Interest rate cuts could impact captives
Cuts in interest rates will lead to lower returns for captive insurance companies, which typically invest in safe and liquid investments like money market funds and government securities.
That was the consensus on a panel at the Bermuda Captive Conference on investments this week.
The audience heard that achieving long-term stability and growth for a captive required strategies which contemplated the moving targets of interest rates, diversification, risk management and strategic asset allocation, all factors pertinent to consistent returns over extended periods.
Innovation and adaptability are also critical in maintaining sustainable growth within a captive’s investment management program.
The panel was Moderated by Miguel Da Ponte, EVP, Chief Wealth Management Officer, Clarien with panelists Stefano Bertolini, Senior Portfolio Manager, Butterfield Asset Management Jason Moshos, Senior Vice President, Portfolio Manager, HSBC and Kevin Yousif, President, Yousif Capital Management.
The panel discussed recent market volatility, with the S&P 500 experiencing an 8.5% sell off between July and August before mostly recovering. Bond yields have also whipsawed with the 10-year benchmark of maturity reaching a high of 4.7% in April and is down to 3.7% today.
One of the major drivers of this volatility has been interest rates.
However, the US Federal Reserves and other central banks around the world have indicated lower interest rates will occur in the near future. The sentiment was that there was no precedent for rates to be at peak rates for this long; typically it's about six months before the Fed begins cutting, so that cycle has stretched longer than normal historically.
The feeling was that there’s some concern with Fed officials and the market that rates have been elevated past the traditional time it takes to cool the economy and so, not wanting to make interest rate cuts near the US election in November, they must get started now.
While investment managers have been content to allocate funds to money market funds and get a reasonable return of 4 to 5%, these returns would fall as interest rates are cut. Concerning bonds, sentiment was that shorter term are better, between one and three-year bonds are ideal due to lower volatility and there was no appetite for longer 30-year bonds.
The panel highlighted that sometimes in the captive space the consensus was for was highly liquid, very safe investments. This means investing in government guaranteed securities, money market funds and so on.
However, it was felt there were other strategies captives could employ to achieve long term stability and growth in their portfolios. Panelists believed that in the near future as interest rates are cut, there's going to be money coming out of money market funds and going into different asset classes, most likely equities.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
