Resilience through innovation

[00:00:00.09] LYENDA DELP: We are going to just get right into the questions very shortly. And I will invite you, as you start to speak, to share anything else you want to share about your background, your impressive backgrounds. But we'll encourage our audience to see the details of your bios in the document that we provided.

[00:00:22.12] So we've just heard from Rick. And over the last 18 plus months, we have all experienced a global pandemic-- the fastest market sell off in history, followed by a powerful economic restart, particularly in the US. I mean, what did Rick say? The equity markets experiencing nirvana. Like, wow. What a strong word. And then, of course, we, as primarily bond investors here in insurance industry land, he's had a lot to say about rates and how low they'll stay for a while yet.

[00:00:58.56] So it's been quite an interesting time. I'd like to start with a fairly broad question. But I think it's important to find out what's most important, and what's most significant, for each of you as you reflect on the 18 plus months that we've had. As a CIO what are you-- what have you taken away as significant in going forward? Vlad, how about I start with you, just because alphabetically you came up first?

[00:01:27.47] VLAD BARBALAT: All right, absolutely. First, Rick is a tough act to follow. So I'll try my best, and I think my co-panelists will do our best. Thanks for having-- thanks for having us. Look, the last 18 months have been dizzying, to put it mildly. There have been many takeaways. I think we'll still have some more takeaways as we walk through time. I don't think this is all done with us just yet.

[00:01:51.67] But what I would say is we were fortunate enough to have been really working to reform our investment process to be one collaborative, but also dynamic. And so I think the reputation we, as insurance company asset managers, typically get is well, we're slow moving, and we're very long term investors, obviously, and so market dislocations, particularly quick ones, are not necessarily our bread and butter. And I think we were fortunate enough to challenge that notion. And we were, in fact, able to be quite nimble when the dislocation happened.

[00:02:31.02] It was not because we certainly had any insight as to what came down and dislocated markets in March of 2020. It was much more about the fact that we were able to communicate across our investment platform, effectively identify the relative value opportunities, and we did end up transacting a lot both, in the public and the private markets taking advantage of the opportunities that were available to us.

[00:02:56.50] So I take all that to say, I think the way the investment process works within an organization that is complex, which includes investments from vanilla CUSIP bonds, to highly structured products, private equity, real estate, et cetera, it requires a certain set of communication channels and ability to act. And I think that is a type of investment process that we're gonna all need to continue to adhere to in the future because markets, whenever they do dislocate, it will be fast.

[00:03:29.78] LYENDA DELP: That's great. Thank you for that. So investment processes-- it was very instrumental and important in the success of your moves during the crisis. Thanks, that's really interesting. Matt how about over to you. What was your perspective?

[00:03:45.20] MATT POZNAR: Sure. Can you hear me?

[00:03:47.00] LYENDA DELP: Yes.

[00:03:47.56] MATT POZNAR: Thank you. Yeah, unfortunately, I'm gonna give a very similar answer to Vlad, but maybe I could put a little different angle on it, or approach. I asked somebody on my team this morning, you know, what was his greatest learning, and they say, “Yeah, buy equities.” But I'll go a little beyond that but-- now the ability to move quickly and to be nimble.

[00:04:07.36] And when I think back to, like, what we actually did, let's say, last year in the first quarter, you know, we've got a very robust risk-- enterprise risk appetite statement and infrastructure where-- very clearly articulated limits and guidelines-- and across the different parts of the business, the general account, as well as our separate account book, and hedging, and all those kinds of things-- liquidity needs across the enterprise.

[00:04:36.14] And so we've got a-- it came from the board on down, right-- the finance committee, the board with established limits. And we kind of know on a daily basis where we stand, relative to those limits. So when-- because the one thing we wanted to make sure, as we were building all of that is, if there was a market opportunity we could spring into action quickly-- to Vlad's point-- and know that we weren't gonna run afoul of those limits.

[00:04:59.05] Or if we were, what would we do? Would we have to get a breach, or waiver? And you know so-- always knowing where we are from enterprise risk perspective. And looking at risk on risk, and stressors, and things like that.

[00:05:11.66] So having a very robust framework, internally, with good analytical tools, both to view our asset portfolio and what might happen as we reformulate it in real time-- kind of ex-ante before we make the investments. But then knowing how the broader enterprise is affected and how much capacity, or room, we really have.

[00:05:29.65] The other piece of that is really having a full range of instruments available. And I think Vlad touched on this as well-- whether it's public or private-- but I would go to cash markets, to the credit markets, derivative markets, credit derivatives, for example, ETFs, and other tools to be able to get market access. Get in and out quickly, or redeploy across different market segments. And other portfolio type strategies like using duration to counterbalance credit risk, et cetera-- things like that.

[00:05:59.30] So having a really good understanding and the ability, either internally or with our partners-- and we do partner with Amy-- that we've got real expertise across a very wide swath of the capital markets to do a lot of different things. And the last point I'll mention-- because this is something we always debate-- dry powder, it ties into the risk and risk capacity.

[00:06:19.42] There's always a running debate. Do you run the portfolio a little hotter I'll call it, just pejoratively, to generate, accumulate greater returns over time, maybe at the risk of when there is a market dislocation, you don't have the capacity to take more? Or do you hold back? And how do you do that?

[00:06:37.79] And again, I don't know that there's a perfect answer to it, but having instruments at our availability that can enable us to be nimble. So whether it's ETFs, or credit, or something like that, and overlay strategy-- if things get bad, if markets do move, you can get out of those quickly and redeploy, let's say, into cash opportunities, which is something we actually were able to do with our investment partners last March of last year. So--

[00:07:03.74] LYENDA DELP: Right. Right. Matt, you gave us a lot to work with there. Thank you. So everything from your robust framework, and your governance, and enterprise risk focus, to being able to deploy across from ETFs all the way to private. So hopefully, we can come back and touch a few of those. Amy, please, what was your big takeaway?

