Insurer assets outsourced to managers jump 54% in 4 years

Portfolios are even more concentrated in fixed income than before

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Randy Brown said insurance company executives always want to talk about non-core fixed income.

Insurance companies outsourced almost $2.8 trillion to the 50 largest money management firms managing non-affiliated insurance assets, a 54% increase from four years earlier, Pensions & Investments data show.

More specifically, the top 10 firms managed $1.08 trillion in outsourced, non-affiliated general account insurance assets. That was up 30.1% from four years earlier.

The assets are even more concentrated in fixed income than they were four years ago, statistics on the non-affiliated general account assets show: 93.4% in fixed income in 2014 vs. 92.8% four years ago. Still, insurance companies are moving beyond traditional core fixed-income strategies.

George Caffrey, head of the insurance investment advisory group at Towers Watson & Co., New York, said the low yields obtained from core fixed-income investments since the financial crisis have caused insurance companies to seek out better-yielding fixed-income strategies such as high yield, bank loans and emerging market debt, and alternatives like private equity and real estate.

Even insurers that have preferred to manage assets in-house have made decisions to outsource, Mr. Caffrey said. “Insurers that don't have the internal expertise for specialized mandates are seeking high-quality third-party managers to invest their assets” he said.

Wellington Management Co. LLP manages the most non-affiliated insurance assets — $234 billion as of March 31 — P&I's survey of money managers that run money for insurers shows. Wellington jumped to first place from third four years earlier. Despite the good news, spokeswoman Anne Mahoney said no one at the company would comment.

BlackRock (BLK) Inc. (BLK), top ranked in 2010, dropped to second, with $230 billion. Pacific Investment Management Co. was third, with $224.7 billion, up from fourth place four years ago; Deutsche Asset & Wealth Management was fourth, down from second place in 2010, with $196.3 billion; and Goldman Sachs Asset Management was fifth with $160 billion, its ranking unchanged.

BlackRock was first and Deutsche was a close second among money managers with the most non-affiliated general account assets from insurers: BlackRock managed $198.6 billion; Deutsche, $196.3 billion as of March 31.

Third was Goldman Sachs, with $105.2 billion, up from seventh in 2010. Goldman Sachs' general account insurance assets jumped 104.6% during the four years between surveys.

Macquarie Group, with $100.6 billion in assets, was fourth, jumping from 54th in 2010. Macquarie's dramatic rise was the result of including for the first time the outsourced insurance assets managed by Delaware Investments, which it acquired in 2010.

Wellington was fifth, with $92.2 billion, down from fourth in 2010.

Beyond the data

The news beyond the data is a move to non-traditional fixed income and alternatives, industry participants say.

“Most of the conversations that I have as I go around and speak with insurance company executives ... ultimately turn to non-core fixed income,” said Randy Brown, a London-based managing director who is head of the U.K. and global head of insurance and pensions solutions for Deutsche.

“The first thing ... is they went from core fixed income to closely related products, like high yield or bank loans, and emerging market debt,” he said.

“This started happening four to five years ago, post-crisis. Treasury rates dropped and they needed to maintain portfolio yield, so they went into securities that had higher yields. That was the first wave. Then, as interest rates continued to stay low, as spreads continued to compress, they also moved into other things like hedge funds, private equity, real estate and infrastructure. It's been ramping up post crisis, especially in the last several years.”

Big winners have been money managers with broad-based investment capabilities, said money manager consultant David Holmes, a partner with Eagar, Davis & Holmes LLC, Louisville, Ky.

Mr. Holmes said those managers have been able to win specialized mandates from insurers because they can build on existing relationships managing core fixed income, cross-selling for more specialized strategies.

“They have been able to play both sides,” he said.

Mr. Holmes, founder of the firm's Insurance Asset Outsourcing Exchange, which tracks insurance company outsourcing of investments,found that specialized managers also have been able to pick up insurance business because they are offering higher-yielding strategies and more diversified, non-correlated strategies than core fixed income.

Expand or join forces

Some money managers are attempting to expand their capabilities or form alliances with other managers that offer alternative strategies, he said.

