North American insurance companies decided to outsource investing in increasing numbers last year, a trend that followed massive insurer investment losses during the financial meltdown of 2007-2008, consultants and managers say.
And the trend shows no sign of abating in 2010, said David Holmes, a consultant with Eager, Davis & Holmes in Louisville, Ky.
“Insurers are continuing to question whether they have the internal expertise and knowledge to navigate the financial markets,' ” said Mr. Holmes, whose firm tracks third-party insurance money management placements.
Data from the firm's Insurance Asset Outsourcing Exchange shows for the first nine months of 2009, the most recent data available, insurers awarded 141 investment mandates to money managers totaling $53.7 billion. That compared with 105 mandates totaling $17.9 billion for all of 2008 and 133 mandates totaling $15 million in all of 2007.
The exchange estimates that for all of 2009, insurers will have awarded 188 accounts totaling $71.6 billion to money managers.
“It's huge,” said Mr. Holmes. “2009 is absolutely a record for the number of managers being hired for new mandates and the associated assets they represent.”
Not only are the numbers way up, but larger insurers — those with more than $5 billion in assets — are joining their smaller counterparts in outsourcing investment management.
“There has been an explosion in larger placements; it's a pretty strong trend,” Mr. Holmes said.
Mr. Holmes, who consults with money managers looking to expand their share of the insurance outsourcing business, said the credit crisis and insurer investment losses have clearly fueled the trend. “There is a realization by insurance companies that they need more expertise than they have in-house,” he said.
Northbrook, Ill.-based Allstate Insurance Co. in October hired Goldman Sachs Asset Management Inc. to manage a $4.6 billion portfolio of public equities. Allstate spokeswoman Maryellen Thielen said in an interview the insurer decided to switch to a passive index approach from an active investment strategy and felt Goldman had expertise in that area.
Swiss Re decided to outsource the management of $23 billion in corporate bonds and non-agency securitized products to BlackRock Inc. last fall because it felt the money manager has the expert knowledge required to manage the portfolio.
“Obviously the market is challenging, the management of complex assets required a specialist,'' said Swiss Re spokeswoman Alayna Francis, based in New York.
Madison, Wis.-based American Family Insurance Co. spokesman Ken Muth confirmed that the company had outsourced part of its asset management in 2009 but would not provide details.
Insurers typically are skittish about revealing outsourcing relationships, Mr. Holmes said; revelations that they aren't managing their own money might not sit well with the public or investors.
But money managers say the relationship makes sense because it allows insurers to focus on underwriting.
“While insurers have always focused on risk management, most of that emphasis has been on the liability portion of their balance sheet, assessing the likelihood of an insurance payout,” said Kristen Dickey, managing director and head of New York-based BlackRock's Financial Institutions Group. “They haven't tended to put the same level of emphasis on risk management on the asset side.“
Ms. Dickey said BlackRock had a record year in inflows from insurers, but she refused to release dollar figures or identify any clients.
Other major money managers also reported that 2009 was their best year for winning insurance business, but would not provide details.
Randy Brown, Deutsche Bank's New York-based global head of insurance asset management, said 2009 was a year of significant growth in insurance outsourcing for his company, the strongest in its history. Deutsche would not provide data about inflows before the quarter end.
Mr. Brown said: “Insurers have traditionally invested in high-grade fixed income, a sector that historically provided stable returns. Last year's market dislocations exposed significant risks that many were not equipped to manage, causing insurers to examine whether they should outsource. “
“The complexities of the market have increased. There is greater need for depth of research,” he said.