[00:07:25.90] AMY STEPNOWSKI: All right, we've obviously all been thinking about things in a similar manner. I took it in a slightly different approach, but I think, really, coming into the same point that Matt and Vlad spoke to. When I looked to the question, the thing that came to my mind was culture.

[00:07:40.33] Because to the point of being nimble and being proactive, I think, also, when we think about the situation of the last 18 months, it was something that, as much as people may have had business resiliency plans, this was beyond I think what most people would have planned for. And having a culture that could come together, act collaboratively, and trust-- have the level of trust and respect for our colleagues, regardless of what the situation was, allowed us all to be able to act more nimbly, be more proactive, think about things in a way that we hadn't thought about them before, because these were clearly unprecedented times.

[00:08:16.40] So from my perspective, while some of you may have been hoping to hear something more around a specific asset allocation strategy, I think the underlying concept for me, coming out of the last 18 months, really is centered on having the right culture of a firm. Really, a culture of trust and respect and collaboration, I think that's ultimately what's going to lead to the best outcomes.

[00:08:40.23] LYENDA DELP: To be honest, I love that. We just don't hear that often enough. And it's the kind of principles that apply, not just to an investment organization, but any organization, right? Trust and respect and focusing on culture--

[00:08:53.17] So thank you. You surprised us, yes, but we love it. It was a great surprise. So moving along, let's drill down a bit into some of the things that you-- a little more into some of the things that you did.

[00:09:05.70] Let's talk a little bit about income, which obviously is so important for all of us in this industry. And especially the low-low rate environment. What are some of the-- particularly asset allocation, portfolio construction-- like what are some of the big potential changes, or actual changes, that you are thinking about there just to continue to cope in what promises to be low for even longer. Why don't I-- Amy, can I pick on you? Let's have you start this one?

[00:09:38.04] AMY STEPNOWSKI: Sure, happy to. I think-- similar to many of my peers on this call-- given the low rate environment, we are within the risk appetite that the Hartford has. The Hartford is leaning into the private asset classes. We've had a history of being involved in private equity, and real estate, and private placements with a range of private asset classes. And that continues.

[00:10:02.85] Again, I emphasize that, for the Hartford, we look at this within our established risk tolerances and risk appetite. I think one of the things that has evolved over the last 18 months, that we continue to pay a lot of attention to, is, with regard to the retail investor, their influence in public markets has obviously increased over the last 18 months. And we're watching that very carefully because, in my perspective, that's something that's likely to evolve into more in the private markets as well.

[00:10:32.62] And we've certainly seen the added volatility that the retail investor has brought, I think, to the public markets. And so that's a consideration for us as we think about the alternatives and private investments as well.

[00:10:45.30] LYENDA DELP: All right. Very interesting, bringing retail into this. Vlad what do you think?

[00:10:50.81] VLAD BARBALAT: Yeah, look, I think a couple of thoughts. One is, I feel like our industry has finally, maybe, come to terms with the fact that rates are going to be-- likely be quite low. I feel that, prior to 2020, there was a lot of still belief that interest rates would, at some point, quote unquote normalize without really framing what normal really is.

[00:11:17.49] So with that out of the way, and kind of the belief now more anchored about interest rates, in fact, staying low-- I think asset allocation has continued to evolve to find ways to take in risk premia that isn't necessarily just associated with credit risk, but all other forms of risk premia, including complexity risk, structuring risk. And while all that may sound like it's-- well, sure we'll just increase our private asset allocation, there's actually a lot of complexity to that.

[00:11:51.36] And there is a lot of delay, effectively, both in terms of being able to get that-- the right exposure on the book, and then struggling to keep it on the book because that treadmill runs very, very fast. And it requires a holistic alignment of, not just the investment portfolio, but also you're scaling your operating capability, aligning your talent strategy to go source and digest and communicate out the risks that are associated with some of these instruments that are different than traditional kind of CUSIP instruments.

[00:12:23.96] So it's quite an undertaking. Again, we've been fortunate to have had also a very long history in private markets. And we've been on the journey of ensuring that we continue to build the kind of muscle on the platform that is able to go out source and source this kind of exposure.

[00:12:42.81] And so, certainly, our asset allocation reflects the views that, yes interest rates are likely to be very low, yes, public market credit is likely to have a lower beta to kind of broader equity market events than before given kind of what the Fed actions were in 2020, and stepping into credit markets that's going to last leave a lasting imprint. And so, it's a journey. But I think all forms of non-CUSIP credit are going to continue to play an increased role in our portfolios.

[00:13:17.42] LYENDA DELP: Great. Thank you. Matt, I'm going to ask you a slightly different question, because both Amy and Vlad have now brought us solidly into focusing on private markets. So let me turn to you to kind of double click on that area, as they say, and let's talk about how you think-- and potentially compare contrast the risk premia versus, like, the capital efficiency of potential investments when you're looking at the private markets. Give us your views on that part.

[00:13:45.80] MATT POZNAR: Oh sure, so I get the hard one. I can't I can't piggyback on my colleagues. But that's fine. You know, yeah, that's-- to me that's like one of those both type questions, right? In that, can I picked both? Risk premia in this environment, as Amy and Vlad have highlighted, is important finding it, and but capital efficiency is critically important too.

[00:14:11.96] And but you know, and we're always-- whether we're doing our strategic asset allocation or picking individual investments where were seeking to maximize excess return-- loss adjusted, expense adjusted, et cetera. But when I think about it whether it's strategic asset allocation or individual investment decisions, while we're looking to maximize excess return, we're always putting a pretty stringent risk parameter on it.

