Todd Hedtke is the chief investment officer at Allianz Life Insurance Company of North America, where he leads the investment management, liquidity planning, hedging, and trading of more than $160 billion of insurance assets. Prior to joining Allianz Life in 2000 as director of Allianz Investment Management and VP for Allianz Life, Hedtke held various finance and investment positions at Cargill, EBF & Associates, and American Express.
In this interview, he discussed how Allianz Life has grown their private book in the last decade; the benefits of having a strategic venture and innovation team; and why he believes that complexity is the most rewarding thing about insurance investing.
Trusted Insight: Tell us about Allianz Life and your role there at the helm of the investment division.
Todd Hedtke: The core of my job is to connect the insurance business to the capital markets and the asset management world. It can be a complex endeavor. There's a lot of considerations when you look at the complexity of our liability and cash flows, especially here in the States, which are regulated 50 different times in the different capital models and accounting models. You have to balance all those things and bring them together. You need to speak the language of both sides, and I find that to be challenging. I also find that complexity pretty engaging from an investment perspective.
Trusted Insight: You’ve been with Allianz Life for nearly two decades. How has the Allianz strategic asset allocation evolved over the years and recently under your leadership in Minnesota?
Todd Hedtke: When I started 20 years ago, we had about $6 billion in assets. Today that number is $160 billion. The transformation has been massive. In terms of strategic asset allocation, I would highlight the expansion of alternative asset classes. We are now at a point in the cycle where I think that's extremely important as you look at corporate credit. If we were to set higher rates, I think corporate liquidity will be more challenged. It's important to expand the number of asset classes we have. We've been doing that for the last 5 years. It’s a particular focus on selling liquidity and complexity.
It's maybe generic by now from CIOs, that we’ve grown our private book. A handful of years ago we needed to get to about 25% of our book in what I call private, less liquid assets. We achieved that just in the last year or so. That's important because moving the portfolio there really recognizes that very basic thesis of understanding your liabilities or selling long-dated contracts. We could be providers of liquidity to the market. Doing that really fits that overall theme of who we are. That's been something we've really focused on since I've been the CIO.
Trusted Insight: We’ve spoken with some of your insurance peers and they each speak about having teams/groups that focus on the tech space. Does Allianz focus on areas such as tech and innovation that might be strategically advantageous for the organization?
Todd Hedtke: Absolutely. I can talk about the strategic ventures team we have at Allianz Life, which we started 3 years ago. There are so many benefits of having that team, which has a dual mandate. I'm part of the oversight. We ensure that every investment we make has a strategic case. Whether that case will play out over the long term is to be determined. The team is a combination of investment people and business people. We have individuals who have experience in either distribution or the operations side of the insurance company.
We‘ve made about 10 investments at this point. We're working them through those strategic business cases, and we continue to invest new money. That's been a real focus of ours. It has the advantage of being a feedback loop throughout the organization and the investment process. As we learn about new technologies and new options that are in the marketplace, that provides a direct feedback loop to our investments as well. It helps there and builds good cultural advantages. We're really happy with the progress that we've made over the last 3 years and will continue to focus on this area.
Trusted Insight: When it comes to investing in venture, what do you believe are the trends that will help increase collaboration between insurance startups and large corporations like Allianz?
Todd Hedtke: Overall, I would say it's happening in every industry. It's probably started more broadly in fintech and now insurtech. We see so many applications, different tools, and mechanisms to help at the point of sale and on the operational side to increase efficiency and productivity.
On the property-casualty side, you see even more options available and more transformation taking place. From a global perspective, you are really seeing this transcend in our industry. You're seeing companies recognize what they’re not good at, such as being nimble and quick, and understanding the latest technologies that can help. Some folks are much more willing to work with startups, learn from them and partner with them. I would say that's probably a secular trend across many industries.
Trusted Insight: With respect to your long-term approach, does today’s near-term market concerns play into your investment strategy?
Todd Hedtke: Absolutely. The key differentiator for us is long term investing. There are serious advantages to being long term investors, one of those being the ability to take advantage of short term volatility or short term opportunities. When we see a pop in volatility, that might disrupt spreads. Even volatility itself as an asset class could be an opportunity.
