IFI recently spoke with Eric Kirsch, Head of the Global Insurance Asset Management Group, approximately one year after the onset of the credit crisis.
Mr. Kirsch, formerly head of insurance asset management at Deutsche Asset Management, joined Goldman Sachs Asset Management (GSAM) in the summer of 2007. GSAM is responsible for over $65 billion in total insurance assets under management as of March 31, 2008. Mr. Kirsch discussed how insurers’ reactions to subprime credit exposures have changed their approaches to asset management and how GSAM’s newly-formed Insurance Strategy Team aims to more fully serve insurers’ needs in the wake of the credit crunch.
IFI: How have the subprime crisis and the credit crunch affected insurers’ approaches to asset management?
Kirsch: Because of the nature of their liabilities, insurers primarily invest in spread products, whether corporates, mortgages, or structured paper. As a result, they have been profoundly affected by the recent market events and are now revisiting their approaches to asset management. Many insurers that manage their assets in-house but aren’t in the asset management business, have been particularly affected by this crisis, and this is forcing their senior management to review their asset management functions. While the level of exposure to the subprime market varies from one insurer to the next, they are all employing sound business practices now by evaluating whether they had the right processes in place and the right expertise on hand given the exposures that they had and what’s happened as a result of the credit crunch. Many of those companies are looking at outsourcing as an option. By outsourcing, they can hire a manager that has deep, broad fixed income teams where they can get leverage from the manager’s scale that’s difficult for them to
have in-house. They can also have the benefit of risk management tools and analytical tools that asset management firms have at their disposal.
IFI: Have your clients fully grasped the impact of the subprime marketplace on their portfolios?
Kirsch: Our clients had no exposure to subprime assets because GSAM didn’t hold any subprime assets. However, we’re talking to a lot of new prospects who did have that exposure, and they are now considering outsourcing or changing the way that they manage their assets. In the insurance industry, there was an increasing trend towards outsourcing before the onset of the credit crisis and problems with subprime mortgages. The recent credit environment in mortgages is now accelerating this outsourcing trend.
IFI: Has price softening impacted insurers’ approaches to their investment portfolios?
Kirsch: Absolutely. As pricing has softened, insurers are naturally examining their investment portfolios and asking how they can improve returns. That’s led to the outsourcing trend and some of the asset allocation work that I described earlier. Insurers must focus and determine if they are doing the best that they can in all parts of their business.
IFI: Could you sum up your general impressions of how insurers have been approaching asset management lately?
Kirsch: Insurers have been approaching their asset management with great scrutiny. They’re reviewing their investment process and assessing if they are best in class and if they are using the best tools. And if not, they are asking themselves how they can improve their asset management. Many insurance companies, who are generally good investors, have purchased fixed income securities over the years and have done relatively well, but given the stressful environment, they realize that they may not have the scale and the scope required to achieve the best possible returns, so they’re exploring alternatives like outsourcing.
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