[00:14:38.03] So it's excess return, but it's excess return for risk. And in that case, it may be defined as excess return volatility because we're super sensitive to volatility. And so that governs it, right? And the other thing we're super sensitive to are risk-based capital under the different regimes, whether it's the [INAUDIBLE] risk-based capital, or the rating agencies, or other jurisdictions.

[00:15:04.13] And so we tend, again, when we're doing strategic or tactical kind of portfolio asset allocation, we almost always have some sort of a risk-based capital budget that we're seeking to live within. So I could say it's-- we're optimizing on risk premia, but it's the capital efficiency that's the anchor.

[00:15:26.72] And even when we're making individual investment decisions in our calculations of comparative returns, we're dealing with expected excess returns, default expense adjusted, but also capital adjusted. So we actually reduce whatever spread or excess return we're gonna get by the cost of capital. So given the exponential scale there, it becomes quite punitive to lower quality, or lower rated, assets which appropriately, right? And so it always acts as a governor.

[00:16:05.30] So my first answer is really that capital efficiency because that's what we're really trying to optimize on. And but that capital adjustment-- I just will add one last point-- it's not just taking the, let's say, the [INAUDIBLE] factors and the rating agency factors against the assets, it's a holistic approach, in that, if you're not getting the yield may cause the actuaries to have the strengthen of reserves. Which means it cycles back through. So again, it's that holistic enterprise view of working into decision making. But I'll pick capital efficiency for that reason.

[00:16:37.46] LYENDA DELP: All right, great. That makes sense. And that is certainly indicative of what we've been seeing-- a significant interest in products that do have that capital-efficient characteristics. So thank you for that. I wanna to change gears a bit because I'm hoping that, in our short time together, we can cover a wide range of topics. Rare that we get the opportunity for such impressive CIOs to join us.

[00:17:03.38] So moving over to sustainability-- and this is important because Charles mentioned, in the opening remarks, our global insurance survey which we'll be releasing in a few weeks. And one of the things that came out of that survey is just the significant focus, much greater focus for insurance investors on sustainability. In fact, we have called the document The Search for Sustainable Yield. So watch for it. It will be coming to an inbox near you pretty soon.

[00:17:33.14] But I'd love to get your views on how you're thinking about ESG in your portfolios. And you know, and how you're beginning to approach and implement. Vlad, can I start with you with this one? We know you've been doing quite a bit in your organization.

[00:17:50.37] VLAD BARBALAT: Yeah, absolutely. Look, I think the topic is obviously all around us. It's swirling, both in markets and in conversations that are not just in the investment portfolio. So I would just bring it back to that, starting with who we are. What is our identity? And our identity is, of course, first and foremost as an insurance company.

[00:18:11.64] And so when we think about ESG, it is very, very much innate in what our product is. It's a social good. And we would certainly want to work towards a world which has addressed, resolved, and improved some of the challenges that we face today, particularly in sustainability.

[00:18:30.61] And so to that end, I think we've been on a journey where defining what the E, the S, and the G mean to us as Liberty Mutual. And then making it practical and working through the various investment opportunities, evaluating them through that lens, while not necessarily being exclusionary, but being aware of certain capital flows that may affect different asset classes. Right?

[00:18:56.47] So that's been, I think, the hard work that we've been doing for quite some time. And, to, it is work that requires investment acumen, but also requires a substantial amount of data. It requires a substantial amount of analytics to be built in coming back to that investment process. And all that is non-trivial.

[00:19:15.46] It requires a substantial investment. It requires understanding how some of these analytics are being created, and how to then utilize them in a way that makes sense and rolls up to what I've kind of said is our interpretation of ESG. And so it is very much with us. It is very much in the investment portfolio. And I expect that we will continue to have an evolution of both the methodologies.

[00:19:41.59] And market orientation around these themes will continue because what we're seeing, partially, in the energy markets now is kind of the clash between the desire to get to a certain place out in the future versus the realities of today and where we are as a society and as an industry today. So I'll just pause there.

[00:20:06.90] LYENDA DELP: Thank you, very interesting. I'm sure we'll be talking about some of those points for a while to come. Amy, let me ask you, what motivates your ESG initiatives? And I'm especially curious, given your answer from earlier, whether your culture has anything to do with that?

[00:20:27.81] AMY STEPNOWSKI: I think similar to some of the comments that Vlad made as he led off-- when you think about the Hartford and you ask me what motivates our ESG initiatives-- I'm speaking specifically to the Hartford-- we have underwritten, as you've heard my leaders at the Hartford say before, we underwrite human achievement, and we've been doing it for over 200 years.

[00:20:47.30] So the idea of ESG, while it has obviously gained stature in terms of the nomenclature, the concepts of ESG have been with us for quite a while. And it's something that's really embredded in the Hartford, and our leadership, and all the employees that work, here I would say. So in terms of motivation, I think it's consistent with the way we've approached business for quite a while.

[00:21:10.66] With regards to the portfolio and how we think about things, again, when we think about the investment portfolio in the context of the Hartford, its purpose, obviously, its objective is to support the claims paying ability of the Hartford and its financial objectives. So obviously that is core to what we do. But we believe that it's very much consistent that we can do that while also being attentive to ESG issues. And it's something that we've been focused on in the scheme of ESG for several years.

[00:21:40.90] And obviously, I think-- very much in agreement with Vlad's points around defining some of these things more specifically, and the importance of data, and harnessing that data to come up with the right conclusion. So, ultimately, I think-- back to your initial question-- it does resonate very much with our focus on culture and is consistent with the company that we have been for such a long time.

[00:22:09.07] LYENDA DELP: Excellent. Excellent. Matt, so tell us about where you are [INAUDIBLE] resolution in your ESG journey. And has anything changed for you in the last 18 plus months while we've been dealing with the global pandemic?

