Survey: US-Managed Insurance Assets on the Upswing

(February 23, 2012) — Outsourced insurance assets managed by investment firms based in the United States continued their post-financial crisis uptick for the third consecutive year in 2011.

A growing trend within the outsourced insurance assets space, according to a survey conducted by Insurance Asset Manager LLC (IAM): Increasing interest among insurers to diversify into alternative asset classes to counter the Federal Reserve’s low rates policy.

“Traditionally, insurance companies have invested in fixed-income, but since the financial crisis they are looking further afield both within the fixed-income space and outside the area,” Alex McCallum, IAM’s editor, told aiCIO. “Insurance companies, traditionally a pretty conservative group, are trying to meet the challenges of low interest rates by seeking investment in alternatives, such as private equity, infrastructure debt, and hedge funds, to meet the challenge of low interest rates.”

McCallum added that the growth trend of outsourcing insurance assets was ongoing before the financial crisis, but became accelerated after 2008. “The fact that many insurance companies don’t have alternatives expertise in-house added to the interest in outsourcing — that’s one way to diversify portfolios with some degree of confidence,” he said. 

The survey showed that insurer assets under management (AUM) increased to $1.78 trillion in the first half of 2011, 5% higher than $1.69 trillion at the end of 2010 and 14% more than the mid-year 2010 figure of $1.56 trillion. 

The study found that the strongest first half of insurer general account performance was recorded by Deutsche Insurance Asset Management which reported an $11 billion increase in insurer assets to $214 billion and overtook its premier rival in the general account rankings, BlackRock, which added $5 billion to $210 billion. 

In response to the increase in outsourced insurance assets, some consulting firms — including Towers Watson — have made efforts to increase offerings in this area. In October, for instance, Towers Watson acquired WellsCanning. “The WellsCanning team adds to Towers Watson’s insurance industry and investment resources that span both sides of the business ⎯ asset and liability ⎯ and strengthens our ability to provide investment advice to our clients at a time of unusual market volatility and regulatory change,” Christopher DeMeo, Head of Towers Watson’s Investment business in the Americas, said in an October statement following the acquisition. “We are extremely pleased to welcome the WellsCanning team to Towers Watson.”

Further evidence showcasing the spike in activity in the insurance business comes from a March 2011 report from the Insurance Asset Outsourcing Exchange, which tracks newly outsourced investment mandates by insurance companies and investment managers. The report revealed that an increasing number of insurers are outsourcing management to third parties. 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, the report showed. “It’s quite interesting,” David Holmes of consulting firm Eager, Davis & Holmes told aiCIO last 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.”