Asset managers began specializing in managing insurance company balance sheet assets about 40 years ago. Initially, these managers focused on managing the core asset class of insurers – investment grade fixed income or what I call Insurance Fixed Income or IFI. IFI specialization required the portfolio manager to focus on many objectives beyond total return like book yield, gain/loss management, ALM, and surplus management. These insurance focused managers also provided what has become known as “Solutions” services. The first examples included state regulation reviews and municipal bond allocation tax optimization.
When I started in the insurance asset management business in the 1990s there were less than ten managers truly focused on this space and my company’s average client size was about $100mn. The typical insurer that outsourced was a mutual P&C company. Things have since evolved dramatically. There are many more managers – the most recent Insurance AUM survey lists 46 participants. Many managers are full-service, but some focus solely on specialty asset classes. The types and the size of insurers that outsource has also grown and it’s now common to see insurers who have billions, even tens of billions of assets outsourced. Finally, the additional services have grown in both depth and breadth with well-staffed Solutions teams and robust modeling tools.
This article is meant to be useful to both insurers who are considering outsourcing and Asset Managers (AMs) who are interested in becoming Insurance Asset Managers (IAMs). While there are a number of specialty product managers working with insurers, the focus of this article is on full-service IAMs who offer the following: Solutions, Investments including IFI, Accounting & Reporting, Relationship Management, and New Business Development. Some IAMs have distinct groups for each, others combine duties. For example, it is common to combine relationship management with new business development, while some combine Accounting and Reporting with Solutions. Others even have IFI portfolio managers that also manage the relationship. No matter how things are organized, the 5 areas are the ingredients to the IAM recipe.
IAM starts with the Solutions function as the services provided here are the foundation of managing insurance assets. In short, Solutions partners with the insurer to design a customized strategic investment program. While it sounds relatively straightforward it’s not – there are many considerations. A misconception that insurers and prospective IAMs may have is that this is an actuarial service, well they are not wrong as that is part of it, but there is much more. Below I list the categories of services and analyses that a well-developed IAM Solutions team can provide. How they execute and weave these together to develop a strategic investment program is an art and could be the topic of not only an article, but even a book.
• Regulatory, accounting and tax interpretation related to insurance investment – both existing and emerging. Examples include state investment codes, statutory accounting and scheduling, GAAP accounting, and federal tax optimization.
• Asset-Liability management that considers cash flow needs, the volatility of both sides of the balance sheet, and duplication of risks.
• Capital management including ratios utilized by rating agencies, regulators, internal models, and the investment strategy’s impact on them. This is analyzed from both measurement and risk standpoints – measuring the capital cost of the investment strategy and modeling of the risk to surplus. Additionally, insurers may use these analyses to inform their ERM process.
• Enterprise-level matters such as underwriting volatility and business projections including growth, decline/run-off, and line of business mix changes.
• Competitor and external stakeholder considerations – rating agency, investment income projections, and peer and industry trend analyses. Well-developed peer and trend studies look at not only investment allocations, but measures such risk-assets relative to surplus, capital strength measures including tradeoffs of underwriting and investment risk, premium growth, investment yields and more. Some even delve into security level holdings and transactions.
• Asset allocation – constrained strategic asset allocation that considers all of the above in establishing objectives and constraints utilizing financial optimization models. This includes both IFI and all risk-assets (defined as essentially everything but IFI including equities and alternatives).
• Customized investment guidelines and investment benchmarks that document the strategy and provide the oversight tools for the strategic investment program.
One important matter that is not listed is insurer preferences. Models inform the process, but insurer preferences guide the final approach. Solutions partners with clients to ensure that their preferences are part of the process and the result.
When an insurer hires an IAM they typically start with attributes that drive the selection of a manager for any client type – total return performance, team tenure and stability, and firm reputation. They then look at managers that can deliver an investment strategy in an insurer context. IAM portfolio managers understand insurer needs and partner with Solutions to inform their approach to managing their client’s assets.
Insurance portfolio managers are adept at managing a constrained portfolio with objectives beyond total return. An IFI manager is almost always asked to deliver both total return and book yield in this constrained context. Sometimes those objectives conflict and it is important that both the manager and the company agree where on the spectrum they are. These dual objectives along with the constraints imposed impact the way IAMs are organized (typically IFI managers are insurance dedicated), and how the IAM evaluates and rewards their IFI portfolio managers.
With the extended low rate environment, insurer interest and allocation to specialty asset classes has grown; and many IAMs offer asset classes beyond IFI. Public markets asset class extension can include high yield, CLOs, EMD, and various types of equities. Private asset classes may include various types of private fixed income, private equity, real estate debt and equity, and hedge funds to name a few. The Solutions team can advise the insurer from a strategic standpoint and then the IAM Investment resources implement and oversee. Oversight can include multi-asset portfolio management advice when allocations are fungible (which is usually not the case in private markets). Where the specialty asset classes are mandates, there is often customization and constraints. When in a fund format, customization is not possible – however, some IAMs create unique fund structures specifically for insurers that consider one or more of the following: regulation, yield, favorable scheduling and accounting, and risk-based capital efficiency.
In addition to the foregoing, the IAM’s portfolio management system must accommodate insurer specific needs. Book yields, book values, and the related gain/loss measures are a must, and ideally, capital charges are incorporated. Some systems even have the ability to include liability information for ALM purposes.
