companies focusing on strategic due diligence of
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Speaker 3: M and A transactions, and it was very past fast
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Speaker 3: paced environment. You do a due diligence in one, two,
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Speaker 3: three weeks and you need to basically keep pace with
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Speaker 3: a private equity team to make sure that the assumptions
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Speaker 3: they need for the model and the conviction for buying
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Speaker 3: an asset could be backed by the analysis the bank team.
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Speaker 2: So this is in the nineteen nineties, private equity was
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Speaker 2: still relatively small. Back then, this is almost thirty years ago.
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Speaker 2: Did you have any sense as to how rapidly private
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Speaker 2: equity would grow and how big it could have it
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Speaker 2: eventually became.
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Speaker 3: I mean it was, I would say in its second inning,
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Speaker 3: back in the nineteen eighty nineteen ninety eight, ninety seven,
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Speaker 3: ninety eight, it was. I mean, it was attracting a
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Speaker 3: lot of talent. So if you look at who was
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Speaker 3: going to private equity, it was the best from the
7:42
Speaker 3: consulting teams, it was the best from the investment banking teams.
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Speaker 3: And I think the value proposition was just very compelling, right,
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Speaker 3: I mean the returns at those times were easily in
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Speaker 3: the mid to upper twenties.
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Speaker 2: Really wow, that's impressive. At the time, I remember NASDA
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Speaker 2: was similarly putting up high twenty twenty twenty five thirty
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Speaker 2: percent returns, very unusual number years in a row. I
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Speaker 2: had no idea private equity was putting up those sort
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Speaker 2: of numbers back then you end up as the head
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Speaker 2: of Bain's private equity experience was that in the US
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Speaker 2: or overseas.
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Speaker 3: So I spent in total nineteen years at Bain, if
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Speaker 3: you at the time, I spent in business school, and
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Speaker 3: I was first in Boston. I actually spent six months
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Speaker 3: in Australia as well.
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Speaker 2: Wow.
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Speaker 3: And then I moved to San Francisco after business school
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Speaker 3: and was again quite focused on the private equity space.
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Speaker 3: Right before two thousand and nine, I felt I was
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Speaker 3: ready to do something else, and that's something else was
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Speaker 3: renewable infrastructure private equity. So that was an emerging space
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Speaker 3: back then.
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Speaker 2: And my renewable infrastructure so this is everything from solar
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Speaker 2: and wind to battery to more efficient lines, I'm still
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Speaker 2: a burgeoning area. How long did you work in that space?
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Speaker 3: So I didn't, Oh you did not. The catch was
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Speaker 3: that the fund had to raise money, and me going
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Speaker 3: to that fund was contingent on them raising the next round.
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Speaker 2: And oh nine got in the way.
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Speaker 3: And oh nine got in the way. And I had
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Speaker 3: already told Bane. I had told Baine. Listen, I you know,
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Speaker 3: I've been here for a long time. It had been
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Speaker 3: you know ten years by then I need to look
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Speaker 3: at something else. I need to do something else. And
9:42
Speaker 3: they told me, listen, instead of leaving, why don't you
9:45
Speaker 3: do a six month transfer in Europe? Why don't you
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Speaker 3: go to Zurich, for example. It's a small office, there's
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Speaker 3: interesting clients, there's quite a lot of US partners there.
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Speaker 3: Why don't you see how you like another office, and
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Speaker 3: then you can come back in six months and we
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Speaker 3: can think about whether you want to still leave or
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Speaker 3: pick up and go down the partner track.
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Speaker 2: So that was six months, and that six months turned
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Speaker 2: into how long?
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Speaker 3: That six months turned into a year, and that year
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Speaker 3: turned into a permanent relocation.
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Speaker 2: And how long did you stay with Bain in Zurich
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Speaker 2: for So?
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Speaker 3: I stayed until I came to Swiss Free. So I
10:27
Speaker 3: moved to Zurich in two thousand and nine and I
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Speaker 3: left Bain in twenty seventeen.
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Speaker 2: So US London, a lot of money centers were kind
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Speaker 2: of imploding during two thousand and nine. What was the
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Speaker 2: view like from Zurich?
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Speaker 3: I would say not that different. Really, it was a
10:47
Speaker 3: glob we call it a global financial crisis. So business
10:51
Speaker 3: was difficult across the globe. Europe was in a difficult situation.
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Speaker 3: I mean I was in Zurich, but I was serving
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Speaker 3: a lot of the European clients and it was hard.
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Speaker 3: But what was different about Zurich compared to San Francisco
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Speaker 3: is zeroch at that time was a very small office
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Speaker 3: with very few partners on a growth trajectory. So it
11:15
Speaker 3: felt like going from a well established company to a startup,
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Speaker 3: and that's where I could develop also business lines and
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Speaker 3: service areas that were not so established across Bain so
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Speaker 3: institution supporting institutional investors. Right, we had worked a lot
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Speaker 3: with private equity funds, but we had not done as
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Speaker 3: much work with solvereign wealth funds, pension funds, and the
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Speaker 3: problems that those institutional investors face when investing in private
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Speaker 3: markets are well served by the knowledge that Bain had
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Speaker 3: in the space. So that's where I found a niche
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Speaker 3: and that's where I focused when I moved to Zurich.
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Speaker 2: So you have a history and an expertise in private
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Speaker 2: equity consulting analysis just generally the space which was small
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Speaker 2: but rapidly growing. How far were you able to take
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Speaker 2: that for Baine? At what point did you realize, Hey,
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Speaker 2: I've gone as far as I can go with this.
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Speaker 2: We can only do so much as as a consultant.
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Speaker 2: I really want to deploy capital in the space.
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Speaker 3: So that had been on the back of my mind
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Speaker 3: for a long time. I mean, obviously, when you work
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Speaker 3: with investors, you're always quite vested in the decisions being made.
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Speaker 3: You're advising on setting up of a new mandate or
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Speaker 3: executing an investment strategy, and that's super intellectually challenging. But
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Speaker 3: the issue is that at some point you need to
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Speaker 3: hand it over right. Here is the plan, here's how
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Speaker 3: you should go about in this deal or in this
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Speaker 3: new asset class. But then it's up to the client
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Speaker 3: to implement it. And what swiss Ree provided me with
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Speaker 3: was the platform to actually do the investing and to
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Speaker 3: take the strategy that I had helped them develop and
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Speaker 3: implement it.
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Speaker 2: We're going to come back to swiss Ree in a
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Speaker 2: few minutes. I want to just stay with your time
13:21
Speaker 2: at Bain in Zurich. So you're on the investment committee
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Speaker 2: in Zurich. Were you looking at global opportunities just Europe,
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Speaker 2: the rest of the world x US? What was your playground?
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Speaker 3: So I'll give a bit of background on what this
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Speaker 3: investment committee is so Bain does a lot of due
13:42
Speaker 3: diligence for private equity clients and as part of that relationship,
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Speaker 3: we as a partnership were allowed by the private equity
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Speaker 3: fund to co invest in transactions that we had diligenced.
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Speaker 2: And that's a voter coninence. Oh we think you should
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Speaker 2: put money into this and we're going to co invest
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Speaker 2: along with you.
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Speaker 3: Absolutely. Well, it's it helps with with kind of the
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Speaker 3: broader relationship, and it's it's an attractive opportunity for the
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Speaker 3: employees of Bane who invest in those co invest vehicles
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Speaker 3: because you're able to do that co investment without fee
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Speaker 3: and carry.
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Speaker 2: Wow.
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Speaker 3: And as you know, well those v and carries are
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Speaker 3: a pretty big chunk of the cost of the product.
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Speaker 3: So the Investment Committee was a small group of global
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Speaker 3: partners that had to decide which ideas that came from
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Speaker 3: the teams we would put into the Bane co Investment Fund.
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Speaker 3: So we were the diligence on the diligence team.
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Speaker 2: Wow. So you really have to know your stuff if
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Speaker 2: you're doing the due diligence for the due diligence team.
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Speaker 3: I mean, that's well, and you need to be willing
14:59
Speaker 3: to say I know two colleagues and friends, who then
15:03
Speaker 3: have to deal with the repercussions of saying to the
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Speaker 3: private equity fund, well, we think it's a good deal,
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Speaker 3: but our investment committee decided to pass.
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Speaker 2: Really, so does that create a problem or is it, hey,
15:16
Speaker 2: we only have so much money to do and this
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Speaker 2: is broader than we usually like, or how do they
15:22
Speaker 2: manage around that?
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Speaker 3: I think that the clients understand that when you're thinking
15:28
Speaker 3: about portfolio construction, you can have only so much allocation
15:31
Speaker 3: to a given geography, to a different industry. So I
15:37
Speaker 3: think that nobody took it personally. I think if you
15:39
Speaker 3: consistently say no to a co investment from a particular client,
15:43
Speaker 3: it may raise questions, but generally the quality of those
15:47
Speaker 3: proposals was very high.
