Paul Forshaw, head of insurance asset management at Schroders, talked to Bermuda Re about trends in the marketplace and Schroders’ ambitions.
How long has Schroders been managing outsourced assets for insurance companies, and what is your experience with reinsurers in particular?
We have been managing insurance assets for clients since 1972 and now have around $36 billion of insurance client assets under management worldwide, for clients in the US, Bermuda, Europe and Asia, so we have a signiﬁcant insurance pedigree.
The sudden and urgent demand for new ideas, and indeed fresh faces, in the wake of the credit crunch and its impact on insurer portfolios gave us a new opportunity to engage with the insurance industry. We established the insurance asset management group in 2007, as a hub of insurance knowledge and expertise within the ﬁrm, recognising the growing interest from insurance companies in a more sophisticated investment and risk dialogue with their asset manager.
We have won more than 25 new insurance clients since then, including many in the reinsurance sector where we have invested a considerable amount of time and energy to understand the regulatory and accounting requirements necessary to inform our investment and service proposition.
"We aim to bridge the gap between clever ideas and regulatory reality. There is no shortage of clever investment ideas out there, but there is a real shortage of ideas that actually work for an insurance company."
I think we have been good at identifying reinsurance client concerns and working with our investment teams to provide solutions. A good example was the disenchantment expressed by many with index plus or minus a few basis point returns by benchmark-hugging managers. We built a US dollar ﬁxed income proposition for reinsurers with the twin objectives of ‘maximising return’ and ‘focusing on capital preservation’ that now has a strong track record. Not every manager can, or indeed wants to, offer this kind of strategy.
You are well known as a UK asset manager. How important are the US and Bermuda to you?
The answer is ‘very important’. Schroders is a global asset manager—in fact two thirds of our revenue comes from outside the UK—and we have a well resourced US investment operation with a long established strength in core US ﬁxed income that is relevant for both the US and Bermuda.
Our US-based team has delivered impressive risk-adjusted returns in our core US ﬁxed income strategies, and this is an important calling-card for us.
We are also increasingly taking calls from US insurers looking to introduce diversifying, non-US ﬁxed income components to their broader bond portfolios. We believe that we are very well positioned in this respect with excellent capability in global bond strategies and in specialist areas such as euro credit and emerging market debt. I expect our role as a supplier of this kind of specialist expertise to grow signiﬁcantly.
Finally, Charles Matterson has relocated from the IAM team in London to New York, so that we can better engage with US and Bermudian clients. We understand that we are smaller than some of the established players, but we are approaching the market with fresh ideas and distinctive capabilities which make us interesting to talk to.
Is there a trend towards increased outsourcing of asset management by insurers? What do you see as the major opportunities for growth?
Insurance companies the world over are struggling to address the new market landscape of low interest rates, heightened volatility, and seismic regulatory change that is emerging from the ﬂames of the ﬁnancial crisis; as a ﬁrm we are very well resourced to meet these challenges. I see a hunger for new ideas, techniques and investment capabilities from all parts of the world and from all types of insurer: ‘local’ portfolios are looking for ‘global’ expertise for diversiﬁcation; ‘core’ portfolios are looking for ‘specialist’ alpha sources; generally, clients are looking for ways of engineering improved risk and return outcomes.
The opportunity for asset managers to supply new investment capabilities to insurers looking to cast the net wider is clearly increasing. A good example would be emerging market corporate bond expertise, which you might want as a diversiﬁer in a broader ﬁxed income portfolio. We have boosted our capability in this area and I expect to see signiﬁcant interest.
We see ourselves as well placed to help insurers access new investment capabilities they do not have in-house. We have a broad range of investment capabilities, strong risk management and we are, crucially, developing an ‘insurance client culture’ within the ﬁrm, through our insurance asset management team.
Over the next three years I would expect to see our community of insurance clients grow, particularly in the US and Bermuda as we supply expertise across a broad range of ‘core’, ‘specialist’ and ‘global’ strategies.
How does your approach to insurance clients differ from that of other asset managers?
We try to focus on a few things that we feel are important. First, we tend not to ‘sell’, at least not in the sense of selling a product. Instead, we consider how we can add value, focusing on providing intellectual capital to help a client analyse and meet its investment objectives. We are committed to relationships: some of our newest clients were engaged in dialogue with us for three or four years before mandating us and we are very comfortable with this approach—we recognise that it takes time to build conﬁdence and trust.
Second, we aim to bridge the gap between clever ideas and regulatory reality. We don’t want to waste anyone’s time. There is no shortage of clever investment ideas out there, but there is a real shortage of ideas that actually work for an insurance company. We think about the relevance of ideas and products from a regulatory and business perspective before we talk about them. A good example is our Absolute Return Emerging Markets Debt strategy: the index may go up a lot, it may go down a lot, but we have a team of people managing emerging market debt who are intensely focused on not losing money in any calendar year. That capital preservation-driven philosophy ﬁts well with insurance company objectives.
Third, we focus intently on the quality of our client service. In the insurance asset management team client service specialists work closely with investment and risk specialists to ensure we support our clients with the technical understanding they require. This, I think, is a huge plus for clients who want a seamless relationship with their asset management partner across multiple areas of input.
Are you discussing any big new ideas with insurers?
Yes, we are. One area of dialogue where I see increasing traction is around diversiﬁcation and correlation. There is much intellectual heat and light being generated discussing why diversiﬁcation has failed as a risk management tool, and what to do about it. We believe a more intelligent approach to constructing and managing assets based on analysing the different risk premiums within each asset class is the future. Schroders’ multi-asset team is a pioneer in this space and this is a fertile area of engagement for us with insurers looking for improved risk: return outcomes.
The views and opinions contained herein are those of Paul Forshaw, Head of Insurance Asset Management and may not necessarily represent views expressed or reﬂected in other Schroders communications, strategies or funds. For professional investors only. Past performance is not a reliable indicator of future results. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Issued in August 2012 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Services Authority. Schroders (Bermuda) Limited is an indirect wholly-owned subsidiary of Schroders plc and is licensed to conduct Investment Management business by the Bermuda Monetary Authority.
Schroders, asset management, investment strategies, reinsurance, insurance