Companies move outside the box

Asia-based insurance companies are reviewing their asset management ambitions amid a hunt for yield that's found them outsourcing an ever-growing chunk of their assets to external money managers.

With that hunt pushing insurers beyond their traditional comfort zones in fixed income into higher fee alternative strategies, a number are asking, “Should we get into the asset management game ourselves ... and make this a profit center?” said Daniel Celeghin, Hong Kong-based partner with money manager consultant Casey Quirk & Associates LLC.

Turning a cost center into a profit center is a perennial issue as insurance industries in different parts of the world have developed, but it's “most pronounced in Asia” today, said Robert Goodman, managing director and global head of insurance relationships with Goldman Sachs Asset Management in New York.

Conversations about whether it makes sense to pursue a broader commitment to asset management remain at a “very early stage” in markets experiencing dramatic regulatory reforms, such as China, but are more advanced in countries such as South Korea, Taiwan and Japan, said Mr. Celeghin.

A recent reshuffling of Korea's Samsung Group — which made Samsung Asset Management a wholly owned subsidiary of Samsung Life Insurance Co. — could ultimately provide one model for insurers in the region looking for a way forward — even as the Korean giant continues to work on the details.

In May, Samsung Life executives announced their company would lift its stake in Samsung Asset Management to 100% from 5.5% by purchasing stakes held by other group companies — a move, they said, would help “create synergies,” boost the competitiveness of “our global asset management business” and make that business “an important driving source for future growth.”

A task force of executives from Samsung Life and Samsung Asset Management is formulating a long-term strategic plan now for the money management business, a Samsung Life spokeswoman said.

One investment consultant, who declined to be named, said Samsung Life will benchmark the success of that effort against the money management undertakings by offshore insurers such as Allianz SE and Aviva PLC.

At the end of 2013, Samsung Asset Management had US$122 billion in assets under management, with 63.1% coming from other Samsung group companies, 19.9% from institutional investors and 17% from retail investors, according to the company's ADV filing with the U.S. Securities and Exchange Commission.

Asked if Samsung Asset Management executives would focus strategically on organic growth or acquisitions, the spokeswoman said the initial focus will be on nurturing Samsung Life's existing strategic alliances with global investment firms, such as New York Life Investments. She didn't rule out acquisitions over the longer term.

Mr. Celeghin said Samsung's moves will be followed closely by other insurers in the region.

Meanwhile, the 50-50 joint venture set up in 2011 by Taipei-based Cathay Financial Holdings and Hartford, Conn.-based Conning Asset Management, a specialist manager of insurance assets with more than US$91 billion in assets under management, is another potential model garnering interest now as a means of expeditiously acquiring global reach, he said.

In an Aug. 11 interview, Mark Konyn, CEO of Hong Kong-based Cathay Conning Asset Management, said progress since the joint venture's launch two years ago has been good, with the firm garnering more than US$1 billion for its Asia equities strategy while servicing another $8 billion for Asia-based clients managed by U.S.-based Conning. Meanwhile, a multi-income strategy launched earlier this year has raised about $140 million.

An April survey from Goldman Sachs Asset Management of more than 230 chief investment officers and chief financial officers from insurance companies around the globe showed a net 33% of Asia-Pacific respondents looking to outsource more of their portfolios over the next 12 months. That compares to 17% for Americas-based insurers and 7% for those in Europe, the Middle East and Africa.

Meanwhile, data supplied by managers of outsourced insurance assets to the Insurance Asset Outsourcing Exchange, overseen by Louisville, Ky.-based money manager consultant Eager, Davis & Holmes LLC, showed Asia-Pacific-based insurance companies accounted for 10% of global search activity in 2013, up from less than 3% in 2009.

Asia is the fastest growing region for BlackRock Inc.'s insurance outsourcing business, noted David Lomas, a New York-based managing director with BlackRock and head of the firm's global financial institutions group.

Longer-term factors such as regulatory reforms allowing Asia-based insurers to invest more offshore are helping to boost outsourcing. But rock-bottom developed market sovereign bond yields — too low to match insurers' obligations — have been the dominant factor.

And even when bond yields rebound, the experience in recent years in achieving higher returns without a material increase in risk should have a lasting effect on how insurers manage their portfolios, said GSAM's Mr. Goodman.

While stressing his view is a personal one, Mr. Goodman said he doesn't believe that, “if and when we get to a high-interest-rate environment, insurers will focus on investment-grade fixed income to the exclusion of newer strategies they've become familiar with.”

BlackRock's analysis suggests it will take 18 months or so after government bond yields eventually recover for those gains to feed through to insurers' income statements, potentially extending insurers' current hunt for yield another three to four years, Mr. Lomas said.

Even then, insurers aren't likely to go back to allocating only 10% to 20% of their portfolios outside the investment grade fixed-income sector, he said.

In an investment universe where diversification remains “the only free lunch,” the easing of once-severe constraints on investing offshore in markets such as China is paving the way for continued growth in outsourcing, said Patrice Conxicoeur, managing director and global head of insurance coverage with HSBC Global Asset Management in Hong Kong.

A Hong Kong-based investment banker, who declined to be named, said a mere two years after insurers in China won approval to invest up to 15% of their portfolios offshore, many are already showing interest in small-scale money management M&A deals.

For now, however, there are no signs of appetite for a transformational deal along the lines of the March 2008 agreement by Shenzhen-based Ping An Insurance (Group) Company of China Ltd. to purchase a 50% stake in Fortis Investments that unraveled five months later as the global financial crisis unfolded, he said.

Signs that insurers in China are gearing up to allocate substantial sums to money managers offshore suggest a greater focus now on “stop-gap diversification to shore up near-term asset-liability mismatches” than on offshore M&A, said Chantal Grinderslev, a Shanghai-based analyst with Z-Ben Advisors, a strategic consultant to financial firms doing business in China.

Even if most insurers in China continue to face a steep learning curve when it comes to investing overseas, “they definitely have ambitions,” noted Manuelita Contreras, a senior analyst based in Singapore with Cerulli Associates. Their emergence on the global M&A scene is “only a matter of time,” she said.