Copyright 2010 Crain CommunicationsAll Rights Reserved Pensions & Investments
August 9, 2010
NEWS; Pg. 0001
More insurers tap outside managers; Financial crisis led firms to reassess their risk and investment skills
Money managers’ non-affiliated general account insurance assets under management rose significantly in the past three years, mostly because even the giant global insurers turned to outsourcing following the financial markets’ near collapse.
The 50 largest managers of non-affiliated general account insurance assets ran a total of $1.14 trillion as of March 31, up 42.7% from $801 billion as of the end of March 2007, the last time Pensions & Investments surveyed these managers.
Many money management executives identified outsourced insurance assets as a way to grow their businesses several years ago. But the market meltdown prompted more insurance company officials to hire outside firms for assets once managed internally.
The financial crisis caused major insurers to assess their internal risk management capabilities as well as their investment management skills, said Onur Erzan, a consultant at McKinsey & Co. in New York.
More often than not, said Mr. Erzan, they concluded their firms might benefit financially from outsourcing some of their investment operations.
In addition, midsize insurers in Europe and Asia also have begun to outsource investment management, consultants and money managers said.
The financial downturn caused some soul-searching among insurers that managed their own money, said Jack Corroon, managing director and head of global client business development at Conning Asset Management, Hartford, Conn. Insurers asked themselves, ‘Are we really as good as we thought?’
Conning is one of the beneficiaries of insurers’ decisions to outsource more. Its non-affiliated general account insurance assets reached $76.5 billion as of March 31, an increase of 15% from three years earlier. Mr. Corroon said much of the asset increase came from new allocations from existing clients.
Conning was third in terms of non-affiliated general account assets under management in P&I’s ranking. Its assets were dwarfed by the two largest managers: BlackRock Inc., with $194.65 billion; and Deutsche Insurance Asset Management with $188 billion.
BlackRock had a spectacular increase in assets since the last survey, jumping 72.3%, and taking first place from Deutsche, whose assets rose a respectable 26% in the period.
The growth comes from both new clients and existing ones seeking new strategies, said Kristen Dickey, managing director and head of New York-based BlackRock’s financial institutions group. BlackRock manages assets for 147 insurance companies.
She said 2010 continues at a positive clip, but would not give specifics. We are experiencing steady and nice growth of assets from new and existing clients, she said.
BlackRock’s acquisition of rival Barclays Global Investors had little impact on insurance assets under management because BGI did not have a dedicated insurance practice, said Ms. Dickey. (Indeed, BGI was not among the firms surveyed in the previous two P&I surveys on insurance outsourcing in 2007 and 2005.)
BlackRock would not name its insurance clients, but in early July, the financially challenged Equitable Life Assurance Society, London, announced it had chosen BlackRock to manage its $8.7 billion portfolio.
And last fall, reinsurer Swiss Re confirmed that it had agreed to outsource to BlackRock a $23 billion bond portfolio.
At Deutsche, Randy Brown, managing director and global head of DIAM, said his company is benefiting as executives at large insurers look to outsource in areas where they believe they need more expertise.
He said some were surprised by the impact the downturn had on some core fixed-income assets. They realized they didn’t have the breadth of resources to manage some core fixed-income asset classes, he said.
Mr. Brown said Deutsche was continuing to experience strong inflows in 2010, but he would not be specific.
BlackRock and Deutsche’s dominance in non-affiliated general account insurance assets is so substantial that, together, they manage more than the next six largest competitors combined.
It’s not surprising that the biggest money managers in the insurance assets business are getting even more of a foothold, said Bradley Kellum, a partner at management consultant Oliver Wyman in New York, who helps insurers conduct strategic reviews on whether to outsource.
The large insurers want players of scale, he said. They don’t want someone who is just learning to shave their face.
Two other money managers, Goldman Sachs Asset Management and Pacific Investment Management Co. LLC, showed dramatic gains since the 2007 survey. Both had made strategic decisions to increase that end of the business.
New York-based Goldman Sachs grew 264.7%, to rank seventh in the current survey, with $51.4 billion in non-affiliated general account assets; in 2007, it ranked 14th. PIMCO now ranks eighth, a leap of 246.7%, to $48.3 billion; in the previous survey, PIMCO ranked 15th.
