Report: Insurance Outsourcing Accelerates

Findings from the Insurance Asset Outsourcing Exchange, which tracks newly outsourced investment mandates by insurance companies and investment managers, show that an increasing number of insurers are outsourcing management to third parties.

(March 24, 2011) — Insurers are accelerating the rate in which they outsource their assets and the uptick is likely to continue, according to a report from the Insurance Asset Outsourcing Exchange.

“Difficult financial markets as well as the slow economy continue to challenge insurance companies’ earnings,” David Holmes, Partner in the Louisville, KY-based consulting firm Eager, Davis & Holmes, said in a statement. “They have become more open to the notion that the outside expertise and resources of an investment manager or consultant can make a difference.”

The report, titled Insurance Asset Outsourcing Analysis, finds a record 290 investment mandates were outsourced to third party investment managers in 2010, up from 256 in 2009 and almost double the 149 reported in 2008. However, fewer large multi-billion dollar mandates were outsourced in 2010.

While outsourcing has been primarily utilized by smaller insurance companies due to lack of resources, the financial crisis has pushed larger companies to increasingly rely on third parties. “It’s quite interesting,” Holmes told aiCIO earlier this year from his office in Kentucky. “The smaller insurance companies have always had a perception—an accurate one—that they don’t have internal resources or expertise to manage general accounts in an effective way. Large companies thought they could do it internally. After 2008, that’s changed.”

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Specifically, the asset classes that experienced increased outsourcing last year, according to the report, include core and core plus fixed income and short duration/cash mandates. “Core fixed-income is the staple of insurance asset investing,” Holmes noted. “Increased outsourcing to specialized mandates reported to our database in 2009 was not fully sustained in 2010. It was at least partly opportunistic.”

Evidence of increased insurance outsourcing can be seen by the decision by Swiss Re to move $23 billion in corporate bond management to New York-based BlackRock in 2009. More recently, the giant European-based reinsurer issued a “longevity trend bond” to transfer $50 million in longevity risk to capital markets and would be triggered if “in the event there is a large divergence in the mortality improvements experienced between male lives aged 75-85 in England & Wales and male lives aged 55-65 in the US.”

In January,another survey of asset managers by the Insurance Asset Outsourcing Exchange noted the top mistakes insurance companies make, providing recommendations on how to avoid them. The most frequently cited suggestion for insurance companies: Provide a better description up front in the request for proposal (RFP), with survey respondents saying that insurance firms could better communicate a clear timeline for the RFP process.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Despite Revisiting Timber Investment, SDCERA Claims No Conflict

SDCERA tells aiCIO that no conflict exists, yet fund CEO Brian White has admitted that a relationship between outsourced CIO Salient Partners and timber investor Molpus Woodlands Group should have been disclosed during the due diligence process.

(March 24, 2011) – Despite public relation’s claims that financial relationships were publicly revealed, the San Diego County Employees’ Retirement System (SDCERA) chief executive officer is claiming that a recent timber investment must be revisited following revelations that potential conflicts of interest were not disclosed.

When asked, on March 21, whether investment officer Loren de Mey “knew of potential conflicts – arising from [outsourced chief investment officer] Salient Partners doing past deals with Molpus [Woodlands Group],” and “if so, was it reported to the Board?,” SDCERA spokesperson Johanna Schick told aiCIO that “at the Board meeting, it was noted that Salient Partners had worked with Molpus for several years and that Salient was not involved in sourcing the investment the Board was considering.”

However, following the revelation of existing ties between Salient and Molpus on March 18, SDCERA CEO Brian White penned an email to fellow board members, claiming that legal council “Steve [Rice] believes that investment counsel and others should have brought this issue up during the due diligence process so that it could have been addressed proactively with the board.” According to SignonSanDiego.com, White did not disclose the partnership between Salient and Molpus in written materials provided to the board or during discussions preceding the vote.

The controversy revolves around potential conflicts between the outsourced CIO, advising the pension fund on what investments it should allocate capital toward, and the financial interests of that outsourced CIO. In this case, Salient has, in the past, had a financial interest in Molpus funds – and SDCERA, advised by Salient, now plans to invest $50 million with Molpus. And, while the public face of SDCERA claims that “Salient’s investments with Molpus are completely unrelated to those SDCERA has made and their investments were closed a number of years ago, before (Salient CIO and SDCERA outsourced CIO Lee Partridge) joined Salient,” fund CEO White has publicly admitted that legal council “Steve [Rice] believes that investment counsel and others should have brought this issue up during the due diligence process so that it could have been addressed proactively with the board.”

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The Salient investments in Molpus are years old, SDCERA’s Schick asserts via email. “Salient has no direct or indirect financial interest in Molpus Woodlands Fund III,” – the fund that SDCERA plans to invest in – “nor will they financially benefit from SDCERA’s investment in Fund III. SDCERA has obtained Molpus’s written confirmation of the fact that Salient has and will have no direct or indirect financial interest in Woodlands III, will receive no remuneration, and will have no co-investment rights.” Yet, SDCERA will revisit the allocation, as per CEO White’s statements.

This is not the first potential controversy to encompass the San Diego fund. Most recently, internal emails suggest that there exists confusion surrounding the roles of the external portfolio strategist – Partridge and SDCERA – and acting internal CIO Lisa Needle. “If I’m not, or the CIO isn’t, managing the investments on a daily basis, then who is?,” wrote SDCERA’s acting CIO Lisa Needle in an email to CEO White. “Must be the Portfolio Strategist, since it cannot be anyone else on staff.” Publicly, however, both Partridge and SDCERA deny that confusion existed.

Previously, former CIO David Deutsch resigned in March 2009 after the fund lost more than $2 billion during the economic downturn. Since then, the plan hired Needle as an interim CIO and Lee Partridge, who was previously employed by the Teacher Retirement System of Texas, as external CIO meant to supplement the fund’s investing expertise. The board hired Partridge as an outside contractor with a contract worth up to $4.5 million and stipulations that he would be unable to direct staff, a structure that circumvented civil service salary limitations.

To contact the aiCIO editor of this story: Kip McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>