In late 2008-2009, when we all knew what was going on, we were very opportunistic in the market. One asset class in particular that offered opportunities were Commercial Mortgage-Backed Securities, as the spread widened out, even on the top tronches by 500 to 1,000 points. As a long term investor, that was a great buying opportunity. Maybe not so much for a short term investor, with the contagion that was going on in capital markets. For us to be able to jump in take advantage of that was huge. If you're a long term investor, you need to be very well in tune with what the current dynamics are as well.
Trusted Insight: Often times we hear that the insurance world is a slow-moving industry that is highly regulated. What are some notable challenges you or your peers face in this institution type?
Todd Hedtke: A term that we use around here is a financial frame. What is our financial frame? This is an interesting notion in terms of investors. As I note often, we don't just get a benchmark and somebody says go beat the benchmark. To me, that's a simple world in some regard. Benchmarks are critical guideposts, but I also have liability constraints. I have regulations across many different seats with many different players. I have 3 different accounting regimes and about 4-5 different capital regimes. We put all of that in the frame at any point in time.
Capital is the funny one in itself. We're always an insurance investor. We're always trying to optimize our return per unit of capital. Absolute capital preservation may be the most important thing at one point in time. Book income might be the most important thing at one point in time. In a normal environment, you would say total return is the most important thing. Regulation is always changing as well, and all of those domains are always changing. To me, the most rewarding thing about insurance investing is that complexity – it is actually pretty exciting. For some people, it might be something else. But for me as an investor, this is what I particularly enjoy.
Trusted Insight: Are there any thoughts or important topics that you feel should be addressed more?
Todd Hedtke: One thing I've been pretty public about is ESG investing. This is another secular trend and something that we feel is critical for investors in the asset management world. Quite frankly, I'm very bullish that the broader community is taking this seriously and we've seen massive changes in the level of understanding, importance, and focus over the last couple of years. That has changed pretty dramatically.
Another thing is that insurance investors have a real opportunity to figure out the aging demographics. The need for income and retirement solutions is critical. There's a lot of opportunities there. The other large portion of the demographic is the millennials. What are the solutions for that generation? Who are we investing for? On one hand, you have the aging population that has certain needs, but then you also have a millennial generation who has different desires and needs.
Those are two things that I spend a lot of time on as the CIO. Determining what are those secular things that are happening and what should our organization be focused on for the future.
View our full catalog of interviews here.
The list of Top 30 Insurance Chief Investment Officers can be found here.
In this interview, he discussed how Allianz Life has grown their private book in the last decade; the benefits of having a strategic venture and innovation team; and why he believes that complexity is the most rewarding thing about insurance investing.
Trusted Insight: Tell us about Allianz Life and your role there at the helm of the investment division.
Todd Hedtke: The core of my job is to connect the insurance business to the capital markets and the asset management world. It can be a complex endeavor. There's a lot of considerations when you look at the complexity of our liability and cash flows, especially here in the States, which are regulated 50 different times in the different capital models and accounting models. You have to balance all those things and bring them together. You need to speak the language of both sides, and I find that to be challenging. I also find that complexity pretty engaging from an investment perspective.
"When I started 20 years ago, we had about $6 billion in assets. Now today that number is $160 billion. The transformation has been massive."
Todd Hedtke: When I started 20 years ago, we had about $6 billion in assets. Today that number is $160 billion. The transformation has been massive. In terms of strategic asset allocation, I would highlight the expansion of alternative asset classes. We are now at a point in the cycle where I think that's extremely important as you look at corporate credit. If we were to set higher rates, I think corporate liquidity will be more challenged. It's important to expand the number of asset classes we have. We've been doing that for the last 5 years. It’s a particular focus on selling liquidity and complexity.
It's maybe generic by now from CIOs, that we’ve grown our private book. A handful of years ago we needed to get to about 25% of our book in what I call private, less liquid assets. We achieved that just in the last year or so. That's important because moving the portfolio there really recognizes that very basic thesis of understanding your liabilities or selling long-dated contracts. We could be providers of liquidity to the market. Doing that really fits that overall theme of who we are. That's been something we've really focused on since I've been the CIO.
Trusted Insight: We’ve spoken with some of your insurance peers and they each speak about having teams/groups that focus on the tech space. Does Allianz focus on areas such as tech and innovation that might be strategically advantageous for the organization?
Todd Hedtke: Absolutely. I can talk about the strategic ventures team we have at Allianz Life, which we started 3 years ago. There are so many benefits of having that team, which has a dual mandate. I'm part of the oversight. We ensure that every investment we make has a strategic case. Whether that case will play out over the long term is to be determined. The team is a combination of investment people and business people. We have individuals who have experience in either distribution or the operations side of the insurance company.