Goldman Sachs made a specific effort to jumpstart its insurance group in May, 2007, when it hired Eric Kirsch as managing director and head of global insurance asset management. Mr. Kirsch had headed Deutsche’s insurance outsourcing operations.
In an interview, Mr. Kirsch said Goldman’s insurance asset management staff has grown to 50 from five when he joined.
He said insurers with more than $10 billion in assets moved toward outsourcing beginning in 2006. The financial crisis the following year accelerated the trend, he said.
If they were on the fence, they decided they needed professional help after seeing their balance sheet seriously impacted, Mr. Kirsch said.
Executives at PIMCO, owned by Munich-based global insurer Allianz, began a concentrated effort to increase non-affiliated general account insurance assets in the last quarter of 2008, said Tom Otterbein, PIMCO’s director of client facing, Americas, Newport Beach, Calif. The firm hired insurance veteran Robert Young as an executive vice president overseeing insurance outsourcing.
Mr. Otterbein said Mr. Young, an actuary by training, had been a managing director in Morgan Stanley’s global capital markets group. He said PIMCO’s strategy in attracting new business has been to hire key personnel to show insurance executives that the firm understands their business and specific needs. He said Mr. Young while at Morgan Stanley had advised insurance companies on capital raising, structured finance, risk management and investment strategy, expertise that was seen as helping attract new insurance company assets.
Mr. Young sees strong potential for growth in insurance outsourcing as the complexities of the financial markets increase and insurers continue to assess their core competencies.
There is definite momentum for outsourcing to continue, Mr. Young said. We feel we are strategically positioned to gain new business.
Not all of the asset increases by the managers in the survey have come from new mandates.
Delaware Investments’ 169% increase in its non-affiliated assets came about because of a change in ownership. In 2007, Philadelphia-based Delaware was investing more than $66 billion in affiliated assets – those of its parent, Lincoln Financial Group. Those assets stayed with Delaware, but became non-affiliated when Delaware was purchased by the Macquarie Group in 2009.
Executives at the largest managers of outsourced insurance assets say the decision to outsource comes down to whether in-house investment resources can equal those of an outside money manager.
You see more and more insurance companies recognize that they need deeper skills and analytics to manage risk. said BlackRock’s Ms. Dickey. Insurance companies are in the business of taking risk. But now, post-crisis, these companies are realizing that they can earn a higher rate of return on risk-taking in their operating business than they can by taking risk in their investment portfolios.
But Oliver Wyman’s Mr. Kellum said the jury is still out as to whether external money managers will have better performance over the long run. He said larger insurers are dipping their toes in the water – outsourcing $1 billion or $5 billion of their portfolio – but still keeping a large chunk inside to see how the new relationships work.
Traditionally, property and casualty insurers have been more willing to outsource their assets than life insurers, Mr. Kellum said, because the former’s investments are more short term and those companies have less complicated asset-liability management issues than life insurers.
Large money managers have made major investments in staff and computer systems to show life insurers that they understand their liabilities, which has made the insurers more willing to experiment with outsourcing, Mr. Kellum said.
Sunny Patpatia, president of consulting firm Patpatia & Associates Inc., Berkeley, Calif., said exploring outsourcing is a good process for insurers because a fresh set of eyes gets to looks at the investment process.
Mr. Patpatia, who advises insurers on outsourcing, said he doesn’t recommend fully outsourcing.
You (insurers) should always have a portion of your assets in-house so you are close to the market, he said. It is important to wake up every day and feel the pulse of the market.
The largest external money managers aren’t just handling insurance company investments.
They are also luring new insurance clients by offering a host of services, including providing investment advice and expertise to insurers’ in-house portfolio managers as well as advisory services, such as custom benchmarks, said Mr. Kellum.
Auxiliary services are important to insurance executives seeking a coordinated approach to their relationship with money managers, said David Holmes, a partner with Eager, Davis & Holmes LLC, Louisville, Ky., a consultant to money managers.
Insurance companies are gravitating to third-party managers that can offer thought leadership, advice and investment expertise to help them mitigate risk while achieving a return on their investments, Mr. Holmes said.
Copyright 2010 Crain Communications Inc. All Rights Reserved.
August 13, 2010