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Speaker 2: Really interesting. So the question that's going to lead us
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Speaker 2: to Swiss Ree is how did your time at Bane
15:58
Speaker 2: and Company influence your coach to investment management strategy private
16:03
Speaker 2: equity selection. This had to be pretty seminal in your
16:08
Speaker 2: developments as an investor.
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Speaker 3: Yeah, So if you think about what you learn as
16:14
Speaker 3: a consultant, first of all, you observe a lot of
16:16
Speaker 3: management teams, right, So ultimately it's all about the team
16:23
Speaker 3: and the quality of the team and the people. That's
16:26
Speaker 3: both with clients and also within Bain. And I think
16:30
Speaker 3: that's also very true about how you set up an
16:32
Speaker 3: investment organization. You can have the frameworks, you can have
16:37
Speaker 3: the processes, but at the end of the day, it's
16:40
Speaker 3: about the quality of the team, the trust between team members,
16:44
Speaker 3: and the culture you create. And I think you know,
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Speaker 3: you may be surprised here, that's the first thing I
16:49
Speaker 3: start with, But I truly believe that quality investment requires
16:54
Speaker 3: just a very strong team behind it.
16:57
Speaker 2: It's the venture capitalists we like to bet on the
17:01
Speaker 2: jockey and not the horse. It's very much a people business.
17:04
Speaker 2: You have to be able to evaluate not just folks
17:08
Speaker 2: ability and insight, but their ability to execute and make
17:13
Speaker 2: stuff happen. So is it safe to say all of
17:18
Speaker 2: the decade you spent in private equity at Bain carried
17:21
Speaker 2: forward to Swiss Rea. No.
17:23
Speaker 3: Absolutely, And maybe there are two more things that I
17:25
Speaker 3: would say carry over. When we talk about investing, we
17:31
Speaker 3: really focus a lot on macro right, but at the
17:34
Speaker 3: end of the day, good investing is a good balance
17:37
Speaker 3: between macro thinking. So, what's happening with the global economy,
17:40
Speaker 3: what's happening with interest rates, what is the FED going
17:43
Speaker 3: to do? And micro right, and understanding how different segments
17:49
Speaker 3: of the economy, how different businesses make money, make profit,
17:54
Speaker 3: what you know, not everything is correlated to GDP growth.
17:58
Speaker 3: And I think that balance. I brought that balance from
18:02
Speaker 3: my consulting days because a lot of the colleagues in
18:07
Speaker 3: the investment organization think first macro and then micro, and
18:11
Speaker 3: I think both in private equity and in consulting, it
18:14
Speaker 3: is more of.
18:15
Speaker 2: That balance, really really interesting.
18:17
Speaker 3: And the third is decision making right, So decision making.
18:21
Speaker 3: I'm an analytical person, and in consulting you focus on
18:25
Speaker 3: the data, on the model, but also observing behavior and
18:31
Speaker 3: stakeholder management. So understanding how the data and how the
18:37
Speaker 3: analytics drives the decision, but then also how do the
18:41
Speaker 3: biases of different stakeholders drive the decisions?
18:46
Speaker 2: Huh, absolutely fascinating. Coming up, we continue our conversation with
18:51
Speaker 2: Billina Penava, Group chief Investment Officer for Swiss Ray, discussing
18:56
Speaker 2: how she found her way to the insurance giant. Let's
19:00
Speaker 2: jump into Swiss Ray a little bit. You join in
19:03
Speaker 2: twenty seventeen after you had been a consultant for Banning
19:07
Speaker 2: Company for nineteen years. What motivated the transition to full
19:13
Speaker 2: time asset management, so Barrie.
19:15
Speaker 3: As we spoke, consulting is exciting because you get to
19:19
Speaker 3: work on your client's most challenging problems. It is super
19:24
Speaker 3: intellectually stimulating and rewarding. However, you lack ownership in the
19:29
Speaker 3: solution that you bring, so for me, that was always
19:35
Speaker 3: the one piece missing in my consulting job. You can
19:39
Speaker 3: come up with the best framework with the best answer,
19:42
Speaker 3: but then you hand it over and how it gets
19:44
Speaker 3: implemented and whether it succeeds. You don't get to follow
19:48
Speaker 3: the whole journey. So the opportunity for me to come
19:52
Speaker 3: to Swiss Free and actually invest and implement a strategy
19:59
Speaker 3: was extremely exciting.
20:01
Speaker 2: I'm curious if consultants run into the same problem that
20:06
Speaker 2: I call it the cocktail party problem. If someone asks
20:10
Speaker 2: you about a particular stock at a cocktail party and
20:14
Speaker 2: you give them an answer, well, if it works out,
20:17
Speaker 2: it's because they're a genius. But if it doesn't work out,
20:20
Speaker 2: it's your fault. Do consultants run into that same lack
20:24
Speaker 2: of agency issue.
20:26
Speaker 3: I don't think it's lack of agency, I think it's
20:28
Speaker 3: lack of opportunity. To follow through, right. I mean consultants
20:31
Speaker 3: are expensive, right, So if you're a company and you
20:35
Speaker 3: want to hire consultants, you want to focus them on
20:40
Speaker 3: getting you the answer that's hard. Right. Consultants often ask
20:44
Speaker 3: the question why is the client's problem so hard? And
20:48
Speaker 3: if you can't really answer that question, then it's you know,
20:53
Speaker 3: why are you then at the client in the first
20:56
Speaker 3: place if the problem is not hard, And that's why
21:02
Speaker 3: companies focus their resources on consulting, on really solving the
21:06
Speaker 3: hardest piece of the problem. But companies run big operations
21:10
Speaker 3: and the implementation is typically something that takes a long time.
21:15
Speaker 3: And even if you were to bring a consultant in
21:18
Speaker 3: to help you with implementation, it's the cost benefit is
21:21
Speaker 3: just not there. So I think if you ask many
21:25
Speaker 3: people who were in consulting, that's always the complaint did
21:28
Speaker 3: they have is yes, I follow through. You know, you
21:32
Speaker 3: obviously keep in touch with your client, you have multier clients,
21:36
Speaker 3: but you have a huge sense of ownership for the
21:40
Speaker 3: solution you have created. You have a huge sense of responsibility.
21:45
Speaker 3: But then you don't have control, You don't have control
21:48
Speaker 3: over the outcome.
21:49
Speaker 2: So you moved to Swiss Ray in twenty seventeen as
21:54
Speaker 2: head of private equity, did you have ownership and control?
21:58
Speaker 2: What was that transition? Like?
22:00
Speaker 3: Absolutely, I had a P and L. So the mandate
22:05
Speaker 3: that I had to set up was selecting private equity funds,
22:12
Speaker 3: co investments, secondaries to put into Swiss frees portfolio and
22:17
Speaker 3: then to make sure that we beat the private equity
22:21
Speaker 3: benchmark or the equity benchmark with that selection.
22:26
Speaker 2: How do they figure out what the targets are for
22:29
Speaker 2: private equity? I know there's a bunch of different benchmarks.
22:33
Speaker 2: There's US, the Europe, this global. Did you have the
22:37
Speaker 2: mandate to go anywhere just find us the best deals
22:41
Speaker 2: or were they focused focusing you in particular sectors or geographies?
22:47
Speaker 3: So I was also responsible for deciding that, and ultimately
22:50
Speaker 3: the decision was to focus more on developed markets, so
22:53
Speaker 3: we really emphasize US Europe, Developed Asia.
23:00
Speaker 2: Which is primarily Japan and Korea.
23:03
Speaker 3: Or Australia, Krea.
23:05
Speaker 2: Yes, all right, So how long were you running private
23:08
Speaker 2: equity for Swiss Ree before they said, hey, we think
23:13
Speaker 2: we have bigger things in mind for you.
23:16
Speaker 3: So sadly only two years it was exact.
23:19
Speaker 2: Sadly you got a giant promotion, right, Sadly.
23:22
Speaker 3: Well, because I just set the mandate up right, it
23:25
Speaker 3: was it was a lot of effort to you know,
23:27
Speaker 3: get with the relationships back with private equity funds, to
23:31
Speaker 3: build the team, to build the operations, to build the systems,
23:35
Speaker 3: and just when things were running and we're looking like
23:40
Speaker 3: you could cruise for a while, you know, opportunity knocked
23:45
Speaker 3: and I had to jump into a completely new and
23:49
Speaker 3: unknown area to me at the time.
23:50
Speaker 2: So we'll talk a little bit about your role as
23:54
Speaker 2: group chief investment Officer for Swiss Ree. But I'm curious
23:59
Speaker 2: as when you're running private equity, are you allocating capital
24:04
Speaker 2: to different private equity funds? Were you investing directly into
24:09
Speaker 2: private equity opportunities as a co investor along with p funds?