Woody Bradford, CEO of Conning & Co., Harford, Conn., a money manager specializing in managing insurance assets, said Conning has broadened its offerings beyond fixed income to meet insurers' needs for higher yields in the past three years. Those include high-dividend income equity, master limited partnerships and Asian equity strategies through the firm's Hong Kong joint venture, Cathay Conning Asset Management.

Conning also partnered with a commercial mortgage firm, Innovative Capital Advisors, to offer commercial mortgage loans as a specialized investment strategy and with liquid alternatives manager Ramius Alternative Solutions, he said.

Conning ranked eighth in the 2014 P&I survey, with $82 billion in outsourced non-affiliated general account insurance assets. The firm had been third in 2010.

Statistics from the Insurance Asset Outsourcing Exchange show that 71% of 101 mandates outsourced by insurance companies in the first quarter of 2014 were for specialty fixed-income, equity or alternative investments.

In 2009, when Mr. Holmes began tracking the mandates, only 42.3% of the mandates outsourced that year by insurers that year were non-core fixed income.

The low yields available to insurers from core fixed-income strategies has meant insurers are investing in entirely new strategies, said John Melvin, chief investment officer, insurance asset management, and global head of insurance fixed-income portfolio management at Goldman Sachs Asset Management in New York.

Mr. Melvin said emerging market debt is an example of a strategy that has gained enormous traction with insurers over the past several years. He said the strategy can pay 70 basis points to 100 basis points above similarly rated debt from companies in developed countries.

Still, he said, insurers maintain about 85% of their assets in core fixed-income investment strategies to meet regulatory requirements.

A Goldman Sachs survey from April found that over the next 12 months, more than one-third of insurance chief investment officers intend to increase overall portfolio risk, while less than 10% intend to decrease the risk, said Mike Siegel, managing director and global head of GSAM's insurance business in New York.

He said the prospects of tightening financial conditions contribute to concern about market volatility and the pace of economic recover globally.

While volatility remains at very low levels in most asset markets, as central banks begin to reduce monetary easing, the concern is that markets will become more volatile, less liquid, and asset prices will reflect this increased volatility, he said.

Mr. Siegel said about 50% of the CIOs surveyed said low yields are the greatest overall risk to their portfolios. He said insurance investment executives intend to make the greatest net allocation increases to infrastructure debt, private equity, commercial mortgage loans and real estate equity in coming months.

He said this is a notable change from 2013, when insurers planned to make the greatest increase to bank loans.

Global infrastructure debt

Global infrastructure debt has been a particularly strong area for BlackRock (BLK) in the last 12 months, accounting for $2 billion in net inflows, said David Lomas, managing director with BlackRock and head of the firm's global financial institutions group in New York.

Investment-grade infrastructure debt can yield 80 basis points to 100 basis points more than an equivalent investment-grade corporate bond with a significantly lower annualized loss rate, Mr. Lomas said.

He said private equity also has been a growing area of investment for insurers.

“Like infrastructure debt or equity, the long-dated nature of private equity investments can work for insurers that have long-dated liabilities,” he said.

Money management executives say they're expanding operations and adding more investment, sales and support personnel as they attempt to win more insurance business.

The outsourcing of general account insurance assets is growing industrywide around 7% a year, said Matt Malloy, a managing director and global head of insurance solutions at J.P. Morgan Asset Management (JPM) in New York.

“Institutional insurance outsourcing is considered a major growth driver,“ Mr. Malloy said. “I would be surprised if any institutional money managers didn't see it the same way.” J.P. Morgan ranked 10th in non-affiliated general account insurance assets as of March 31, up nearly 77% in four years.

Deutsche's Mr. Brown said the case for his company and competitors for expanding their insurance outsourcing business is clear. “The big investment banks all have the same issue: less reliance on the investment bank to drive earnings as a result of less trading due to new federal regulations,” he said.

This article originally appeared in the September 1, 2014 print issue as, "Assets outsourced to managers jump 54% in 4 years".