Get this: insurance companies have long been very big institutional investors. They get cash from premiums and have to pay it out in the future. If they are in the property and casualty or health insurance business, there isn’t that long a time between premium payments and when the losses might show up, but other lines of business (notoriously, life insurance) are long-tailed. And many insurers got into the business of offering annuities, so managing investments to meet future obligations is again important.
So what is happening? Increasingly, daunted by product complexity, they are deciding to give up this traditional role and hand it over to money managers. This looks to be yet another example of the never-ending rise of opacity and complexity enabling the bigger financial players to pull more fees not just out of the real economy, but now also other supposedly sophisticated financial firms (yes, I know some readers will take issue with the “sophistication” of some insurers, but the benchmark is professional v. retail). Deutsche Bank, Blackrock, and Goldman are among the big winners.
The argument is that the cause is the complexity of their portfolios….but how did they get to be so complicated in the first place? These firms somehow talked themselves into dabbling in products and strategies that were over their head.
From the Wall Street Journal:
While many insurers looked after their own investments for decades, lately more have looked for some help, after finding themselves caught off guard by the weakness, or complexity, of their own portfolios. Insurers last year outsourced management of more than $1.1 trillion, according to industry estimates, up from about $980 billion in 2008….
Last year, the company chose BlackRock Inc. to look after $23 billion of bond securities of its nearly $160 billion portfolio. Allstate Corp. got out of the stock-picking business by hiring Goldman Sachs Group Inc. to manage a $5 billion equity portfolio out of its overall $100 billion investment pool….
The move isn’t for everyone. Prudential Financial Inc., which has its own $260 billion investment portfolio, considers asset management to be a core business. The insurance company employs a staff of 3,000 to look after its own investments and about $273 billion of assets from other companies, including insurers.
“The insurers in Europe are feeling that they don’t have the expertise to handle U.S. credit markets, so they hand off responsibility of managing a U.S. credit portfolio,” said Bernard Winograd, Prudential’s chief operating officer who oversees the insurer’s investment-management business. “Smaller insurers are doing the same. We’re proud of the fact we manage a lot of parties.”..
Swiss Re’s Mr. Blumer said that farming out the $23 billion in “credit and securitized assets” to BlackRock while retaining control of the overall strategy has helped turn around the firm’s portfolio. Swiss Re reported a profit for the fourth quarter, after being walloped during the financial crisis by about $6 billion of losses from wrong-way bets on credit-default swaps.