Insurance has never looked so sexy to money managers.
As the pool of defined benefit pension assets declines, more investment management firms are growing their business by managing assets outsourced by insurers. Indeed, general account insurance assets managed by the 50 largest firms in the business increased 28% — 18.1% on a market-adjusted basis — in less than two years.
For a list of the largest managers of insurance assets, plus profiles of the 30 largest managers, click here.
As of March 31, the 50 largest managers of general account insurance assets (excluding any corporate affiliates) ran a total of $801 billion, according to a survey conducted by Pensions & Investments. And that figure could easily grow to $2 trillion over the next several years, insurance experts predict.
The 50 largest managers of outsourced insurance money ran $626 billion at the end of June 2005, the last time P&I conducted a survey of insurance asset managers.
Insurance companies have relied on external money managers to run chunks of their general account assets for years, typically in plain-vanilla bond strategies.
But the needs of both investment managers and insurance companies now are converging: money managers want and need to gather assets to grow their businesses; insurance companies want and need more sophisticated and better-performing investment strategies, and so are moving away from in-house asset management.
“It’s a new period of insurance asset management … a new phase of accelerated outsourcing,” said Jack Corroon, managing director and head of global client business development at Conning Asset Management, Hartford, Conn., which runs $66 billion in non-affiliated insurance assets.
“There’s no question about the growth opportunities,” said David Holmes, partner at strategic consulting firm Eager, Davis and Holmes LLC, Louisville, Ky.
But Mr. Holmes predicts that much of the soon-to-be-outsourced assets will likely go to the managers that have already established themselves as players in the insurance space.
“It’s not enough to just have investment products, you have to understand the insurance business,” said Sunny Patpatia, founder of financial services consulting firm Patpatia & Associates Inc., Berkeley, Calif. “And you also have to have scale too.”
Large players
So far, the market for externally managed industry assets has been dominated by a handful of large players. The 10 largest managers of insurance assets run a combined $626 billion in non-affiliated general account assets — roughly 80% of the total outsourced assets managed by the 50 largest players.
Several have won megamandates from insurers during the past 18 months, further increasing the top 10’s hold.
Most notably, BlackRock Inc., New York, grabbed a $10.6 billion assignment in May from Safeco Corp., Seattle, in one of the largest single outsourcing assignments to date in the industry. Safeco also hired BlackRock to handle its investment management account services.
This assignment will further boost New York-based BlackRock’s insurance assets under management from the $113 billion it reported at the end of March, continuing a significant growth spurt for the firm. Since June 2005, BlackRock has increased its insurance assets by roughly 50%.
“The vast majority of our relationships have started out with small assignments that have gradually grown as insurers have looked for broader services and investment strategies,” said Michael Huebsch, managing director and head of BlackRock’s financial institutions group.
BlackRock offers not only specialty and alternative fixed-income strategies, but also asset allocation, accounting, technology and risk-modeling services. “Insurance clients are looking to reduce the number of vendors they use, not increase them,” Mr. Huebsch noted.
In another big hiring earlier this year, Deutsche Asset Management, New York, was hired by Converium, a Zug, Switzerland-based reinsurer, to manage roughly $4 billion in assets previously run in-house. In addition to providing Converium with asset management, DeAM is advising the reinsurer on another $1 billion in assets the company continues to run in-house.
This assignment illustrates the importance of being able to package asset management with other services, but also points to the significant potential to tap into global insurance companies, said Robert Goodman, managing director and co-head of DeAM’s insurance asset management business.
DeAM executives see so much potential with insurance companies worldwide that they estimate the firm — already the largest insurance asset manager with $150 billion in assets — could eventually grow the business to as large as $1 trillion in insurance assets under management.
More competition
Globally, estimates of the size of the insurance industry’s manageable assets range from $12 trillion to $15 trillion. With only a fraction outsourced to date, and the growth in the size of mandates, many expect the competition among asset managers to significantly increase in the near future.
“There are a lot of assets to be had and there are also more options for insurance companies as a result,” said James Hirschmann III, chief executive officer of Western Asset Management Co., Pasadena, Calif., which manages $38.8 billion in non-affiliated general account assets. “Theoretically, it’s great for insurance companies because (the competition) should increase the quality of the research and the service they are getting from money managers.”
Among the largest insurance asset managers, Western Asset, Wellington Management Co., General Re-New England Asset Management, State Street Global Advisors, General Electric Asset Management, Goldman Sachs Asset Management and AAM Insurance Investment Management each significantly increased insurance assets since June 2005.
“Not only are these insurance assignments larger than traditional pension assignments, but they’re also much stickier,” said Mr. Patpatia, who estimated an investment manager’s relationship with an insurance client can last two to three times as long as a relationship with a defined benefit plan. “For investment managers, you have to go where the growth is, and right now it’s with insurance companies.”