24:14
Speaker 2: A little bit of everything? How are you alcanning Swiss
24:17
Speaker 2: rays internal capital?
24:20
Speaker 3: So it's a little bit of all, but it's mostly
24:24
Speaker 3: investing in private equity funds. So I would say about
24:27
Speaker 3: seventy eighty percent of the allocation is in funds and
24:31
Speaker 3: then the rest is in co investments alongside the funds
24:35
Speaker 3: that we have invested in.
24:36
Speaker 2: Huh, really interesting, all right, So two years later you
24:40
Speaker 2: get a promotion, you're head of Swiss Rays Group, your
24:44
Speaker 2: chief investment officer for Swiss Rays Group. That's their internal
24:49
Speaker 2: pool of assets.
24:50
Speaker 3: They yet not yet, Yeah, I had an intermediate promotion.
24:54
Speaker 2: So what was the twenty nineteen promotion?
24:56
Speaker 3: So the twenty nineteen promotion was Head of Client co
24:59
Speaker 3: Head of c Solutions and Analytics, and I was focused
25:03
Speaker 3: more on the ALM side of the business ALMB asset
25:09
Speaker 3: liability management. So it was if you think about insurance
25:13
Speaker 3: asset management, we have you know, we obviously served the group,
25:16
Speaker 3: but we have business units and Lego entities, and each
25:20
Speaker 3: of these business units and Lego entities have their own
25:25
Speaker 3: strategic asset allocations. So my role was to manage those
25:32
Speaker 3: business unit and Lego entity ACID allocations.
25:36
Speaker 2: So how long did you do that for? From twenty
25:38
Speaker 2: nineteen till.
25:39
Speaker 3: One until I got the CIO job, which was in twenty.
25:43
Speaker 2: Three Okay, so seventeen nineteen twenty three. So for the
25:46
Speaker 2: past two years, you've been chief investment officer for Swiss
25:50
Speaker 2: Ray's internal fund, which is one hundred something billion dollars
25:56
Speaker 2: Is that right?
25:57
Speaker 3: One hundred and eight hundred, one hundred and eight.
26:00
Speaker 2: It's a billionaire or two between friends. How much of
26:04
Speaker 2: that is allocated to private equity and alternatives. How much
26:08
Speaker 2: of that goes to public assets like stocks and bonds?
26:12
Speaker 2: Is it a different set of strategies, a very different
26:15
Speaker 2: mandate than you had when you were running private equity.
26:18
Speaker 3: So maybe before I answer this question for your listeners,
26:22
Speaker 3: I want to give a very quick primer of what
26:24
Speaker 3: insurance asset management is and how it's different from asset
26:30
Speaker 3: management for other institutional investors, because I think you know
26:35
Speaker 3: the answer will make a lot more sense with that.
26:37
Speaker 3: With that in mind, So, if you think about insurance
26:41
Speaker 3: asset management, the optimizing function that we have is in
26:46
Speaker 3: three pillars. First is long term value creation. We'd focus
26:51
Speaker 3: on stable, sustainable returns and cash flows. And our liabilities
26:57
Speaker 3: if you think about especially the life business, are long term.
27:02
Speaker 2: But you do have annuity to.
27:05
Speaker 3: We don't have annuities, but we have not annuities.
27:07
Speaker 2: I'm using the wrong word, so I'm gonna have to
27:09
Speaker 2: pull that out. You have life expectancy tables, so you
27:13
Speaker 2: have some sense of what you're exactly. Life insurers have
27:16
Speaker 2: a sense of, hey, we have this much of a
27:19
Speaker 2: future liability in twenty five thirty years down the road.
27:22
Speaker 2: We don't know who's going to pass away when but
27:25
Speaker 2: with a large enough group we can more or less
27:28
Speaker 2: have a sense of future liabilities.
27:30
Speaker 3: No, no, we have a decent scent of future liabilities.
27:33
Speaker 3: But we also need to make sure we have a
27:36
Speaker 3: portfolio that's resilient across cycles. The second pillar is asset
27:42
Speaker 3: liability management. Right, so because we have a view on
27:47
Speaker 3: our liability profile, we need to make sure we match
27:52
Speaker 3: our assets on a currency, duration, and liquidity basis. So
27:57
Speaker 3: the strategy is very intricately linked with what's happening on
28:02
Speaker 3: the other side of the balance sheet. And then the
28:05
Speaker 3: third pillar is capital efficiency and diversification. I think that
28:09
Speaker 3: is one of the big differences with other institutional investors.
28:14
Speaker 3: We are regulated and we have a risk based capital regime,
28:22
Speaker 3: which means that the cost that we have for holding
28:26
Speaker 3: certain high volatility asset classes is very high, such as
28:30
Speaker 3: equities or high yield, and that means that we maximize
28:35
Speaker 3: return on a risk adjusted basis. So it's you know,
28:40
Speaker 3: maximizing risk adjusted return per unit of capital.
28:44
Speaker 2: That makes sense. When we were talking about private equity,
28:48
Speaker 2: I was thinking about those future liabilities. A lot of
28:52
Speaker 2: people realize private equity has tends to be liquid for
28:56
Speaker 2: five or seven years at a time, but I would
28:59
Speaker 2: imagine that you could ladder or stagger that, so there's
29:04
Speaker 2: always some fun coming up when a future liability arises.
29:09
Speaker 2: It may be you liquid for five years or seven years,
29:12
Speaker 2: but you're talking about twenty thirty, forty years in the future.
29:15
Speaker 3: On the life side, I mean, we also have a
29:17
Speaker 3: property and casualty business, which is.
29:19
Speaker 2: Much short random.
29:21
Speaker 3: Yeah, well, it's annual renewal, and it's a function of
29:25
Speaker 3: what happens with natural catastrophes, so whether you have a
29:29
Speaker 3: hurricane or an earthquake, but that business renews every year,
29:33
Speaker 3: so it's a very short tail.
29:35
Speaker 2: On the liability side of that. It feels these days
29:39
Speaker 2: like natural catastrophes are not just more frequent, but so random.
29:45
Speaker 2: I don't know if we're just paying more attention to
29:47
Speaker 2: them or if they're actually happening more frequently. How do
29:51
Speaker 2: you manage around having that sort of future liability when
29:56
Speaker 2: it kind of feels a little random. When a hurricane hits,
29:59
Speaker 2: a tornado hit, it's a wildfire happens, all these things
30:03
Speaker 2: just seem to come out of nowhere.
30:06
Speaker 3: Well, so I think that's why the whole element of
30:10
Speaker 3: liquidity and stability is so important on the asset side,
30:14
Speaker 3: we need to have a sustainable portfolio regardless of psycho
30:19
Speaker 3: and regardless of what happens, which means we need to
30:21
Speaker 3: hold more liquidity then you would think at first glance,
30:25
Speaker 3: and we need to have a portfolio that can cover liability.
30:28
Speaker 3: So it cannot be the case that if a hurricane
30:31
Speaker 3: hits and we have claims and people are waiting to
30:35
Speaker 3: get paid to rebuild their roof, we say we're sorry, but.
30:38
Speaker 2: There is a market alternatives. We're locked up.
30:41
Speaker 3: We can't see exactly so and then keep that in mind.
30:44
Speaker 2: You know, in the US, I think Swiss Rea is
30:47
Speaker 2: known primarily as a giant reinsurer. Same situation. Obviously, you
30:53
Speaker 2: never know when some insurance company gets to make a
30:57
Speaker 2: claim on their reinsurance policy. I'm going to assume that
31:01
Speaker 2: having stability, sustainability and liquidity is really important for those
31:07
Speaker 2: future liabilities as well.
31:09
Speaker 3: No, no, absolutely, I mean we are ultimately the insure
31:12
Speaker 3: of insurance companies. We ensure the tail. So every time
31:18
Speaker 3: you open the paper and there's a big event, you
31:21
Speaker 3: should think of Swiss Rea real and what the impact is.
31:24
Speaker 3: So whether there is a you know, the Suez Canal
31:28
Speaker 3: is blocked, or there's a big earthquake, or the airplanes
31:33
Speaker 3: have been cannot be returned to the lessers in Russia.
31:38
Speaker 3: All of these macro big events ultimately hit reinsurance. Or
31:43
Speaker 3: if there's a big pandemic and the Tokyo Olympics are delayed,
31:49
Speaker 3: that is a reinsurance level event.
31:51
Speaker 2: So it's interesting because you spend so much time in
31:54
Speaker 2: private equity, but it sounds like what Swiss raid does
31:59
Speaker 2: in internally is going to be a little less alternative focused,
32:05
Speaker 2: a little more liquidly focused. Is that a fair statement? No?