[00:22:25.42] MATT POZNAR: Yeah, so it's interesting. So like with Amy and Vlad and their institutions, ESG is a long journey, and we've all been on it. ESG considerations have long been part of the credit assessment process. And how we act-- Amy brought up culture-- how we act both the inside the four walls of our enterprises as well as in our broader communities.

[00:22:48.85] But we are changing. And my first inclination would say we're at the beginning of the journey. After listening to Vlad and Amy, I'm thinking we're far along because it's been something that's been something we've-- our basic industry, and what we do, and how we operate-- it's been with us. But I gotta say, it's really intensified over these last 18 months or 24 months.

[00:23:10.84] And we are making, kind of, I think, a breakthrough change. And we're at the beginning of that second wave, if you will, or second-step function of the journey. I'll give an example-- diversity, equity inclusion. You know we've always tried to practice good DEI principles with our employee base and in our communities. But as a society, we've become aware of more things over the last couple of years, in particular. Things have intensified.

[00:23:35.80] And so what we did-- about 18 months ago was-- we established a formal diversity, equity, inclusion council. So it's kind of grassroots led but, it's there as a conscious-- consciousness-raising body to keep functional leaders responsible for different aspects of the business, aware that you gotta to keep your eye on DEI. We may not be as good as we want to be or need to be. And we may need to make some changes, right?

[00:24:01.84] And so even on the investment portfolio, I need that DEI counsel pushing me to say, hey Matt, in your investment strategies and philosophies, are you applying the right lens? So-- And if you apply that across [INAUDIBLE]. So we've always practice good D E and I hygiene, if you will, but we've intensified the effort there.

[00:24:20.54] Similarly, in the investment portfolio, ESG factors have always been implicit or explicit in our investment policies and practices. But now we're taking a step function up to be more declarative in what we want to do. And also, and particularly around things like climate change where a lot is changing rapidly, to make sure that we're not just looking at the obvious first derivative type effects, but, let's say, with the energy, or coal miners, or things like that.

[00:24:50.29] But we're looking at our real estate portfolio with a new lens in terms of different risks that could be apparent there, or even into corporate credit, second, third, tertiary effects. So I don't know if that's an overly complicated answer to your question, but we've been along right away. But there has there has been a big step up, I would say.

[00:25:08.87] LYENDA DELP: That's great. Well, we appreciate your sharing a specific example there. So thank you for that. So there are so many topics we would love to discuss with each of you-- with all of you, collectively-- in this forum, but given the tight frame, we're gonna wrap up this last few minutes that we have with some, what I'd call, rapid fire questions. Just questions and a range of different topics. Just the short answer required.

[00:25:34.07] Feel free to make it a wild answer, or not justified too much. But let's have a little fun with it. So my first question is going to be on rates. Because why not? We're long term fixed-income investors. So in what year, if ever, do you think the 10-year, treasury of course, will get to 5%? So OK, I got a hand up.

[00:26:04.67] MATT POZNAR: Leynda, I've been waiting years for someone to ask me a question like that. I gotta to tell you, I actually have a very precise answer to that question. And this is something I learned a few years ago, in terms of rate forcing from Rob Kapito, of all people. And slightly different context, but I'll give a similar styled to answer. And I will tell you the exact time that the 10-year will take a very sudden and precipitous move towards 5%, and that will be the day after I take my portfolio to the max duration. So--

[00:26:36.62] [LAUGHING]

[00:26:38.37] MATT POZNAR: If you didn't like that answer, you can blame Rob. But like I said, I've been waiting several years for that. But yeah, that underscores the challenges of forecasting, right? And we tried to circumvent having to make that call by having a pretty well-matched ALM discipline in our shop.

[00:26:56.51] LYENDA DELP: All right, thank you for that, Matt. That was-- your surprise is probably even bigger than Amy's, but we enjoyed it. The next question-- will usage of bond ETFs rise now that the New York regulator has reviewed it and is considering it for bond consideration? Anybody? Should I pick on someone? Or Vlad or Amy, do you want to take that?

[00:27:23.45] AMY STEPNOWSKI: I think Matt answered it earlier when he talked about capital efficiency. And certainly, that, I think, hits that one on the nail, hits that on the head. So I would expect that it would go up. That and access-- obviously, scale is very important these days as you're trying to access different opportunities. And this is another way that helps with that.

[00:27:45.83] LYENDA DELP: That's great. That's great. All right, Vlad, over to you now. Should crypto currencies be added to asset allocations for insurance general accounts?

[00:27:55.56] VLAD BARBALAT: I should have taken the previous one.

[00:27:56.90] [LAUGHING]

[00:27:59.99] VLAD BARBALAT: Look I think that's a-- I'll give you a nuanced answer. I think, in direct form, I think it may be a little bit early, but we do think that this, the digital asset ecosystem is evolving very rapidly. We think it's here to stay. The regulations that are forthcoming are validating that ecosystem. And so without referring to any specific one of the tokens, or the coins, we do think that this is an industry that is, if you can call it that, that is going to be with us for some time. And so while putting cryptocurrency directly onto the balance sheet may be a stretch too far right now, engaging in that ecosystem, I think, is absolutely important.

[00:28:42.63] LYENDA DELP: All right, great. I have to ask this one, are you long term bullish or bearish on China? I'm sure you all have a view? So who wants to grab this one?

[00:28:54.44] VLAD BARBALAT: I can go again, just to wrap that around. Look, I think I would, sort of, maybe push back the question a little bit and say bullish on what exactly? If we're talking about capital markets, I think that is really going to depend on which way China evolves. I think in the short term, there's substantial skepticism from foreign investors that what we think we're participating in is really anything akin to what we're used to participating in other kind of financial markets.

