INSURANCE OUTSOURCING:10 firms dominate market

The management of insurance companies' assets is dominated by a select group of money management firms.

While the 70 managers polled by Pensions & Investments reported a total of $628.7 billion in non-affiliated insurance assets under management as of June 30, the 20 largest firms account for approximately 90%, or $566.3 billion, of the total.

The 10 largest managers of insurance assets run nearly 80% of total non-affiliated insurance assets — or assets from insurance companies other than a parent company or insurance subsidiary — reported in the survey.

Deutsche Asset Management, New York, was the survey's largest manager of insurance assets, reporting nearly twice the amount run by its closest competitor, BlackRock Inc. DeAM has $151 billion in insurance assets under management, or roughly one quarter of the total non-affiliated assets reported in the survey.

New York-based BlackRock reported $75.1 billion in insurance assets under management, followed by Principal Global Investors Inc., Des Moines, Iowa, with $59.8 billion; Conning Asset Management Co., Hartford, Conn., with $51.1 billion; and Wellington Management Co., Boston, with $47.5 billion.

Combined, these five investment managers have roughly $385 billion in external insurance assets under management, or approximately 61% of the total insurance assets in the survey.

Eric Kirsch, managing director and global head of DeAM's insurance asset management business, said the firm is continuing to expand the business, and international markets present excellent opportunities for growth.

Earlier this year, DeAM completed a project to integrate all of its insurance functions — including the firm's fixed-income management, insurance advisory services group and client servicing — into one unit. Operating under a single structure will help the firm increase business both in the United States and abroad, he said. Specifically, he added, European insurance companies have yet to farm out their assets as readily as U.S. companies have, but the region could soon prove to be a strong growth channel because Europeans are starting to look seriously at it.

The firm now has about 100 people on its dedicated insurance team. "We structure and position our resources based on where we think the markets are going," said Mr. Kirsch, adding that while fixed income will always be the most important asset class in an insurer's portfolio, many are evaluating higher alpha-generating strategies. The insurance unit already offers existing DeAM strategies such as alternative investments from its DB Absolute Return Strategies group to insurance clients seeking to build more sophisticated portfolios.

"You cannot position yourself as just a fixed-income manager," Mr. Kirsch said. "You need to be able to do more and work with the clients holistically in this industry now."

Managing assets is just half of the relationship with insurance companies, said Sal Correnti, president and chief executive officer of Conning Asset Management.

"You must be able to function in an advisory role," he said. "These companies are driven by their liabilities, so you need to be able to manage both sides of the equation. You can't manage insurance assets appropriately without consideration of their liabilities or their tax situations."

Many of the largest managers of insurance assets bundle a number of insurance services together. The packaging may vary, but many of these firms offer insurance companies asset-to-liability modeling, investment reporting and accounting services, risk management analysis and actuarial services, in addition to having tax and credit experts supporting research and services teams.

Managers also need to be able to work with insurance companies to determine insurance-specific calculations such as surplus duration, income projections and cash flow, said Michael Huebsch, managing director and head of BlackRock's financial institutions group. "The breadth of outsourcing today is greater," he said. "There are multiple tasks that insurance companies are looking for managers to provide."

BlackRock provides asset management to 80 global insurance companies, Mr. Huebsch said, adding that the firm also provides "unbundled" non-asset management services. BlackRock's clients include several insurance companies that use only the firm's risk management, investment accounting, or advisory services.

"Finding top-quality people" is also critical in supporting the insurance business, he said. BlackRock has been steadily expanding its insurance team and added seven new members this year, for a total of 50 dedicated insurance staffers. The firm has added staff in Chicago, Asia and London to focus on enhancing business development strategies for its insurance business.

But it's not just the largest managers that have an eye on growth. Firms such as JPMorgan Asset Management, New York, are expanding their existing asset management platforms to support the growth of their insurance business.

Gary Madich, managing director and CIO of JPMorgan Asset Management's fixed-income team, said the firm recently began adding staff to its insurance practice, an area he and his team first started servicing four years ago at Banc One Investment Advisers Corp.

Once Banc One's merger with JPMorgan was completed in July 2004, Mr. Madich created a specific insurance group, rather that one that was "handled much more generically" within the fixed income group, he said.

JPMorgan has increased the size of its insurance team from three to 10 people since the merger, adding a dedicated sales person and portfolio managers to leverage the firm's existing credit and quantitative analysis, said Mr. Madich. Since the merger, the firm's external insurance assets under management have increased 61% to $8.2 billion, making it the 14th largest manager in P&I's survey.

"There are a number of different issues facing insurance companies — whether its consolidation, Sarbanes-Oxley or they are looking for economies of scale — that are continuing to argue for outsourcing their investment functions," said Mr. Madich.