32:09
Speaker 3: Absolutely, And if you look at our portfolio, we are
32:13
Speaker 3: eighty five percent fixed income, oh no kidding, of which
32:16
Speaker 3: half is government bonds and we use government bonds to
32:21
Speaker 3: match liabilities. That is our risk freeway of matching liabilities.
32:27
Speaker 3: And then the rest is corporate credit and private debt.
32:30
Speaker 3: And private debt has been one of the acid classes
32:33
Speaker 3: that we have participated in for a long time, but
32:37
Speaker 3: where we're seeing a lot of opportunities. So if you
32:39
Speaker 3: say eighty five percent fixed income, the rest is private equity,
32:44
Speaker 3: listed equity, we have some minority positions, and then real estate.
32:47
Speaker 2: Huh, that's really fascinating. I wouldn't have guessed so much.
32:51
Speaker 2: We're in government bonds. But I guess if you want
32:57
Speaker 2: liquid and you want stable, and you want just buy,
33:01
Speaker 2: what's the tenure now? Four and a half percent.
33:03
Speaker 3: That's not so bad.
33:05
Speaker 2: Well with inflation two and a half percent, it's not
33:07
Speaker 2: so good. So what do you how do you think
33:10
Speaker 2: about the return. It's it's really more about staying ahead
33:14
Speaker 2: of inflation than it is about generating market beating returns.
33:19
Speaker 2: Is that is that fair?
33:21
Speaker 3: Well? You want to so, as I mentioned, we we
33:25
Speaker 3: do focus on long term value creation. And if you
33:29
Speaker 3: think about again our optimizing function, most institutional investors focus
33:35
Speaker 3: on economic returns. We focus on economic returns and accounting returns,
33:41
Speaker 3: and we always need to strike that balance.
33:44
Speaker 2: To find accounting returns versus economic returns.
33:48
Speaker 3: So economic returns is you know, if you have a
33:50
Speaker 3: bond and you know the market value of that bond
33:54
Speaker 3: moves in a negative direction, even if it pays your yield,
33:59
Speaker 3: you know, net, you might be losing economic value on
34:02
Speaker 3: holding that position. In ifs, if you hold a corporate bond,
34:07
Speaker 3: the market movements do not go through.
34:10
Speaker 2: P and L, so you'll eventually get par when it because.
34:14
Speaker 3: We hold it to maturity right, exactly, all right, So
34:18
Speaker 3: what features into our I for us result is only
34:21
Speaker 3: the yield on that bond, not the market movement.
34:25
Speaker 2: So here we are in twenty twenty five, we're still
34:28
Speaker 2: debating whether or not the FED is going to cut.
34:31
Speaker 2: How much attention do you pay as chief chief investment
34:37
Speaker 2: officer to all of the noise around? Will the Fed cut?
34:42
Speaker 2: Will they not cut? Are they staying put? Oh? Here
34:44
Speaker 2: comes the dot plot like how noisy and and or
34:49
Speaker 2: insignificant is everything around central bank activity.
34:54
Speaker 3: We start the year always with highlighting where we think
34:58
Speaker 3: markets will go and what is our baseline and what
35:01
Speaker 3: are our scenarios. So of course what the FED will
35:05
Speaker 3: do impact markets, impact valuations, impact interest rates, so of
35:11
Speaker 3: course we follow it. We are a long term investors,
35:14
Speaker 3: so we try to While we i'd say sometimes obsessively
35:19
Speaker 3: follow the market news, we try to separate the noise
35:24
Speaker 3: from what we really need to do.
35:27
Speaker 2: You guys were in private credit before it became very popular,
35:32
Speaker 2: as it seems to have done recently. At what point
35:35
Speaker 2: does that become a little bit of a crowded trade
35:40
Speaker 2: or given the size and the history of Swiss ray
35:44
Speaker 2: in the space, you have your favorite places to play
35:49
Speaker 2: in you know, the funds you like, the private credit
35:52
Speaker 2: shops you like, like, how are you looking at the
35:55
Speaker 2: change in private credit over the past five years, How's
35:58
Speaker 2: that affecting your investment strategy?
36:01
Speaker 3: Private credit is in the usual lot these days. The
36:05
Speaker 3: reality is that private credit is not one asset class.
36:09
Speaker 3: There are many, many flavors, and you have private credit
36:14
Speaker 3: that is mostly IG like investment grade, like senior secured loans.
36:19
Speaker 3: You have some pretty speculative asset classes, and Swiss Free
36:26
Speaker 3: has been focusing on the former. So we started building
36:31
Speaker 3: and we play in that aset class in a more
36:33
Speaker 3: direct way. So we provide infrastructure loans directly to projects
36:40
Speaker 3: and we underwrite each of those loans, so we have
36:45
Speaker 3: a pretty high bar of what we see as quality.
36:49
Speaker 3: And also the private debt premium, so that's the premium
36:53
Speaker 3: above the spread that those loans provide in order to
36:58
Speaker 3: put those in our portfolio.
37:00
Speaker 2: So I mentioned the ten years about four and a
37:02
Speaker 2: half percent today. Go back before twenty twenty two and
37:08
Speaker 2: the yield on government bonds were half or worse. Were
37:15
Speaker 2: what were you guys doing when we were in an
37:17
Speaker 2: era of one percent inflation and two and a half
37:21
Speaker 2: percent yield, Does that get you to where you want
37:24
Speaker 2: to be? Or is that still did that raise problems
37:28
Speaker 2: for being insurers like Swiss Ree.
37:31
Speaker 3: I think this was a problem for the whole industry,
37:33
Speaker 3: especially for the insurance industry, given how much reliance we
37:37
Speaker 3: have on fixed income. And that was the driver in
37:41
Speaker 3: a way for us to start looking at areas like
37:44
Speaker 3: private debt, because there you have bespoke transactions and you
37:49
Speaker 3: can definitely earn a premium versus what you get even
37:53
Speaker 3: in the corporate bond space. But I mean, I'm not
37:55
Speaker 3: going to lie. You're looking to you're reaching for yield
37:58
Speaker 3: right in those in the those moments, well.
38:01
Speaker 2: There's reaching for yield like people did during the financial crisis,
38:04
Speaker 2: and then there's senior secured privately due diligenced debt that
38:12
Speaker 2: didn't carry the same leverage and risk characteristics like we
38:15
Speaker 2: saw with securitized junk mortgages. That was a very different world.
38:20
Speaker 2: But I guess the insight that I'm picking up from
38:24
Speaker 2: you is, hey, two decades of zero percent interest rate
38:28
Speaker 2: from the US Central Bank and other central banks really
38:33
Speaker 2: is the key driver of what's expanded private debt, private credit,
38:37
Speaker 2: private equity, and a whole slew of alternatives that substituted
38:44
Speaker 2: for sovereign treasuries and other issuances. Fair insight, No.
38:50
Speaker 3: It's a fair insight. And I think if there's one
38:53
Speaker 3: concern that we have is if you look at when
38:56
Speaker 3: this space really exploded, it was after the financial crime
39:01
Speaker 3: and there hasn't been a test of the market. So
39:06
Speaker 3: since two thousand and ten, there hasn't been a real
39:11
Speaker 3: credit crisis to really test the quality of these of
39:15
Speaker 3: these products. And I think they have. You know, new
39:20
Speaker 3: products have kept coming to the market, some with a
39:24
Speaker 3: very short history, and we still don't know how private
39:29
Speaker 3: credit will actually react in a more prolonged crisis.
39:33
Speaker 2: Well, well, twenty twenty two was pretty much a down
39:37
Speaker 2: fifteen percent year for treasuries and down twenty plus for equities.
39:42
Speaker 2: That's kind of unusual. I think you have to go
39:44
Speaker 2: back to nineteen eighty one to have them both down
39:46
Speaker 2: double digits in the same year.
39:49
Speaker 3: But we had no defaults, so our portfolio had no
39:52
Speaker 3: default So.
39:53
Speaker 2: The fact that and the accounting hold till maturity means
39:57
Speaker 2: we don't care what the noisy day to day stuff is.
40:00
Speaker 2: We're in it until this matures.
40:01
Speaker 3: So well, we care about quality because what hurts us
40:04
Speaker 3: is defaults and reratings.
40:08
Speaker 2: So you had no defaults, any reratings.
40:11
Speaker 3: We've had some reratings, but I mean we also have
40:14
Speaker 3: middle market lending, so we have been expecting to see
40:18
Speaker 3: some wobble, but not so much and not so much. Yeah,
40:23
Speaker 3: and I think, and you know, you always attribute good
40:28
Speaker 3: outcomes to skill when maybe some of it is attributable
40:32
Speaker 3: to luck. But so far our very conservative underwriting has
40:37
Speaker 3: paid off.
