Over the recent past, DeAM has been making changes to the way it runs its insurance asset management business, trying to implement globally the successful insurance-specific business model that Scudder had in the US.
“What we are doing is very much focused on helping insurance companies and partnering with them in the asset management area and trying to create a lot of sustainable value for them,” says Robert Goodman, global head of insurance relationships at DeAM. “We are doing that by globalising what had traditionally been a North American business which came to us through the acquisition of Scudder,” he says.
Mr Goodman joined the company at the beginning of 2006 to lead the group’s insurance asset management new business development and client services teams around the world.
He adds: “What we have done this year is to put in place in Europe as well as in Asia regional heads of the business, and also more junior people focusing exclusively on business development and client services. As a result we have started covering insurance companies that we didn’t cover previously and working with new clients in those parts of the world.” Changes have also taken place in North America with the appointment of a new regional head and additional staff.
The company has also been active in organising conferences on insurance asset management for senior executives in the industry across the world. “This is part of our belief that if you educate clients to the opportunity, they will make better partners,” he said. “We are really expanding what I call the educative part and trying to build on the leadership position that Scudder had.”
In Europe, for instance, prior to the Scudder acquisition, DeAM had one major client, Zurich Financial Services, with whom it enjoyed a global relationship. “Following the acquisition I would say that our client base in Europe has probably grown by at least 15 companies and what is most significant is that the clients range from those with whom we are doing full outsourcing arrangements to those to whom we offer individual products for specific asset classes,” he comments. He points out the growth is not only happening in the German-speaking region – the traditional home market of Deutsche Bank – but also in other parts of Europe.
In Asia ex-Australia, the existing client base was stagnant but is starting to grow; DeAM now has a significant client base including companies in Korea, Singapore and Japan and also expanded in Australia. “And it is not only multinationals but also regional and domestic companies that we have started working with,” Mr Goodman says.
The growth in numbers of clients has gone hand in hand with the increase in assets under management. In 2002 DeAM’s insurance assets represented around $100bn (€75.5bn) and today it manages about $150bn of non-affiliated assets.
These figures show the importance of the insurance asset management business for the group as a whole. Insurance assets roughly represent 20 per cent of DeAM’s total assets under management, and more than 50 per cent of the firm’s institutional business.
Mr Goodman believes that in order to be successful in this business it is crucial to understand the very specific requirements of insurers that traditionally have not fully focused on alternative value creation opportunities. “Most insurance companies when they think of value creation tend to focus on the underwriting themes and back office operations areas. They tend not to view themselves, particularly on the non-life insurance side, as being in the asset management business. They view themselves more as being in the risk transfer business.” He explains that insurers tend to be highly constrained investors compared to other institutional investors. “For instance endowments in theory could go 100 per cent into hedge funds, and some are pretty close to that because they don’t have any particular liabilities that they need to match their investments to. They don’t have regulations that create particular costs associated with one type of investment or another and they don’t have accounting rules that prevent them from going into certain asset classes. Insurance companies have all those constraints,” he says.
He explains that when insurance companies invest, the need to match their liabilities can often constrain them from going, for example, into extremely long duration assets if they are going to need liquidity within a short period of time. “On the regulatory capital side, they are subjected to rules that mean they create a greater capital cost for going into investments that the regulators consider to be riskier than others. So, for example, for every dollar of capital that you have in your company you get virtually full credit if you invest in high grade bonds but if you want to go into equities you only get 75 cents in the dollar credit. That means that if you invest in equities you need to obtain a much higher return because the capital cost of going into that asset class is higher than it is for going into bonds.” The accounting rules mean considering vehicles such as hedge funds is more difficult.
Mr Goodman says that asset managers operating in this sector need to be very knowledgeable about the implications of any type of investments for an insurance company. “We train people on an ongoing basis so they really do know what the implications are before they present any idea to an insurer.”
Depending on the client, Mr Goodman identifies four major approaches to investment currently followed by insurers. The first one – the most extreme and conservative approach – is followed by insurance companies that do not want to do anything other than immunise their liabilities. “In other words they want to make sure that money is available when needed to pay clients and they don’t try to create any more value on the asset side,” he explains. This type of client tends to be overwhelmingly invested in high grade fixed income instruments and has a very high exposure to interest rate risk.
A second approach, which Mr Goodman calls “modified immunisation”, is followed by investors who are more open to trying to create some extra value in their portfolios. This type of insurer is prepared to invest in bonds to match liabilities but also to have some additional money which can be invested in other asset classes. “We are seeing more and more insurance companies moving from the first strategy to this second one and they are prepared to look at other asset classes which are real estate and infrastructure funds, private equity, hedge funds. The easiest transition for an insurance transition to make is from fixed income to specialist fixed income such as asset-back securities or collateralised debt obligations.”
A third approach to investment is when insurers look beyond the modified immunisation approach and want to match assets and liabilities not only considering the expected duration, but also taking into account the risk profile of their assets and liabilities. “This is called the enterprise approach. It involves looking at the risk of the entire balance sheet and usually getting into many more asset classes. And again we are seeing more insurance companies moving beyond the pure or modified immunisation approaches into this enterprise risk management approach, really looking to create a lot of value on the investment side.”
Pure value
The fourth a final approach would be the one followed by insurers that look for pure value maximisation for the investment portfolio, where their whole underwriting strategy is geared towards addressing their investment goals. This approach is not very common but it is followed by some Bermudian insurance companies, for instance, which operate under a less constrained regulatory environment.
“What we are seeing is a move by a lot of insurance companies to become more tolerant in their approach to different asset classes, trying to create value not only on the yield side but also through their interest in cost reduction through outsourcing the management of their assets,” Mr Goodman adds.
He says that this trend towards outsourcing has been driven by the increasing acceptance among insurers that asset management is not their core business. “Or in the case of life insurance companies, that in many cases do view asset management as their core business, they still think they can benefit from taking advantage of the global resources of somebody like us to help them get better returns.”
Because of the business expansion and the increasing trend among insurance companies towards outsourcing their asset management capabilities to third parties, Mr Goodman is confident of positive growth rates in the near future. “We are looking at an expected growth rate, in terms of assets under management in this business, of at least 15 per cent annually. But it might be higher because the general outsourcing trend among insurance companies is growing at a global rate of around 10 per cent annually.”