[00:29:30.57] So I think the Chinese economy is certainly gonna continue to grow. It's undergoing its own challenges right now, and those challenges are not meaningless. But overall, China is gonna continue to be an important component of the global market puzzle. In terms of the Chinese asset markets, I think it continues to be very, very difficult for firms like ourselves to think of that as a place where we're going to allocate very significant amount of capital in the foreseeable future.

[00:30:00.71] LYENDA DELP: Great, thank you. So even though they were fun questions, see they're really significant and important for investors to be thinking about. So I appreciate your thoughtful responses. So I've got one last question. Indulge me in this one. It's a little bit wild. Prepare yourself.

[00:30:16.40] So with Bezos and Musk now enticing us with space travel, right, and probably suggesting we should add it to our bucket list, do you think your firm will one day ensure space-- space trips or space tourism?

[00:30:35.28] AMY STEPNOWSKI: Maybe I'll take a stab at the risk of my insurance colleagues having a view. I would say, I think as everyone is seeing with more driving on the road and higher speeds, we've got a lot of challenges just looking at pricing, personal-- and personal travel here in the US, or commercial travel. So I'm not sure that space is on the agenda any time soon. [INAUDIBLE].

[00:31:01.13] LYENDA DELP: I think that makes a lot of sense.

[00:31:04.54] MATT POZNAR: Just to take the counterpoint point on Amy on that, we're an annuity company, so we will gladly sell annuities to our space travelers.

[00:31:13.63] [LAUGHING]

[00:31:16.21] LYENDA DELP: I love it. Thank you, Matt. And we appreciate all of your comments. And we are just about at the end of our session. I just want to thank you all very much for joining us, for helping to make this a really interesting discussion, for sharing your very thoughtful perspectives.

[00:31:31.72] We are truly grateful. Our goal here at BlackRock is always to be listening to our clients. And this is why this is an important part of the shortened ILS that we have this time. And I think that people would not have been disappointed at all in what you have shared.

[00:00:00.15] MARK MCCOMBE: Andrew, great pleasure to see you. Thank you for joining us for the Insurance Leaders Symposium. Now, your backdrop looks a little bit different. I've actually been to the Guardian office. And I know that you guys are all getting back to work in Hudson Yards, where we'll be your neighbors shortly. But where are you calling in from today?

[00:00:21.57] ANDREW MCMAHON: Thank you. Thank you, Mark. It's a pleasure to be here today. I'm calling in from my home office, which over the course of the last 18 months I found the studio lighting at home is better than the lighting in my office, office in Hudson Yards. So here's where I'm from.

[00:00:35.62] MARK MCCOMBE: You're looking great. So thank you, again, for joining us for this. We always have a CEO as our keynote. And we're thrilled that you would join, and obviously there's a lot been going on. This is our second year, I guess, in lockdown and with the pandemic. And dealing with it.

[00:00:55.59] And there's a lot been going on over the last 18 months that I'd love to unpick with you. Let's just start at a very macro level. As we think about the industry, and we think about some of the forces shaping the industry both short term and long term-- Obviously, we've been seeing a lot of M&A activity across the life industry and more broadly. From your seat, what do you see as the major drivers across the industry over the next few months and years?

[00:01:25.69] ANDREW MCMAHON: Yeah. So very important question, and critical question, for many of us dealing with the trends, what we've been seeing. As I reflect on what we're seeing today-- For those of us who've been in the industry 25, 30-some-odd years-- We go back pre-financial crisis, the last crisis in 2008, and there was really a war on what, I would call, product feature functionality.

[00:01:55.08] And how everybody could up one another on product feature functionality. I mean since the financial crisis in '08, we saw low yields. We've seen low yields since then. It's been a lot more of capital light products, capital light services. How do we make our products more efficient? How do we optimize yield?

[00:02:17.19] And then, most recently, in some of the trends here now have been accelerated with the pandemic. You know, war for talent. And that talent being anywhere from investing talent, to data and analytics talent, to technology talent. I think over that same period of time, we've seen consumers' preferences change driven much by technology, driven by the Amazons of the world, and so forth.

[00:02:39.75] The consumers' expectations of being ready now and instantaneous. And delivery how they want it. And service how they want it and very quickly. Then the pandemic on top of that, I think, accelerated that. But also accelerated awareness for our products and an awareness for wellness and health overall.

[00:03:00.91] And so there's a lot of things going on. I think the hunt for yield has created a convergence between life insurance and alternative asset managers, and really trying to optimize portfolio yields in this environment that we're in.

[00:03:15.87] We have a lot of capital, both in private equity side, but then also venture capital. Which I think are stirring, poking business models quite a bit, which makes it an exciting time. And I think a great time for incumbents to take advantage of their incumbent status by being nimble, being faster, being quicker. And that's what we've been trying to do at Guardian, as you know, Mark.

[00:03:40.62] MARK MCCOMBE: Thanks for that. And let's kind of double-click a little bit on some of the things you talked about. And you talked about this transformation. I liked your term. From sort of product feature and functionality to a much more dynamic industry. I wonder, again, as a mutual you could share a little bit, your observations on what's happening within the sort of M&A and private equity space.

[00:04:00.66] Because clearly, historically where you could compete on those three verticals, now you have to think about all kinds of different competitive environments. And so forth. So as you think about that, what would you say the industry has to do to stay competitive and relevant? I guess, against some of these disruptors.

[00:04:23.07] ANDREW MCMAHON: Yeah. I think, as I mentioned, yield is obviously one dimension here that we have to be competitive on. And that competitiveness has evolved over the last 15 years, in particularly. But beyond yield, consumer interests, and those interests today around ESG, around digital--

[00:04:47.90] And are we, as insurers, interacting with consumers on what I would call, and categorize, as on a contemporary basis? And what does that engagement look like? If you go back 50, a 100 years-- Guardian the 161-year-old company, we go back all the way to the origins of this. While always a noble purpose around insurance, these were relationships driven from agents.