"As we learn about new technologies and new options that are in the marketplace, that provides a direct feedback loop to our investments as well."
We‘ve made about 10 investments at this point. We're working them through those strategic business cases, and we continue to invest new money. That's been a real focus of ours. It has the advantage of being a feedback loop throughout the organization and the investment process. As we learn about new technologies and new options that are in the marketplace, that provides a direct feedback loop to our investments as well. It helps there and builds good cultural advantages. We're really happy with the progress that we've made over the last 3 years and will continue to focus on this area.
Trusted Insight: When it comes to investing in venture, what do you believe are the trends that will help increase collaboration between insurance startups and large corporations like Allianz?
Todd Hedtke: Overall, I would say it's happening in every industry. It's probably started more broadly in fintech and now insurtech. We see so many applications, different tools, and mechanisms to help at the point of sale and on the operational side to increase efficiency and productivity.
On the property-casualty side, you see even more options available and more transformation taking place. From a global perspective, you are really seeing this transcend in our industry. You're seeing companies recognize what they’re not good at, such as being nimble and quick, and understanding the latest technologies that can help. Some folks are much more willing to work with startups, learn from them and partner with them. I would say that's probably a secular trend across many industries.
Trusted Insight: With respect to your long-term approach, does today’s near-term market concerns play into your investment strategy?
Todd Hedtke: Absolutely. The key differentiator for us is long term investing. There are serious advantages to being long term investors, one of those being the ability to take advantage of short term volatility or short term opportunities. When we see a pop in volatility, that might disrupt spreads. Even volatility itself as an asset class could be an opportunity.
In late 2008-2009, when we all knew what was going on, we were very opportunistic in the market. One asset class in particular that offered opportunities were Commercial Mortgage-Backed Securities, as the spread widened out, even on the top tronches by 500 to 1,000 points. As a long term investor, that was a great buying opportunity. Maybe not so much for a short term investor, with the contagion that was going on in capital markets. For us to be able to jump in take advantage of that was huge. If you're a long term investor, you need to be very well in tune with what the current dynamics are as well.
Trusted Insight: Often times we hear that the insurance world is a slow-moving industry that is highly regulated. What are some notable challenges you or your peers face in this institution type?
Todd Hedtke: A term that we use around here is a financial frame. What is our financial frame? This is an interesting notion in terms of investors. As I note often, we don't just get a benchmark and somebody says go beat the benchmark. To me, that's a simple world in some regard. Benchmarks are critical guideposts, but I also have liability constraints. I have regulations across many different seats with many different players. I have 3 different accounting regimes and about 4-5 different capital regimes. We put all of that in the frame at any point in time.
"Insurance investors have a real opportunity to figure out the aging demographics. The need for income and retirement solutions is critical. There's a lot of opportunities there."
Capital is the funny one in itself. We're always an insurance investor. We're always trying to optimize our return per unit of capital. Absolute capital preservation may be the most important thing at one point in time. Book income might be the most important thing at one point in time. In a normal environment, you would say total return is the most important thing. Regulation is always changing as well, and all of those domains are always changing. To me, the most rewarding thing about insurance investing is that complexity – it is actually pretty exciting. For some people, it might be something else. But for me as an investor, this is what I particularly enjoy.
Trusted Insight: Are there any thoughts or important topics that you feel should be addressed more?
Todd Hedtke: One thing I've been pretty public about is ESG investing. This is another secular trend and something that we feel is critical for investors in the asset management world. Quite frankly, I'm very bullish that the broader community is taking this seriously and we've seen massive changes in the level of understanding, importance, and focus over the last couple of years. That has changed pretty dramatically.
Another thing is that insurance investors have a real opportunity to figure out the aging demographics. The need for income and retirement solutions is critical. There's a lot of opportunities there. The other large portion of the demographic is the millennials. What are the solutions for that generation? Who are we investing for? On one hand, you have the aging population that has certain needs, but then you also have a millennial generation who has different desires and needs.
Those are two things that I spend a lot of time on as the CIO. Determining what are those secular things that are happening and what should our organization be focused on for the future.
View our full catalog of interviews here.
The list of Top 30 Insurance Chief Investment Officers can be found here.