40:38
Speaker 2: Huh really really very interesting. Coming up, we continue our
40:41
Speaker 2: conversation with Elena Heneva, Group chief Investment Officer for Swiss
40:46
Speaker 2: Ray discussing the state of markets and fixed income today.
40:52
Speaker 2: So it's twenty twenty five. The year is just about
40:56
Speaker 2: halfway done. Kind of been a wacky year. What surprised
41:00
Speaker 2: you most about the global economy in twenty twenty five?
41:06
Speaker 3: So I have to say coming into the year, sentiment
41:10
Speaker 3: was very bullish. I was in the Valce in January,
41:13
Speaker 3: and there's always the joke of whatever you hear in
41:15
Speaker 3: the vals, the reverse will happen. Whatever you hear where
41:19
Speaker 3: in the vals at the world economic for.
41:22
Speaker 2: Oh, Davos, okay, yeah, yeah, so yeah, it's Davos has
41:25
Speaker 2: a tendency to pick tops and bombs accidentally exactly.
41:30
Speaker 3: But back in January, the sentiment was super bullish. It
41:34
Speaker 3: was all about us exceptionalism. It was all about Ai
41:40
Speaker 3: and how AI will drive returns to the moon. And
41:47
Speaker 3: the sentiment has vastly shifted. So just the speed with
41:51
Speaker 3: which we saw sentiment reverse and the narrative reverse this
41:57
Speaker 3: year a few times now has been to some degree surprising.
42:02
Speaker 2: To be fair, As much as the US President has
42:07
Speaker 2: been talking about Tariff's whole adult life, it's his favored word,
42:11
Speaker 2: call me tariff man. You know, I believe that everybody
42:16
Speaker 2: saw his first term. All right, we'll get some ten
42:19
Speaker 2: percent tariffs. We can live with that. It feels like
42:24
Speaker 2: a collective failure of imagination as to what took place
42:28
Speaker 2: on April second. I'm loath to call it liberation Day
42:33
Speaker 2: because the only thing that was liberated were a bunch
42:36
Speaker 2: of people were liberated from their money. But other than that,
42:41
Speaker 2: everybody seemed to be surprised by that. And should we
42:47
Speaker 2: have been should we have expected that, or just collectively knowing,
42:53
Speaker 2: why would you mess with this? This is going so well?
42:55
Speaker 2: Seems to be the Wall Street consensus. Hey, you've inherited
42:58
Speaker 2: a great economy, in the stockho markets trending higher. Just
43:02
Speaker 2: leave it alone, like, how does that perceived from Europe?
43:07
Speaker 3: So I wish I said that we were super surprised.
43:10
Speaker 3: I mean, we do always tend to be a little
43:13
Speaker 3: bit glass half empty, because you know, we are risk company,
43:16
Speaker 3: We're a risk knowledge company.
43:18
Speaker 2: Bond investors are always about return of capital, not return
43:22
Speaker 2: on capital. So you're the glass half empty. The equity
43:26
Speaker 2: side is the glass half full. But even given that,
43:30
Speaker 2: it still feels like this was really a surprising year.
43:33
Speaker 3: I think the extent of the announcement on April second
43:38
Speaker 3: was a shock. I don't think that. I mean, if
43:41
Speaker 3: you remember that day, people couldn't understand the magnitude of
43:46
Speaker 3: some of the numbers that were shown on that chart, right,
43:49
Speaker 3: and what the formula was and what it really meant.
43:52
Speaker 3: But I think the direction of travel was you know,
43:57
Speaker 3: if you had listened to also what President said before
44:01
Speaker 3: the election, you know that you know we expect at
44:04
Speaker 3: some level of increase in terroris. I think it was
44:07
Speaker 3: just the weight was communicated right and the execution of
44:12
Speaker 3: it that that caught many, including us, off guard.
44:15
Speaker 2: It seemed to be a little ham fisted, especially when
44:19
Speaker 2: we see how the pains the Federal Reserve takes to
44:23
Speaker 2: not surprise the markets. Hey there's a rate increase coming
44:27
Speaker 2: a couple of months. Get ready, Hey we're two months away.
44:30
Speaker 2: Look at CPI, look at PCE, and then all the
44:34
Speaker 2: Fed governors go out and they all speak at the
44:36
Speaker 2: various clubs, like the Fed really takes pains to not
44:41
Speaker 2: surprise the market. It kind of felt like this was
44:44
Speaker 2: a purposeful surprise to the markets. How big of an
44:48
Speaker 2: impact did that have?
44:51
Speaker 3: I think the good news for us was that we
44:53
Speaker 3: don't hold a lot of listed equities, right, so it
44:58
Speaker 3: was more an opportunity to think about our playbook of
45:01
Speaker 3: when do we add exposure in the market versus you know, stressing.
45:05
Speaker 3: So we actually if we look back at that period
45:09
Speaker 3: of about a month where you had extreme volatility, we
45:13
Speaker 3: didn't make a lot of sharp turns, right. It was about,
45:16
Speaker 3: you know, are we still comfortable with the portfolio we're holding.
45:20
Speaker 3: We had come into the year with cautious optimism, right,
45:24
Speaker 3: but I think the emphasis on cautious and we felt
45:29
Speaker 3: comfortable holding the risk that we had in the book.
45:32
Speaker 3: At the same time, we were surprised by the resilience
45:36
Speaker 3: of the market right. I mean, this was a very
45:39
Speaker 3: sharp reaction, but the recovery was also lightning fast.
45:46
Speaker 2: So I'm glad you use the word resilience because that's
45:49
Speaker 2: the word that keeps coming up. Resilience in the economy,
45:53
Speaker 2: resilience in consumer spending even if their consumer sentiment is
45:58
Speaker 2: kind of weak, and resilience in both equity and bond markets.
46:04
Speaker 2: It seems that you can throw anything at this economy,
46:07
Speaker 2: in this market, and at least so far, it brushes
46:10
Speaker 2: itself up often and just keeps going. How surprising has
46:14
Speaker 2: that been?
46:16
Speaker 3: I mean, if you look at the valuations, if you
46:18
Speaker 3: look at the fundamentals, it is it's surprising, right, because
46:23
Speaker 3: you would expect I mean, you're seeing the consumer slowing down,
46:28
Speaker 3: you still have high interest rates, valuations especially in the US,
46:32
Speaker 3: are in their top test styles, and outlook is not
46:39
Speaker 3: looking as promising as a few months back. So I
46:42
Speaker 3: think from a pure fundamentals perspective, it's surprising. But markets
46:48
Speaker 3: are not you know better than me, Markets are not
46:51
Speaker 3: driven purely by fundamentals. There are a lot of technicals
46:56
Speaker 3: that have maintained the resilience of the market. First of all,
46:58
Speaker 3: there's just a lot of money.
47:00
Speaker 2: There endless amounts of capital slashing around.
47:03
Speaker 3: And there's not that many assets to invest in. So
47:05
Speaker 3: if you look at the size of the US stock
47:09
Speaker 3: market versus the amount of money that needs to be invested,
47:15
Speaker 3: you have a bit of a supply demand and balance,
47:18
Speaker 3: which basically is keeping valuations higher than historically.
47:22
Speaker 2: And isn't the same true in sovereign treasuries not just
47:26
Speaker 2: the US, but there really isn't a lot of sovereign paper,
47:30
Speaker 2: at least a rated paper around. It's almost as if
47:33
Speaker 2: there's a shortfall of sovereign treasury paper.
47:38
Speaker 3: Well, and if you think about also ig credit investment
47:42
Speaker 3: great credit, you could almost argue. Now the other surprise
47:47
Speaker 3: has been how tight spreads have become in high quality credit.
47:53
Speaker 2: Right, Why go risky if you're not getting paid to
47:55
Speaker 2: take that risk.
47:56
Speaker 3: But if you think about what companies are issuing that
47:59
Speaker 3: credit are maybe this will sound controversial, some of these
48:05
Speaker 3: companies are more credit worthy than some governments. So in
48:11
Speaker 3: a way, you could imagine a situation where you know,
48:15
Speaker 3: some investment great credit even goes tighter, you know the
48:19
Speaker 3: crazy Yeah, Microsoft could have negative spread.
48:22
Speaker 2: Right, Microsoft is more credit worthy than a lot of
48:25
Speaker 2: large nations out there exactly, that's.
48:28
Speaker 3: Right, and that is what I think has been keeping
48:30
Speaker 3: you know, both equities higher and spreads as tight as
48:35
Speaker 3: they are.