[00:05:14.27] Giving a product which was much more transactional in nature. Collecting premiums, giving a policy, collecting premiums over the way but less so holistic. And I think in this day and age, in order to compete the entire industry needs to be more digitally enabled. And we've made lots of progress in the last 10 years. But I think there's lots, lots more room to go.

[00:05:34.64] I think scale is really important. Cost efficiency is really important. And because of the pressures on yield, those become even more important. And I think in order to get there, the biggest lever here, to help all of us, is around attraction and retention of talent.

[00:05:54.44] And while I think our industry is one of the most complicated and challenging ones, which would attract lots of great, great talent, I think it's been a struggle for many, many firms, actually, to attract, what I'll call, contemporary talent. Contemporary thinking and training as it comes to digital, and artificial intelligence, and machine learning. And even investing for that matter.

[00:06:19.74] MARK MCCOMBE: We've touched on a couple of areas that I want to come back to a little bit later. But let's jump to this term, or this concept, of digital transformation. I know that you've actually been very involved in a lot of digital initiatives and insurer tech initiatives over your career.

[00:06:38.58] Can you just paint a little bit of a picture for the audience on what does it really mean digital transformation, in the insurance industry? And what do you think are the trends that we should be looking out for? Both from the sort of, as you say InsurTech, side of things as well as actually modernizing and making the industry more efficient as the war for talent obviously increases dramatically.

[00:07:04.28] ANDREW MCMAHON: Yeah. So I often like to think back and reflect on the basic fundamental aspects of an environment, or situation, or business or whatever. If we fundamentally reflect on what is the basis of insurance, and what we do every day as insurers, right.

[00:07:26.27] It's a massive amount of data that we ingest. We underwrite. We assess a risk for. We create a product for. We then manage assets against that liability for a long period of time. Lots and lots of pieces of data. Data being the fundamental aspect and component of digital. And our industry has been, for a long time and there's lots of people in particular that Venture pointed out, very analog.

[00:07:55.31] For me the trend here is digitization of that. How do we best ingest, find, ingest data? Drive insights from that to really create innovative new product, serve consumers better. But then also to automate things that are being done manually, analog today that take a lot longer time. So, an example I've used often over the years-- and it hasn't really changed that much dramatically, other than in the last years of pandemic-- has been around underwriting.

[00:08:26.66] And life and mortality underwriting that on average in the industry has been about 32 days. On average that we spend, as an industry, $10 billion on underwriting mortality. And it's an analog, lots of paper based, between attending physician statements and so forth, application data, questionnaires, et cetera that get along and gets scored.

[00:08:47.91] In some respects-- again, my view on this has gone back 10 or 15 years-- it should be entirely digital. It should be entirely fast with electronic medical records and all of these things. And automated so that we reduce the cost of underwriting. We in turn reduce, hopefully, the price of the products.

[00:09:07.01] We can access more people that we aren't accessing today because of either the agent network. Or the advisor network that we have is not out there. And that the industry can then provide more of the service, which I think is a really important service of products. And services that we offer the public today but is not reaching everybody.

[00:09:28.79] Again, for lots of different reasons and maybe people aren't even interested in it. But I think the pandemic has accelerated some of those things. The pandemic has certainly is accelerated the uses of digital data. In order to automate underwriting more, to make faster decisions, the pandemic has accelerated less use of paper. I'm sure at BlackRock as well--

[00:09:48.53] I mean, I have not really printed very much in the last 18 months whatsoever. We're finding consumers are embracing that. Rather than getting things on large pieces of glossy paper, the digital interactions with them is creating a much more fruitful relationship that we see. And I think that's here to say. And that's not going away.

[00:10:13.21] MARK MCCOMBE: Yeah. I think I would agree with you. The digital transformation was underway well before the pandemic. But I think it has definitely accelerated it. Another trend that's accelerating-- and we're just a couple of days away from the COP26 gathering, which I think will shine a light on exactly where we are in terms of sustainability and climate change.

[00:10:38.47] I know that you've been thinking a lot about ESG and sustainability. I wonder if you could just take a step back. And share your thoughts on your approach, both in terms of communication with your clients but obviously then your investment portfolio. And how you've been thinking about it. And any observations as this obviously is a pretty long journey, and one where we're still in the early innings.

[00:11:07.33] ANDREW MCMAHON: Sure. Yes sustainability-- I mean ESG as a total-- what a critical, important topic for us all to be addressing today and beyond. Like many at Guardian, we have what we'll call an ESG factors and consideration on our investment portfolio. We both do that on investment selection. But then also on portfolio review over time.

[00:11:34.01] And I think it is really critically important here, as we see the effects on climate and the world. What I've been really moved by, and I think has got our teams quite engaged-- again silver lining of the pandemic here --is about what our environmental footprint at Guardian looks like during the pandemic.

[00:11:58.48] And how much we actually had an impact on doing stuff. Now maybe some of that was forced on us. So for instance, closing offices. Not using as much electricity. Not using as much natural gas. Not using as much water. And as I've already mentioned, about printing paper. But when you actually quantify that and look at how much we actually reduced those things in our footprint over last year.

[00:12:21.52] If I just took last year, 3.8 million kilowatts of electricity reduction, 56,000 therms of natural gas, 2.2 million gallons of water. And we printed 11.4 million less pieces of paper than we did in the previous year. And if you look at the impact of that, Guardian just one small company here around the world. And again, a different dynamic with the pandemic and being forced upon us and to really change.

[00:12:52.72] But we had that ability to adapt and change. We have that ability, still. Those 11.4 million pieces of paper that we previously had printed on, we were able to still deliver those same messages in a different way. And I think sustainability takes all of us to take a hard look at how can we effect these changes. And knowing that, by the way, it all adds up and starts to be big numbers after a while.

