Navigating todays low interest rates is especially daunting for insurance companies, which load up on fixed-income products to match their liabilities and meet regulators capital requirements. Since becoming CIO of MetLife in 2011, Steven Goulart says his role has been re-risking the insurers $500 billion general account portfolio after the firm shed riskier assets in the wake of the global financial meltdown. Under his direction the 800-strong investments team, based in Morristown, New Jersey, has locked in yield by jumping back into areas deserted by investors.
During almost a decade with MetLife, Goulart, who holds an MBA from Harvard Business School, has racked up his share of achievements. In 2012 the Stockton, California, native formed MetLife Investment Management, which has attracted some $10 billion from pensions, sovereign wealth funds and other insurance companies to invest in real estate equity, commercial mortgages and private placement debt. Goulart helmed the mergers and acquisitions unit from 2006 until he moved to the investments department after orchestrating the largest takeover in the companys history: the 2010 purchase of American Life Insurance Co. for $16.2 billion.
Staff Writer Jess Delaney recently sat down with the 57-year-old CIO on the 41st floor of MetLifes midtown Manhattan headquarters. With the Empire State Building visible in the window behind him, Goulart calmly reflected on the challenges facing insurers today, from low interest rates to the threat of new regulations which looms large for MetLife after U.S. regulators in December designated it a nonbank systemically important financial institution (SIFI), a status it is contesting.
How would you characterize the current investing environment and its challenges for insurance companies?
The biggest thing today is interest rates. Weve continued to battle this low interest rate environment for the past few years, but asset-liability management helps you through that. Presumably in a lower rate environment, our liabilities have lower rates on them as well. As long as were pricing our liabilities right, we usually start in a position where were okay, and then its about finding the best assets given the cost of the liability.
However, rates do hurt because were always reinvesting too. Something like a structured settlement might be 40 years long, and you cant find matching assets. You always have that reinvestment risk, which has probably been the most dramatic thing for us over the past three to four years. As Ive said on our earnings call, we reinvest billions of dollars a quarter as assets mature, and unfortunately, the rates were losing on that roll-off are 100 to 150 basis points higher than what were able to reinvest it in today. So theres a built-in bias in the portfolio to see a declining yield, but weve still found ways to offset that.
Theres clearly much less liquidity in the markets, most notably in off-the-run Treasury securities, smaller corporate bond issues and older corporate bonds. To us thats important because corporate bonds are the single biggest asset sector in our portfolio. Because were not short-term traders, we can take illiquidity risk in the portfolio. But we want to make sure it isnt a permanent change in the market because then we would have to think about some of our securities and valuations differently.
Do you think the Federal Reserve will raise rates this year, and what trajectory do you expect?
My view is that the Fed really wants to move, but theyve put themselves in this box of being data-dependent. There is still a lot of mixed news out there. For example, theres no inflation risk and the jobs data is good, but the wage growth really isnt. That all said, Ill think theyll move in December because the data wont be fully positive enough by September.
From there I think theyll continue to be in the data-dependent bucket. I think its going to be a slower upward trajectory than weve seen historically. If the economy isnt showing additional growth as a result, theyre probably going to be less inclined to keep raising rates because they dont want to force a recession.
In a low-yield environment, how do you meet your return targets while maintaining the more conservative risk profile required of insurers?
We try to stay one step ahead of the general market. The size and diversification of the portfolio really help because we understand the basics of different asset sectors. Weve been continuing to find good private asset opportunities. Private placements in infrastructure are an example where I think were ahead of a lot of our peers.
Weve also had very big origination platforms in commercial mortgages. When we came out of the financial crisis, banks and other insurance companies had pulled back from that market, and we were early getting back into it. People have jumped back in over the past three years as well, so were starting to see those opportunities narrow.
Weve also looked for new asset sectors that make sense from an ALM and a risk perspective. Examples would be in the residential mortgage loan area, where weve done different variations of whole loans and reperforming loans. A lot of that was driven by the global banks need to shrink their balance sheets. They all had big mortgage portfolios, and given our expertise and capabilities in that area, we were able to work with them to structure good opportunities for us.
Where do you see the most attractive fixed-income investments, given low rates and ongoing uncertainty in sovereign debt markets?
Where we see our best opportunities are in commercial mortgages, agriculture lending and residential whole loans. Another thing weve been able to take advantage of is the little spurts of market volatility arising from liquidity issues. In both the investment-grade and high-yield corporate bond sectors, weve seen opportunities to find a block of securities that we think are trading very attractively given that volatility. Thats not the regular ongoing business like mortgages, but its the ability to take advantage of short-term market disruption.
What challenges have regulations presented for MetLife?
Its hard to talk a lot about regulation because we dont know where its going. Weve been designated a nonbank SIFI, but there are no regulations that apply to nonbank SIFIs at this point. Certainly the goal of Dodd-Frank and SIFI regulation was to increase capital requirements and make the banks safer, but there are no rules written for nonbanks yet. We stay very involved through our industry associations and directly ourselves in trying to keep the dialogue open with regulators and with Congress.
Were challenging the nonbank SIFI label. We dont think that MetLife is systemically important to the overall financial system. But if we ultimately are a SIFI, we want to make sure the playing field is as level as possible. The minute you start saying certain insurance companies are going to be treated differently, thats going to impact how those companies do business. All those capital charges are going to work their way through into product pricing, which means consumers wont have as much choice or will pay higher prices.
MetLifes portfolio is heavily skewed toward corporate debt, mortgage-backed securities and real estate loans. How do you protect yourself against write-downs from changes in ratings?
We have a commitment to credit research and due diligence on those assets. An example would be our roughly $14 billion energy portfolio and whats happened with oil prices in the past 12 months. A year ago we started restructuring that portfolio, moving it away from some of the lower-rated debt that we knew would be hit first if oil prices were to continue going down.
In commercial mortgages and agriculture lending, we start with a very conservative underwriting perspective as well. Our average loan-to-values are very low for the industry. Because the loans are very conservatively underwritten, they can take a substantial change to the asset value before theres any real risk to us in those portfolios.
How do you use equities and alternative investments in the portfolio?
Sparingly. Our portfolio is roughly 5 percent equity and 95 percent fixed income. We have approximately $20 billion across three big buckets: real estate equity, private equity funds and hedge funds. Strong performance in our private equity and hedge fund portfolios has helped offset the drop in yield we see from reinvesting at lower rates when our fixed-income securities roll over. When we look at our total net investment income, the variable investment income component is 7 or 8 percent, and thats enough to move the needle.
The negative is that as a regulated insurance company, we have to hold capital against every investment we make, and the capital requirements are much higher for equity investments than fixed income. Cash flow management and predictability are difficult for equities and important for asset liability management, so they have a more limited use.
Follow Jess Delaney on Twitter at @jdelaney_NYC.