48:35
Speaker 2: So you mentioned we're in the top death style evaluation
48:38
Speaker 2: in the US, But for almost a year now Europe
48:44
Speaker 2: has been outperforming, very quietly, at least for the first
48:48
Speaker 2: for the tail end of twenty twenty four, but a
48:51
Speaker 2: little more visibly in twenty twenty five, Europe has been
48:56
Speaker 2: significantly outperforming the US. You know, people been waiting for
49:00
Speaker 2: this mean reversion to take place, this leadership swap for
49:04
Speaker 2: a decade. It finally seems to be happening. First, why
49:08
Speaker 2: do you think that is? Is it strictly a function
49:11
Speaker 2: of valuation, or are some of these things being driven
49:15
Speaker 2: by policy, by the US dollar, by a return of
49:20
Speaker 2: capital away from the United States? What is leading to
49:24
Speaker 2: this outperformance elsewhere in the world.
49:27
Speaker 3: So I want to start by saying that Europe still
49:29
Speaker 3: has a lot of catching up to do, for sure.
49:32
Speaker 3: So if you look at multiples in Europe, there in
49:35
Speaker 3: kind of the mid teens. Now multiples in the US
49:40
Speaker 3: are you know, mid twenties, slow mid twenties, So there's
49:43
Speaker 3: still a pretty big valuation gap, and some of that
49:46
Speaker 3: is just the constitution of the market. You know, you
49:48
Speaker 3: have more high tech, more high growth, but some of
49:52
Speaker 3: it is kind of a European penalty, just given all
49:56
Speaker 3: the you know, regulation and slow growth and challenges that
49:59
Speaker 3: you has been facing. So yes, we have done better
50:04
Speaker 3: in Europe in the equity space in the last year,
50:08
Speaker 3: you know, then in the last ten, but I think
50:12
Speaker 3: the gap is still pretty meaningful, and I think there's
50:14
Speaker 3: some level of optimism that Europe will need to really
50:19
Speaker 3: speed up investments, whether it's military or infrastructure. I think
50:23
Speaker 3: that Europe has woken up to the fact that in
50:26
Speaker 3: order to quote unquote survive in this new geopolitical environment,
50:31
Speaker 3: they need to get their act together and they need
50:34
Speaker 3: to start focusing on investing and reducing a bit the
50:38
Speaker 3: regulatory burden that that we've had on companies on the continent.
50:46
Speaker 2: It's much greater on the content. And but the flip
50:49
Speaker 2: side of that is I vividly recall in two thousand,
50:54
Speaker 2: right in the middle of the dot com implosion, going
50:57
Speaker 2: to London, going to and New York was very stressed out, Hey,
51:04
Speaker 2: I lose my job, I lose my healthcare. What happens
51:07
Speaker 2: if my kid needs a surgery? In Europe, people were
51:11
Speaker 2: still having cappuccino and cigarettes in the cafes there was.
51:15
Speaker 2: It just felt a lot looser and a lot less stressful.
51:19
Speaker 2: Is that simply a quality of life trade off that, Hey,
51:23
Speaker 2: the Europeans know how to live. Yeah, the Americans can
51:26
Speaker 2: make fast growth tech companies, but we have a better lifestyle.
51:32
Speaker 2: How do you respond to that sort of position?
51:36
Speaker 3: I mean, I think the European expectation for what a
51:39
Speaker 3: good life is is probably quite a bit different from
51:43
Speaker 3: the American definition. I think that there's some people see
51:48
Speaker 3: certain elements of government service as basic right, so be healthcare, education, Right.
51:58
Speaker 3: I can send my kids to a Swiss university for
52:01
Speaker 3: I don't know, a thousand francs a year, and you know,
52:05
Speaker 3: you can get an MIT type education for you know,
52:08
Speaker 3: a small fraction of what you pay in the US. Right,
52:10
Speaker 3: And and that's considered a social good.
52:12
Speaker 1: Right.
52:13
Speaker 2: So I think the taxes are much higher, so you pay,
52:16
Speaker 2: taxes are higher.
52:18
Speaker 3: Taxes are higher, but there is this social web that
52:25
Speaker 3: you know that people value, right. You Also, you know,
52:27
Speaker 3: you go to most European cities, you don't see homeless
52:31
Speaker 3: people right on the street. To the degree you don't
52:34
Speaker 3: have you don't have some of these, you know, extreme
52:37
Speaker 3: situations that you have in the US. And another question
52:40
Speaker 3: is how far is you know what's the right balance.
52:44
Speaker 3: So I'm not saying that it's all good, right because
52:47
Speaker 3: you also have a generation in Europe that expects this
52:54
Speaker 3: but doesn't understand the cost that it comes it comes at,
52:58
Speaker 3: and expects the life though and expects work like life balance.
53:02
Speaker 3: But at the same time, you know it doesn't have
53:07
Speaker 3: the work ethic required to keep the economy successful.
53:14
Speaker 2: So we're recording this. The Russian Ukraine War is still ongoing,
53:19
Speaker 2: the Israel Hamas War has now become an Israel Iran war.
53:25
Speaker 2: There are all these geopolitical tensions and shifts taking place.
53:31
Speaker 2: How do you think about what's going on in the
53:33
Speaker 2: broader geopolitical area when you're thinking about making investments for
53:40
Speaker 2: ten twenty years down the road. Is it significant or
53:43
Speaker 2: is it something that, hey, there's a war every year.
53:46
Speaker 2: It's just something we have to deal with.
53:49
Speaker 3: So if you look at history and what impact wars
53:54
Speaker 3: have on markets, the conclusion is that yes, there's a
53:59
Speaker 3: short term show, but in the long term, even within
54:02
Speaker 3: a few months, that dissipates. So making near term investment
54:08
Speaker 3: decisions driven by geopolitics is probably not the best investment strategy.
54:16
Speaker 3: I think what matters is what is the symptom behind
54:21
Speaker 3: these events? So these wars are a symptom of the
54:26
Speaker 3: fact that we have deglobalization, We are moving in different
54:31
Speaker 3: spheres of influence, and Swiss Free is a truly global company.
54:38
Speaker 3: So the value we bring is that we can ensure
54:44
Speaker 3: tail risks because we can diversify a lot of tail
54:48
Speaker 3: risks at a global level. Right we reinsure earthquakes in
54:54
Speaker 3: California and in Japan, and hurricanes in Florida and pandemics
55:01
Speaker 3: and those risks are uncorrelated at a global level. And
55:05
Speaker 3: in order to provide that extra cover, you need to
55:09
Speaker 3: have a global mindset. And in an environment where globalization
55:16
Speaker 3: is no longer what it was ten years ago, one
55:19
Speaker 3: needs to think about how does that impact truly global businesses.
55:24
Speaker 3: So we think about it as long term trend and
55:28
Speaker 3: impact on where we think the portfolio needs to go,
55:31
Speaker 3: versus making tactical decisions influenced by short term events.
55:37
Speaker 2: So given that that you're a long term thinker, you're
55:41
Speaker 2: not playing the tactical game, you still end up with
55:45
Speaker 2: these disruptions and risks and opportunities. How do you assess
55:50
Speaker 2: the state of the market today? Where do you see opportunities?
55:53
Speaker 2: Where do you see risks?
55:58
Speaker 3: So I would say that and maybe that's my private
56:03
Speaker 3: markets background. I continue to see opportunities in private markets
56:09
Speaker 3: in part because you have imperfect information. You can actually
56:14
Speaker 3: add value to your portfolio if you really have the
56:16
Speaker 3: channels and expertise. I think areas like infrastructure debt are
56:22
Speaker 3: ones that will only grow in the next few years
56:27
Speaker 3: because the world needs a lot more new infrastructure and
56:32
Speaker 3: companies that provide loans but also equity in the infrastructure space,
56:38
Speaker 3: we'll both find a lot of deals but also have
56:42
Speaker 3: a lot of opportunities. So you need to think of
56:44
Speaker 3: it from a macro perspective of what you know, where
56:49
Speaker 3: is the need for capital and can do we have
56:53
Speaker 3: the expertise as a team to provide a solution that
56:57
Speaker 3: is uniquely fitted to.
56:58
Speaker 2: This mentioned private equity and private credit. European Central Bank
57:04
Speaker 2: has cut rates recently a number of times. Does that
57:08
Speaker 2: work as a tailwind for private credit? How does that
57:11
Speaker 2: impact what you see out there?
57:14
Speaker 3: It's definitely a tailwind for private equity, right, So what
57:18
Speaker 3: we see is European funding cost has actually fallen twenty
57:23
Speaker 3: basis points since Liberation Day versus in the US funding
57:28
Speaker 3: costs has gone up twenty points. And if you think
57:31
Speaker 3: about what makes private equity successful, it is, you know,
57:34
Speaker 3: it's a leveraged buyout right that's ultimately part of the
57:39
Speaker 3: value of those transactions is in the leverage part. And
57:42
Speaker 3: lower interest rates clearly are beneficial for the private equity space.
