Should passive or active strategies take precedence for investors?

Todd Campbell, CEO of Builders Insurance Group, discusses the challenges and opportunities around being a high growth company, and what this means for portfolio management strategies.

New II Orange #EC652F 1200 (6)
Todd Campbell, CEO of Builders Insurance Group.

Andrew Putwain: Is the active versus passive debate stale? Why/why not?

Todd Campbell: For us, it is always not stale.

We manage internally and have external advisors, which means our fixed income portfolio is managed by a large investment manager. Then, we complement this with select investments across the portfolio, and the totality is guided by external policy and strategy advice. So, in essence, an investment manager is actually outside.

This means we don’t have a full-time 24/7 Chief Investment Officer (CIO), so, in the strictest sense, it's not active in that way, but it is always alive. We’re constantly monitoring opportunities and shifting not just for the flavour of the day, but for long-term discipline and appropriate returns.

In regard to our investments, we look for folks who are actively managing certain aspects. It isn’t the case for our entire portfolio, but there are elements that are never stale.

Andrew: Does outsourcing the Chief Investment Officer (CIO) role work well? Is it the long-term plan, or will you look to bring it in-house eventually?

Todd: One day, it is possible that we’ll have someone in-house when the size reaches that level.

"We are always looking for the best investment opportunities –
which, sometimes, we wouldn’t find on our own."

We're a super-regional carrier, and we operate in about 25 states, so our portfolio is meaningful at $1.1 billion but certainly smaller than compared to the major players.

External advisors and managers can bring us reach that we may not be able to access given our particular size. We are always looking for the best investment opportunities – which, sometimes, we wouldn’t find on our own.

Our solution is to use excellent external advice and solid management, coupled with opportunities that they might be able to bring us.

Andrew: How are you thinking about portfolio management strategies in 2024 and beyond? What are the newest developments?

Todd: Towards Q4 last year, we took a hard look internally – the chair of our investment committee is a seasoned investment pro – and had an intense review of our portfolio. We have a fair amount of internal expertise, and I wear that investment chair hat at another board with a much larger portfolio, so I've learned a great deal. We also constantly review and monitor our portfolio with our advisors.

"We were thinking beyond – to take advantage of this
 higher-for-longer mentality."

So, as we got into Q4, we looked at duration and returns. This was with the mind that our business mix requires a midterm time duration. We have long-term GLs related to construction and construction defect, so we have a longer-than-average horizon for many. It’s not as long as a life policy for returns, but we're always looking for the best mix for duration.

To do so, we sold down a bit in Q4 to access a hybrid, longer-term return and funded that shift into 2024. We were thinking beyond – to take advantage of this higher-for-longer mentality. The purpose of the sell-off was to get ready for that, and then we invested it in Q1 with the hope of extending both returns and duration.

Like many of our competitors and peers, we have gained some favourable long-term income.

Andrew: How has the current US rate environment – with cuts expected not in Q1 but maybe in Q2 – impacted your outlook? What has increased macro volatility meant for the way you structure and run your portfolio?

Todd: To reference that Q4 action we took, around September 2023 we started analysing the portfolio and, like lots of our peers, we had long durations at 2.5-3%, so we took the opportunity in Q4 to sell a lot of that and even took a small loss in some and sold selectively before maturity.

We had modelled that out with our advisors and internal team, and we looked at how much we should sell and what the return on the opportunity to reinvest that over the next x number of years was. The results were so clear that we had to act, so in November and December we sold down a bit, which was a meaningful action.

It wasn’t a mad rush; we took our time early in Q1 to reinvest with discipline. Reinvesting was an obvious choice for us in the long term because of where the returns would go.

It went well, and we need more of it, of course, but we're pleased with the returns we have locked in. It will add meaningful income to pay off the portfolio in 2024 and beyond. We're able to lock in some certainty for a number of years, so we're delighted with that.

Andrew: Builders is organised as a mutual; how does this change your day-to-day investment operations as well as your wider strategy for financial and regulatory efforts?

Todd: We’re a mutual captive, and we converted to a mutual holding company last year, which was an initiative I believe is essential to our future success.

We're in a unique position in that, yes, we want the highest and best returns out of our portfolio, of course; however, our mission overall is to look after our injured workers and to be here in the future for the duration, however long that may be.

So, we seek profit, and we're always looking for a portfolio, first and foremost, to support and optimise the returns for our policyholders and our injured claimants. Surplus is key to our future growth, so we have a lot of the same buttons to push and levers to pull that a public company or a large privately held individual family-owned company has.

"These are things that stabilise us and give us returns for future generations
not only inside our company but for our future workers."

However, that mutuality does change the dynamic. It doesn't take the pressure off, but it gives us a longer view, and it’s how we're able to invest. We always talk about how our choices are not just for today but are choices for the next 30 years.

These are things that stabilise us and give us returns for future generations not only inside our company but for our future workers and future injured claimants. That's our driving force.

Andrew: How are you thinking about artificial intelligence (AI) in regard to portfolio management processes and capabilities? What pain points could AI address? What concerns do you have about its deployment?

Todd: We employ AI in underwriting, so we use a ‘true’ AI solution. We've bought that in and tweaked it, and we’ve let it learn. We use federated and internal data, and as we put all that together, it has gotten smarter and smarter.

It is bringing huge efficiencies to us on margins, so it doesn’t replace but it is freeing up our expertise for our underwriters to write bigger, more intricate cases. It is also freeing them up from the small, straight-through processing things that should be able to move quickly. That said, we haven't employed an AI tool in our portfolio. And that's the issue.

"Internally, we’ve formed an AI Council, which includes our finance leaders
and a range of folks from different departments."

Funnily enough, I was on a panel at an InsurTech event not long ago with other insurers from different parts of the industry discussing the insurance value chain. About 50% of our conversation migrated over to AI and the business, and we talked about underwriting with AI, claims management, health care, and looking for fraud in the claims process.

What does this mean in general? Well, we look to our external advisors to answer this question for our portfolio.

Internally, we’ve formed an AI Council, which includes our finance leaders and a range of folks from different departments – and we’ve also included different generations, as there are things that one person picks up that others don’t. We know our external advisors run a lot of money for us and other companies, so they are learning quickly what AI can do and feeding this information back to us where applicable.

We watch the space carefully and lean on our experts as much as possible.

Todd Campbell will be speaking at Insurance Investor Live | Spring 2024 in Chicago on May 2. You can find more information on the event, including how to register to attend, here.