Accounting and Reporting
IAM’s manage insurance company balance sheet money. Accordingly, the accounting for those assets and the delivery of reports to management and other stakeholder reporting is extremely important – this is not what is typically viewed as a back-office function. I’ve often seen Accounting and Reporting become an integral part of IAM relationships with frequent and regular communication. An IAM can’t be an IAM without these services.
Insurer investment reporting starts with the standard information in portfolio review books including total return, sector allocations, and transactions and holdings. Beyond that is where unique insurer needs come into play and includes reports specifically designed for insurers that are often customized based on requests from a specific insurer. One common need is to break-down and summarize portfolios in multiple ways – examples are legal entities, insurer defined profit centers, and liability buckets. Additionally, a full-service manager may be asked to consolidate information from other managers with the portfolios they manage. All of this requires IAM’s to have robust tools that allow customization in both reports and web-portals – that are delivered by insurance knowledgeable reporting professionals.
Investment accounting is an option that many IAMs offer. Today, this service is not the IAM requirement it once was as many insurers outsource directly to an insurance investment accounting provider (and some do it internally). With either approach, the focus for U.S domiciled insurers is on statutory accounting with specialized “Schedule D” and related schedules being populated by 3rd party insurance-specific software. IAM’s offer transaction and related feeds from their portfolio management systems into these accounting systems. Insurers who utilize the IAM to deliver the accounting service can often take advantage of their manager’s scale and purchasing power resulting in fees that are lower than what an insurer could obtain going direct to an investment accounting provider.
The Relationship Management (RM) function is much more important to insurers than other types of investors. Again, these are balance sheet assets and a core part of the insurer’s business – insurers absolutely do not take a “set it and forget it” approach. RMs facilitate collaboration with the broader IAM team to keep the insurer informed and ensure the needed services are delivered. They are the “MC” of the relationship bringing the full organization to the insurer. IAM RMs ideally have the following characteristics: insurance only clients and insurance knowledge, modest client loads, a solid understanding of their organization with internal relationships they can leverage for the benefit of the insurer, and the ability to leverage a variety of client experiences to the benefit of individual insurers.
In some AM models, the RMs are the required point of contact for the client and act as a gatekeeper of firm resources. Most IAM’s don’t operate in that way as many insurers want to interact directly with the Investors, Solutions or other resources. A well-run RM organization adjusts to each client relationship and facilitates access in a way that works for both parties.
RMs also often act as the de facto IFI product specialist. They spend considerable time with portfolio managers as part of servicing several clients and keep up on the fixed income market, the economy, and how the portfolio management team is positioning the portfolio. This is not done to restrict access to the Investors, but instead to complement those resources.
Finally, good RMs adapt and grow with clients. As an example, I’ve seen RM’s work closely with insurers as they look to expand the asset classes in their portfolio. The RM leverages similar themes with other clients as well as internal resources to aid the client in exploring new asset classes including Solutions and asset class experts.
New Business Development
IAMs are only IAMs because of their insurance clients – and of course, new clients seldom knock on the door and sign-up! Perhaps I should have listed this function first, but I didn’t because the sales function needs the resources of the other functions to be successful. Selling IAM is probably the best example of a consultative sale in the AM space and requires collaboration across the IAM platform. Solutions can be tapped to utilize their insurance financial databases to identify insurers that match up with their firm’s capabilities. Solutions and Portfolio Management can review the company and its portfolio and make preliminary recommendations on strategy and portfolio positioning. A New Business Development professional must be insurance knowledgeable and dedicated to make this collaborative approach effective. Given this, IAMs recognize that they can’t simply hire generalist institutional salespeople. They further understand that even an insurance literate salesperson can’t succeed without the collaboration of supporting insurance specialty resources. Insurers expect that IAM salespeople are insurance knowledgeable and bring ideas that work for them as an insurer and their specific company.
Another aspect of business development for IAMs is that winning new insurance clients is often a long process – sometimes years. Unlike general institutional business where clients or their consultants filter databases based on performance and related factors, insurers need the many added-value services an IAM brings. They are entrusting the IAM with half of their balance sheet and that trust must be earned. Insurers can expect consultative and long-term attention and even “free consulting” and client like treatment from IAM sales professionals. Successful IAMs are rewarded with deep relationships that last for long periods – in fact, it is not uncommon to see relationships that span not years but decades.
Now that we have gone through the attributes of a full-service IAM, I will highlight an important overall characteristic of most successful IAMs – scale. Unlike an insurer managing their own assets, an IAM manages the assets of multiple insurers and can use that scale to their client’s benefit. Scale allows access to talent, depth of Investors and supporting teams like credit research and trading, Solutions expertise, technology, and insights from serving many insurers and many insurer types. Recognized IAMs bring credibility to stakeholders like the all-important rating agencies. As technology continues to advance in society and in business, scale allows IAMs to develop and invest in their systems.
One final consideration for an insurer that is considering adopting an outsourced model is organizational set-up. It is often said that “you can delegate a duty, but you can’t delegate the responsibility” and that applies here. The insurer must have asset management knowledgeable resources. For smaller insurers, this may be the CFO who wears multiple hats. For many of the medium to large insurers, it is an internal CIO who manages and oversees outside manager(s). Insurers may also choose to enlist the services of an investment consultant that specializes in IAM to partner with internal resources.
I trust this article provided insight into the many facets of insurance asset management. Insurers are a unique investor type that aspiring IAMs need to recognize and specialize in to be successful in the IAM space. The “product” insurers buy is not just portfolio management of an asset class – it goes well beyond that. Insurers can take advantage of a broad IAM field with a level of sophistication that has grown and developed significantly from where it started.