57:48
Speaker 2: So the phrase we hear and quite honestly hear way
57:52
Speaker 2: too much in the US is so much uncertainty, so
57:55
Speaker 2: much economic uncertainty. How do you see this lack of
58:00
Speaker 2: clarity at least around policy decisions in the US affecting
58:05
Speaker 2: your outlook for the markets, for the economy. How does
58:09
Speaker 2: this sort of new regime in Washington, d C. Affect
58:13
Speaker 2: the global economy?
58:17
Speaker 3: So if you think about how we plan right on
58:20
Speaker 3: an annual or three year basis for many years, we
58:24
Speaker 3: would have a baseline, right would say we think there's
58:27
Speaker 3: a seventy percent chance that this will happen, and we'll
58:30
Speaker 3: set up our portfolio and our decisions based on this
58:34
Speaker 3: core scenario. And then there's some tail scenarios which we
58:38
Speaker 3: will assess and we'll look at you know water, you know,
58:43
Speaker 3: how could we assess whether we're moving into those scenarios today?
58:48
Speaker 3: Our baseline quote unquote is a forty percent odds, so
58:53
Speaker 3: I don't want to even call it a baseline. And
58:56
Speaker 3: we have moved from thinking in baseline and other scenarios
58:59
Speaker 3: to what is the range of outcomes that we should
59:02
Speaker 3: expect and what do we need to be tracking on
59:06
Speaker 3: the macro side, on kind of the high frequency data
59:10
Speaker 3: site to understand how we're moving from the scenario we
59:13
Speaker 3: think we're in right now to something else. But if
59:16
Speaker 3: you have that path, you have fewer surprises, right. So
59:21
Speaker 3: that's one thing that we have done, and we dynamically
59:24
Speaker 3: assess the probabilities of those scenarios on a monthly basis.
59:28
Speaker 3: We have an investment committee and we do a survey
59:32
Speaker 3: of fifteen investment committee members to say, you know, what
59:35
Speaker 3: do you think the odds are? It's kind of the
59:37
Speaker 3: wisdom of the crowd's idea, and we discuss, you know,
59:40
Speaker 3: where in which scenario are we moving. So that's one
59:44
Speaker 3: thing we have done and I think that provides a
59:46
Speaker 3: lot more flexibility in thinking. And the second is we
59:50
Speaker 3: think ahead of risk events. So markets are much more
59:56
Speaker 3: volatile today, and typically at the depth of a correction,
1:00:03
Speaker 3: you're scared, you don't know how to interpret the information
1:00:09
Speaker 3: you're getting, and you're paralyzed in making decisions. So what
1:00:13
Speaker 3: we do is we have playbooks to say, if the
1:00:17
Speaker 3: market moves up or down at certain levels, these are
1:00:24
Speaker 3: the levels at which we'll add risk. This amount of
1:00:28
Speaker 3: risk and is you know, as the market goes down,
1:00:31
Speaker 3: we'll continue to add risk. And then we have playbooks
1:00:34
Speaker 3: to think about, okay, at what levels if the market
1:00:36
Speaker 3: recovers has gone too far and we lighten up on risk,
1:00:41
Speaker 3: And those playbooks have taken the emotion and the bias
1:00:44
Speaker 3: out of the decisions and it makes it much, you know,
1:00:49
Speaker 3: much less stressful in a way to execute on strategy because.
1:00:53
Speaker 2: You have a plan that you created when you were
1:00:55
Speaker 2: calm and relaxed, as opposed to responding when you're stressful. We'
1:01:00
Speaker 2: kind of fascinated by the seventy percent baseline in normal circumstances,
1:01:06
Speaker 2: but this year it's more of a forty percent baseline.
1:01:09
Speaker 2: It sounds like you're saying that tail risk is rising.
1:01:15
Speaker 2: Is that a fair assessment?
1:01:18
Speaker 3: Yeah, this is you call it fatter tails. So we
1:01:24
Speaker 3: see the more uncertainty means that it's less clear what
1:01:29
Speaker 3: will turn out to be, so there are more scenarios
1:01:32
Speaker 3: that are more.
1:01:33
Speaker 2: Likely, including the possibility of something really extreme on either
1:01:39
Speaker 2: end of the tail exactly.
1:01:40
Speaker 3: And we do I mean again, we're in the business
1:01:42
Speaker 3: of til tail risk, so we also do think about
1:01:46
Speaker 3: what could be a really really tail scenario and what
1:01:49
Speaker 3: that means for our business. But we do it not
1:01:51
Speaker 3: just at the acid management level, more broadly at.
1:01:55
Speaker 2: The group, do across the entire insurance company. I would imagine,
1:01:58
Speaker 2: all right, I only have you for a few more minutes,
1:02:01
Speaker 2: so let's jump to our favorite section, our favorite questions
1:02:05
Speaker 2: we ask all of our guests starting with what are
1:02:08
Speaker 2: you watching or listening to these days? What's keeping you entertained?
1:02:14
Speaker 2: So I have two.
1:02:14
Speaker 3: Kids and I try to show them some more, you know,
1:02:21
Speaker 3: intellectual programming. And the latest show we've been watching is
1:02:25
Speaker 3: called The Real Bugs Life on Disney, which is, if
1:02:31
Speaker 3: you know, a bugs life, it was a Disney movie.
1:02:34
Speaker 3: This is real. So it's amazing technology that's being used
1:02:40
Speaker 3: to record this. But it follows different insects in their
1:02:44
Speaker 3: natural environment at a very with amazing cameras. Right, So
1:02:49
Speaker 3: they have you basically get a macro view of you know,
1:02:54
Speaker 3: how a dragonfly flies and how a dragonfly you know,
1:03:00
Speaker 3: runs away from from it's from frogs or other animals.
1:03:05
Speaker 3: So it's a it's a fascinating show. So that's on
1:03:08
Speaker 3: the on the TV side. On podcasts in good Company,
1:03:13
Speaker 3: I guess this might be a competitive podcast to yours.
1:03:16
Speaker 3: It's Nicolai Tongan.
1:03:19
Speaker 2: Who hosts that.
1:03:20
Speaker 3: It's Nikolaye Tongan. He's the CEO of the Norges Bank.
1:03:26
Speaker 3: So that's the largest sovereign wealth fund in Norway and
1:03:30
Speaker 3: they're a large equity investor and.
1:03:33
Speaker 2: They I'm going to look into that.
1:03:35
Speaker 3: They hold one or two percent share in some of
1:03:37
Speaker 3: the largest companies. So he gets to interview CEOs of
1:03:41
Speaker 3: these companies and it's a it's always pretty fascinating discusion.
1:03:45
Speaker 2: I'm gonna definitely check that out. That sounds good. Tell
1:03:48
Speaker 2: us about your mentors who helped to shape your career.
1:03:53
Speaker 3: Early on. It was definitely my grandmother. She she was
1:03:58
Speaker 3: a professor of agronomy.
1:04:01
Speaker 2: Back in the day.
1:04:03
Speaker 3: Agronomy is the science of agriculture, and she took a
1:04:08
Speaker 3: keen interest in my education and really pushing me to
1:04:14
Speaker 3: push myself to do better, to have the right moral compass.
1:04:19
Speaker 3: So some of the lessons that weren't instilled in me
1:04:22
Speaker 3: are still from her time. And then during the Bay years,
1:04:28
Speaker 3: a partner called Dan has who was one of the
1:04:31
Speaker 3: founders of our private equity practice back in Boston and
1:04:35
Speaker 3: whom I met in Zurich and who I blame for
1:04:38
Speaker 3: staying in Zurich permanently after I came in two thousand
1:04:42
Speaker 3: and nine. But he really has played a fundamental role
1:04:46
Speaker 3: in kind of coaching me, you know, on both my
1:04:49
Speaker 3: career moves, on how I approach problems, just listening at
1:04:55
Speaker 3: times and really being an invaluable friend and co.
1:05:01
Speaker 2: Let's talk about books. What are some of your favorites?
1:05:03
Speaker 2: What are you reading right now?
1:05:06
Speaker 3: I'd say my all time favorite is The Three Body Problem.
1:05:10
Speaker 3: It's a trilogy by now miss pronounce the name Lord
1:05:14
Speaker 3: Tsushin right, And it's sci fi mixed with history, philosophy,
1:05:22
Speaker 3: game theory, you name it. I don't know if you
1:05:26
Speaker 3: were familiar with it.
1:05:27
Speaker 2: Oh, I'm very familiar with the book. And I actually
1:05:30
Speaker 2: watched the Apple TV.
1:05:32
Speaker 3: Series, which is not as good.