[00:13:18.25] And I think as we all commit to this, it's important for us as a world, as a country, as industries to commit to this even more than we have.

[00:13:30.27] MARK MCCOMBE: Thank you, Andrew. I do want to turn a little bit to what you're dealing with. What we're all dealing with on a day-to-day basis. But the kind of intersection of our social purpose as organizations and our responsibility as employers-- Again, we're just a few days away at BlackRock from introducing our pilot return to work, where we're introducing a three day, two day hybrid model.

[00:14:00.09] And I think we're all looking at this scarcity of talent that we've been facing, not just as a financial services industry, but more broadly. Give us a little bit of perspective from your seat, as to how you've been thinking through the return to work over the short term.

[00:14:20.22] But then also how are you going to continue to attract the best and brightest to come into the industry? And what would be your advice to some of the participants here as to how we ensure that financial services, and insurance in particular, remains a very attractive career for young folks?

[00:14:41.64] ANDREW MCMAHON: Sure. This is a topic that I'm very passionate about as you might know, Mark Let's first talk about return to office. Or return to whatever the new normal, I guess, is. So we, like BlackRock, is in a similar camp here with likely a three-two hybrid-type model for many of our folks.

[00:15:08.91] I would say we, meaning Guardian, learned back during Hurricane Sandy-- we were displaced from our offices in N.O. We were displaced from our offices downtown New York for nine months. Basically overnight, over the weekend, and we're out of that office for almost nine months. So we found ourselves in a position of being dislocated from our main office, and really our hub of doing business for nine months.

[00:15:39.54] Back then-- again, that's just about like it's 10 years ago right about now-- we put in place a bunch of infrastructure to be able to work remotely. And we adopted-- post-coming-out of that nine months of scattering around to different office space, and so forth. Scouting out to starting working remote back then.

[00:16:02.58] And while it was probably more of a four-one model and sometimes three. And sometimes two to three model. We had already had some experience in remote work. I would say the one learnings that we had was we really realized that when we're together, there's certain innovations and creativity that come out working together in the same office.

[00:16:26.94] Now, we also know there's lots of tasks that we each have every day that's, what I call, heads down work. That we've got to put pen to paper. We need some quiet time. And those things work for people. In flexibility of working from home or a quiet office somewhere, wherever they chose to go. And that worked.

[00:16:46.65] Where I think we probably could have done better, there was not that many rules on which days you're in the office, not in the office. And how do we track when we were in the office. So at times, I would come in the office. The people I was looking for were not in the office. So we're building and learning from that to really schedule those times in days, to put more transparency to understand who's going to be in the office, when.

[00:17:08.25] So then we could also, not necessarily for a formal meeting, but to start to really predict when do we create those informal interactions in person that creates that spark, and that magic, and that innovation that comes out. And that comes out to new things that help our clients and help everybody better. So that's where we're at. We've decided-- Our offices are open now.

[00:17:37.26] We require vaccines to be back in the office right now. We don't require you to be back in the office three days a week yet. We will do that starting in January, January 18. And we'll start to roll out some of those details in the next coming days. But we're telling people that to give them a little bit time and flexibility.

[00:17:58.74] But I will be totally honest with you, I have been in the office three to four days-a-week now for the last several. It's refreshing to be back. There's certain aspects to it that you really forget and miss. And while lots of people don't like the commute, I've actually had many people say you know what? I forgot about all that time that I used to read, to catch up, to relax, to take a nap on a train, or whatever it is that people go back.

[00:18:22.17] I think we're in for a new normal going forward with this balancing act. How to best balance the flexibility in people's lives for the talent attraction, but also the talent development. And I've said, oftentimes, I don't think, my own personal development, I would be what I am today. Or the experience I've had if I didn't have lots of people that I sat next to in meetings.

[00:18:47.09] I sat next to in presentations. I was in a boardroom with seeing, even if I wasn't presenting, somebody else presenting. The goods, and the bads, and the puts, and the takes of that shaped each who we are and our experiences. And frankly, it's also that fabric that I think bonds our companies' teams closer together. And that is hard.

[00:19:07.48] While I appreciate doing this on this platform right now, I think there are some advantages. That you could be on the West Coast. I can be on the East Coast. You and I could still have a very meaningful interaction. But I do think when you and I have lunch or dinner together. There's a different level of that interaction. There's different things in granularity that come out of that.

[00:19:26.25] So the second part of your question, let me address around talent attraction, a talent development or retention. I mean, I listen I'm a little biased here, being in the life insurance industry. Again, I think it's such a-- Somebody recently asked me when did you know that you're going to your life insurance industry. I said oh, when I was a little kid I said oh I can't wait to be, I want to be in life insurance.

[00:19:51.86] And that's a bit of a joke. So people like start laughing when I say that. The humor in that is, for me, there's not a lot of people you find to say oh I just woke up. And coming out of school, I want to be in the life insurance industry. However, if you look at what our industry does, if you look at the complexity of our industry, and how we deal-- Between regulation, between product design, actuarial science, long term forecasting, matching long duration assets and liabilities--

[00:20:24.23] The dynamics of all that goes on. And then policyholder behavior in there, and trying to predict human behavior over the course of 20 or 30 years, right? That complexity, the good it provides, plus the complexity for me it's an ideal, ideal platform for really intellectually curious people. Really smart people. People who like solving problems. People who like doing good. And it matches with that all.

[00:20:49.35] And so for me, there's no reason. I just don't think we've done, as an industry, we've done that good a job of educating. And unfortunately, lots of people may have negative connotations. Or saying wow this seems like a boring old bureaucratic industry to me, so why would I want to work in that? But again as you get steeped in it, know it, to me, I couldn't ask for a better challenge. And a better industry to be aligned and associated with it.

