Big Insurers Are Outsourcing Investments

While pensions, endowments, hedge funds and traditional asset managers adjust to a new landscape that features smaller portfolios, more-volatile markets and tighter regulations, insurance companies have been quietly remaking their investment practices. Increasingly, the global insurance industry wants external help to manage its $22.6 trillion in assets. Once favored only by the smallest insurers, investment management outsourcing now appeals to firms of all stripes.

“We took the decision in 2009,” says David Blumer, who runs a partly outsourced $156.5 billion portfolio as head of the asset management division at Swiss Reinsurance Co. in Zurich. In the wake of the crisis, Blumer recalls, “we asked ourselves, How do we want to manage our assets going forward?”

What began as a trickle after the tech wreck has become a flood following the deeper downturn of 2008 and 2009. “Third-party insurance assets just exploded as a result of the credit crisis,” confirms David Holmes, whose Louisville, Kentucky–based consulting firm Eager, Davis & Holmes spearheaded a 2010 insurance asset management survey of 14 leading investment firms. Among its findings: 62 percent of managers got more requests for proposals from insurers in 2010 than in 2009.

“The financial crisis created a crisis of confidence, and more and more executives of insurance companies are recognizing they have to focus on risk management,” says Kristen Dickey, head of the financial institutions group within BlackRock’s global client group. At New York–based BlackRock, the largest third-party insurance asset manager, Dickey oversees $200 billion for Swiss Re and other insurers. She reports a 23 percent compound annual growth rate in these assets since 2001, and 29 percent growth since 2008.

Insurance assets run by the biggest asset managers rose 19.5 percent annually from 2001 to 2009, according to Swiss Re. As of 2009, roughly $1.032 trillion was outsourced, up from $798 billion in 2008, estimates Eager, Davis & Holmes. With just 5 percent of that $22.6 trillion outsourced to date, there’s plenty more to come, and managers are jockeying for it now that other business has slowed.

“We believe it will grow to $3 trillion in the next five years,” says Eric Kirsch, global head of insurance asset management at Goldman Sachs Asset Management in New York. Kirsch was hired away from Deutsche Asset Management’s insurance division in 2007 when Goldman decided to build a 50-person team to manage its insurance assets. With $70 billion, Goldman ranks seventh among external insurance asset managers, according to Patpatia & Associates, a Berkeley, California–based financial services consulting firm.

Postcrisis, managing insurance assets takes more expertise and resources. Low interest rates make it tough for insurers, which have traditionally invested 90 percent of their assets in fixed income, to meet their asset-liability requirements. After the credit crunch, Swiss Re’s Blumer led a portfolio de-risking that raised cash levels from 11 percent in 2008 to 19 percent today. Short-term investments also got a boost, to between 12 percent from 4 percent. For help adding returns and for advice on its other investments, Swiss Re gave BlackRock a $23 billion mandate to manage its corporate bonds and nonagency securitized products.

Managing insurance assets is different from managing, say, pension funds. “You have to have a deep understanding of liability streams, accounting and tax issues and the regulatory environment,” BlackRock’s Dickey notes. Also, most insurers’ investment offices are not equipped to deal in hedge funds and other alternative investments. “There are just certain asset classes they cannot build in-house,” says Sunny Patpatia, who helps insurance companies with outsourcing.

Insurers are also bracing for new regulations, such as Europe’s Solvency II. Credit rating firms and insurance supervisors will expect higher capital requirements. Changes to accounting standards may cause more volatility in financial statements, and derivatives face closer scrutiny. None of this is likely to stop the coming wave of insurance assets looking for outside management.

—Additional reporting by Franziska Scheven