1:05:34
Speaker 2: Well, it seems like it just pulls a handful of
1:05:37
Speaker 2: things out of it. Although, to be honest, I started
1:05:42
Speaker 2: reading the first book, and the three body problem for
1:05:46
Speaker 2: those people who aren't physical nerds are we can predict
1:05:50
Speaker 2: two bodies, but once you introduce a third body, the
1:05:53
Speaker 2: range of outcomes are practically infinite, and you really have
1:05:56
Speaker 2: no idea where these three gravitational bodies are going to
1:06:00
Speaker 2: are going to take us. But it was I believe
1:06:03
Speaker 2: the author is Chinese. It was originally written in Chinese
1:06:06
Speaker 2: and then translated. The US translation is a little challenging
1:06:11
Speaker 2: to fight you.
1:06:12
Speaker 3: With, especially the second book.
1:06:13
Speaker 2: I'd say so I found the first book difficult, Like
1:06:18
Speaker 2: it's a little like you could see that whoever did
1:06:20
Speaker 2: the translation English wasn't necessarily their their native land.
1:06:24
Speaker 3: But the concepts were pretty fascinating, yeah, to think about.
1:06:28
Speaker 3: I mean, it was a lot about game theory, right,
1:06:30
Speaker 3: and and and the fact that humanity lacks the ability
1:06:34
Speaker 3: of reacting to you know, existential long term threats, right
1:06:40
Speaker 3: and what is the psychology behind it? Even when faced
1:06:44
Speaker 3: with something that you know guarantees destruction of humanity, we
1:06:49
Speaker 3: still squabble around more earthly, earthly.
1:06:53
Speaker 2: Problems, tribal arguments as opposed to, hey, we're all going
1:06:57
Speaker 2: to die. We better do something.
1:06:58
Speaker 3: The aliens are coming, right, that's right.
1:07:00
Speaker 2: And we know you get fifty years to prepare.
1:07:02
Speaker 3: It was five hundred in the book.
1:07:04
Speaker 2: Five hundred.
1:07:05
Speaker 3: Yeah. And even with that, I mean on the positive side,
1:07:08
Speaker 3: it also awoke amazing innovation. Right, So it shows you
1:07:12
Speaker 3: also the best of humanity that you know, when people
1:07:16
Speaker 3: put their mind to it, they can solve really impossible problems.
1:07:22
Speaker 3: But I think that the outcome is a mixed bag
1:07:24
Speaker 3: for humanity.
1:07:25
Speaker 2: What else are you reading? What else are you?
1:07:27
Speaker 3: So? Today I'm reading a book called Human Kind. It's
1:07:31
Speaker 3: by Dutch writer called Rodger Bragmann, and the premise of
1:07:36
Speaker 3: the book is that humans are innately kind. And meanwhile,
1:07:43
Speaker 3: so our human nature is not savage, but it's actually good, right,
1:07:49
Speaker 3: And he goes through.
1:07:51
Speaker 2: Cooperative social primates right exactly.
1:07:55
Speaker 3: But a lot of history has been telling us that,
1:07:56
Speaker 3: you know, we have this veneer of civility and underneath
1:08:01
Speaker 3: we we're untrustworthy and evil beings. And I think he
1:08:06
Speaker 3: goes through a lot of that, and this proves a
1:08:08
Speaker 3: lot of historical beliefs. And you know, in this day
1:08:13
Speaker 3: and age, you need some optimism, and I'd say this
1:08:16
Speaker 3: this book gives you belief and trust in humanity.
1:08:20
Speaker 2: So humankind kind of the opposite of sapiens exactly like
1:08:27
Speaker 2: that that that book was fascinating, but like a little bit, gee,
1:08:31
Speaker 2: we really suck as a species or the selfish gene.
1:08:35
Speaker 3: Right, So Richard Dawkins book that also, I mean he
1:08:38
Speaker 3: did this author disproves some of the thesis, right because
1:08:42
Speaker 3: Richard Dawkins basically says, well, ey genes basically make us,
1:08:47
Speaker 3: you know, the species we are, and there's a lot
1:08:49
Speaker 3: of not so on good features. This version says, well,
1:08:53
Speaker 3: there's a lot of misrepresentation there, and ultimately he shows
1:08:57
Speaker 3: examples of you know, why people I mean, he gets
1:09:00
Speaker 3: and the example of when soldiers in the First World War,
1:09:04
Speaker 3: you know what percent of debts was caused by people
1:09:08
Speaker 3: directly shooting at the enemy, and that was a tiny
1:09:11
Speaker 3: percent because soldiers had a very difficult time to look
1:09:15
Speaker 3: the enemy in the eye and kill them. So most
1:09:18
Speaker 3: of the debts were done by you know, grenade or
1:09:21
Speaker 3: kind of indirect means. Because ultimately, you know, humans don't
1:09:26
Speaker 3: want to hurt other humans.
1:09:28
Speaker 2: That's that's really fascinating. Our final two questions, what sort
1:09:32
Speaker 2: of advice would you give a recent college grad interested
1:09:35
Speaker 2: in a career in either investing or private equity or finance.
1:09:42
Speaker 3: I would say, don't narrow down your options too early.
1:09:47
Speaker 3: As as I've experienced in my career, I've done a
1:09:50
Speaker 3: lot of different things, and I learned in each experience,
1:09:54
Speaker 3: even though they might not look related. I've learned things
1:09:57
Speaker 3: that have made me a better investor, a better leader.
1:10:02
Speaker 3: And I think a lot of young people today come
1:10:04
Speaker 3: in to the workforce and say I know what I
1:10:06
Speaker 3: want to do, and I think that they actually don't.
1:10:12
Speaker 2: And your experience going from consulting to private equity to
1:10:17
Speaker 2: being CIO. Did you have any idea that would be
1:10:21
Speaker 2: your path when you first started.
1:10:22
Speaker 3: Well, I thought I wanted to be a doctor.
1:10:24
Speaker 1: There you go.
1:10:25
Speaker 2: Well, so not just one pivot, but multiple pivots exactly.
1:10:29
Speaker 3: So I think that young people really need to be
1:10:31
Speaker 3: open minded and explore and you know, take opportunities for
1:10:36
Speaker 3: what they are. Right. So, if you're given the chance
1:10:39
Speaker 3: to if you're loving what you do, but you're given
1:10:41
Speaker 3: the chance to experiment with something else, instead of immediately
1:10:44
Speaker 3: saying no, think twice and think you know, what could
1:10:46
Speaker 3: I learn? How could this be good for me? Because
1:10:49
Speaker 3: I think that richness of experience at the end makes
1:10:52
Speaker 3: you makes you a better business person.
1:10:56
Speaker 2: And our final question, what do you know about the
1:10:58
Speaker 2: world of investing today that would have been helpful back
1:11:01
Speaker 2: in the nineties when you were first getting started.
1:11:04
Speaker 3: Well, so, when you study in academia, you do a
1:11:07
Speaker 3: lot of analysis, right, So we talked about markets are overvalued,
1:11:11
Speaker 3: multiples are high. I think when I was starting out,
1:11:16
Speaker 3: I had a lot more belief in you know, rigorous
1:11:20
Speaker 3: analysis and numbers give you the right answer. I think
1:11:24
Speaker 3: investing is much more messy, right, So putting in the
1:11:28
Speaker 3: rigor of the analysis, with understanding behavior and human biases,
1:11:35
Speaker 3: technicals flows, that is the way you get a fuller
1:11:40
Speaker 3: picture of the investment space. And I think we talk
1:11:43
Speaker 3: I mean, there's a lot of very smart people that
1:11:45
Speaker 3: are very good with numbers, but I think understanding behavior
1:11:49
Speaker 3: and people is just as important.
1:11:51
Speaker 2: Huh, really, really fascinating. We have been speaking with Felina Panava,
1:11:58
Speaker 2: Group chief investment Officer for WIS Ray. If you enjoy
1:12:02
Speaker 2: this conversation, well, be sure and check any of the
1:12:04
Speaker 2: five hundred we've done over the past eleven years. You
1:12:08
Speaker 2: can find those at iTunes, Spotify, YouTube, Bloomberg, wherever. Week
1:12:13
Speaker 2: you find your favorite podcasts, be sure and check out
1:12:16
Speaker 2: my new book How Not to Invest The Ideas, numbers,
1:12:20
Speaker 2: and behaviors that destroy wealth and how to avoid them
1:12:24
Speaker 2: How Not to Invest. Wherever you find your favorite books,
1:12:27
Speaker 2: I would be remiss if I did not thank the
1:12:29
Speaker 2: Crack staff that helps put these conversations together each week.
1:12:33
Speaker 2: Peter Nicolina is my audio engineer. Anna Luke is my producer.
1:12:38
Speaker 2: Sean Russo is my researcher. I'm Battery Results. You've been
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Speaker 2: listening to pastors in business on Boomberg Radio