[00:21:19.22] MARK MCCOMBE: I think when you marry it with some of the initial tech, developments that we talked about earlier on, I think you can see that it's an industry that still has a lot of appeal. And as you say, real relevance in society, particularly as we move forward. For us talking about things like the retirement crisis, and so forth, that's where the insurance and asset management industries really come together. And can offer innovation that actually, hopefully, can help folks' lives be better in retirement.

[00:21:51.03] So I agree with that. One sub-question on talent. Obviously, the insurance industry hasn't always been at the cutting edge of bringing diversity into its ranks. But I know it's been a big focus for you. Can you share a few of your observations or strategies that you're adopting to broaden out the inclusion within the insurance sector?

[00:22:15.20] ANDREW MCMAHON: Yeah, sure. I am an enormous believer in that the best ideas and the best solutions to problems come from a diverse perspective and diverse teams. So while I wholeheartedly believe in it for equality purposes and so forth, it's also great business practice. And I think we're going to get a much better answer, a better run company, with much diverse teams.

[00:22:44.63] And as you pointed out, yes, I think our industry has been behind on diversity for whatever reasons that existed there. Back to even sustainability, on diversity there's a lot we can do. And as we've all recognized, you get what you measure. And so we've started measuring lots of this And we've started putting people's goals.

[00:23:06.02] And so for instance, we mandate diverse slates on every job hiring. And so until we have a diverse slate, you can't proceed. We're holding people to the fire on that. We're holding people to it in their performance reviews. And the idea is really creating, again not just diversity numbers for the sake of diversity numbers, but creating an environment, a culture, a platform of business where people feel comfortable. They feel included. They feel valued.

[00:23:40.70] And they bring that diverse background and perspective to the problem solving to shape it differently. And we know that answer will be better than we could do without a diverse set. And this includes using diverse suppliers for things. And again, we're measuring how many diverse suppliers we've been using in the past.

[00:23:59.12] What are we doing today? And whose goal is that going? Unconscious bias training, diversity training, we've been doing lots of inclusion training. There's lots of things, as we do some of this training, people walk away from the training culturally, and not even realize they had an unconscious bias for something. And none of us, I think deep down, nobody wants to admit if they have a bias.

[00:24:25.13] And many of us can't even see our own unconscious bias. But I think that training is critically important for us to bring out awareness of where we may be falling short and not even knowing it. And so that's what we've been really focused on the last couple of years. And we're starting to see good rewards in it. And we're being recognized by some outside organizations now on the track record that we're developing and building.

[00:24:51.17] MARK MCCOMBE: Appreciate that, Andrew. We're coming up on time. And I just I have one more question that maybe is a bit off left field from the conversation we've just had. A couple of weeks ago now, we were together in the IMF with an awful lot of central bank governors.

[00:25:09.80] You can imagine when you get a collection of central bank governors together that topic number one, two, and three was inflation. And so I guess my final question for you is what is on your mind about 2022? What are you worrying about? What are you what are you focused on? And to what degree is the debate about inflation part of the conversation and narrative that you're having in thinking about your strategy going forward?

[00:25:40.50] ANDREW MCMAHON: Yeah. Mark, I guess if I was an economist I'd start with, on this hand and then on this hand. I would weigh the different things. The inflation topic obviously, is a really important topic. I think dovetailing with that topic is also sustainability. And as we see supply chain challenges and issues here in the United States, cargo ships all backed up outside all many of our harbors right now.

[00:26:09.07] And I think if we think back to the pandemic, the sustainability even of-- as we look at pharmaceutical drugs that we're dependent on other countries for to get here. We look at PPE, equipment for people during the pandemic, and masks, and so forth and so on.

[00:26:29.08] I think sustainability is first then inflation on top of that. And so are we seeing this supply chain challenge an issue. Will we see more of this going forward, as we hopefully emerge from this pandemic?

[00:26:45.26] However emergence looks like. With going back to those sustainability pieces and does that actually make-- the inflation we're seeing now being argued as transitory, a more permanent inflation thing. That is what we're talking about inside. And that's what we're trying to understand, certainly from an investing perspective of our general account. On one hand, I don't worry about it. On the other hand, I worry extremely about it as the economist would say.

[00:27:17.48] MARK MCCOMBE: Well, I would say as a CEO that's probably the right approach. To be worried about it but obviously, much is the debate of BlackRock, the degree to which it becomes more permanent. And then what impact it has on asset prices, I think, is something we're spending a lot of time on, as I'm sure the industry is.

[00:27:35.26] Andrew, this has been a huge pleasure. First, it's been great to get to know you over the past couple of years and since you took on the role at Guardian. And I know you have a lot of really great ideas for the firm. And so it's just been a pleasure to get to know you and your team. I want to thank you for taking the time today to talk to us. I really look forward to staying close, and hopefully, next year we may be able to do this in person, if we're very lucky.

[00:28:07.30] ANDREW MCMAHON: Absolutely, Mark. Thank you very much. I appreciate the time. I'm really excited with the partnership that we have with BlackRock. And I appreciate all of you and your team's help as we continue to go forward. I'm really excited about the future for all of us and the industry. So thank you.

[00:28:23.62] MARK MCCOMBE: All right. Well, this draws to a close our Insurance Leaders Symposium for 2021. I, for one, had money absolutely on us doing this in person. But in the interest of optimizing attendance and optimizing safety, I think we decided to go with this virtual event again. But I think it's been a huge success and great conversation.

[00:28:48.98] So I'd just like to say thank you to all of the people who attended. We look forward to seeing you in person. As you heard from me earlier, we will be back in the office starting at the beginning of November. And so, look forward to welcoming you back and spending more time together. Thank you and on behalf of everyone at BlackRock, all the organizers, we hope you have a very enjoyable evening and heading into the weekend.