obert Young, the head of PIMCO’s U.S. insurance business since 2009, has 25 years of experience in the investment field including senior positions at Morgan Stanley, MetLife and Tillinghast. During Young’s time as U.S. leader, PIMCO’s worldwide non-affiliated insurance assets have more than doubled, ranking the firm in the top bracket among managers of outsourced insurer assets.
IAM editor Alex McCallum interviewed Young at the beginning of 2012 when Young accurately predicted that the challenge of low yields would continue to test the investment skills of insurers and their advisors. Twelve months later, as 2013 got under way, McCallum returned with a fresh set of questions. Here they are, with Young’s replies:
IAM: Through the first nine months of 2012, PIMCO grew its insurer assets impressively, with a sizeable chunk coming in the third quarter. What influenced this impressive growth, and how did you finish up the year?
Young: Current growth is coming from Europe, where sovereign risk and overall market complexity have spurred a high volume of outsourcing much like we saw in the U.S. on the heels of the housing crisis. We are also seeing a high level of interest in the U.S. for emerging market, opportunistic strategies and other non-core strategies. And our variable annuity business is seeing a high degree of activity in asset allocation and risk managed strategies.
IAM: Unlike most top insurance asset managers, PIMCO ranks high in the management of both General Account assets and SubAdvised assets. Very few of your competitors do the same. How does this work? Do you have two separate teams for GA and SA assets?
Young:We recently reorganized as a Financial Institutions Group (FIG), formally combining bank and Advisory businesses with insurance. Within insurance, we have three businesses: general account, variable annuity and bank-owned life insurance (BOLI). Our Advisory group is an adjunct to all of our FIG businesses, offering detailed analytical, valuation and risk management services. All of our FIG businesses benefit from coordination and synergies with one another. In total, it’s a group of 50 investment professionals in the U.S.
IAM: On a similar theme, and realizing that parent Allianz SE is based in Germany, does PIMCO handle its domestic and international insurance asset management business differently?
Young: Our investment management business is a global business. We have trading operations in seven locations around the world. Similarly, our insurance investment management business is global. Our FIG business in Europe is run by Matthieu Louanges.
IAM. The NAIC (National Association of Insurance Commissioners) recently published a study concluding that, in 2010 and 2011, insurers held back from taking additional investment risk to achieve higher yields. Do you think the same was true in 2012, and how does this finding correspond with the growing attraction of alternatives?
Young: Sustained low rates and tight credit spreads have catalyzed a greater level of interest in strategies that have not been commonly considered -- – for example, RMBS and emerging market fixed income. Furthermore, generally good capitalization levels, coupled with limited opportunities in traditional sectors, means companies are more open minded about higher capital consuming sectors such as hedge funds, private equity and bank loans.
IAM: The term “alternatives” has become a generic description for non-traditional investments, but their risk attributes stretch right across the board. Which of the alternatives varieties does PIMCO see as most suitable for insurer portfolios, and why?
Young: We aim to look at client portfolios holistically and to understand risk exposures that arise from both assets and liabilities. We can offer a variety of strategies that are designed to offer diversification benefits and offer favorable return versus volatility characteristics. For ex- ample, many insurance companies are underexposed to emerging markets which in many regards offer stronger fundamentals and better yields than developed markets. A similar story exists for bank loans vs. traditional high yield. Loans also offer the added benefit of being in floating rate space for those concerned about inflation and rising rates. PIMCO also offers hedge funds that are generally uncorrelated to interest rates, credit spreads and equity returns – risk factors that prevail in most insurance companies.
IAM: Insurers are not only facing investment challenges such as the prolonged low-rate scenario, but also impending regulatory pressures, both in the United States and abroad. How is PIMCO going about helping its insurer clients handle the regulation challenges?
Young: There are many examples. PIMCO identified early the opportunity to partner with variable annuity clients in developing investment strategies that mitigate the risk (and required capital) posed by insurance guarantees. We have been engaged by several companies seeking risk managed solutions such as volatility mitigation and tail risk hedging. In Europe, we are active with our clients in developing asset-liability strategies that are capital efficient under Solvency II. Our Advisory group, the same group hired by the NAIC to analyze non- agency residential mortgage-backed securities (RMBS), has been tapped to offer detailed insight and advice on many of our clients’ bond portfolios.
IAM: On a broader front, how does PIMCO see the world’s major economies performing in the next 2-3 years, and are insurance companies suitably positioned to meet any operating challenges and produce reasonable returns on their surpluses?
Young: Most countries in the developed world are faced with little real growth, high unemployment and high debt burdens. Central banks are implementing monetary policies that, for the time being, anchor intermediate and short rates at very low levels. Sustained low rates and tight spreads, as we know, hurt the earnings and overall business prospects of insurance companies, particularly Life. To make matters more complicated, the threat of inflation looms as the enemy of bond portfolios as well as certain product lines. Positioning investment portfolios in this environment requires considering a wide range of sectors such as less liquid investments in a private equity structure, hedge funds, floating income (bank loans, RMBS), emerging markets and real asset opportunities.
IAM: Finally, with 2013 now under way, how do you gauge the factors and prospects for outsourced insurance asset management over the next 12 months, both for PIMCO and for insurance asset managers as a whole?
Young: The factors encouraging outsourcing remain strong. The focus of companies will be on developing a range of solutions to counteract low yields. We expect companies to have a strong, increasing interest in alternatives and other non-core strategies.
IAM: Thank you very much.
Pacific Investment Management Company LLC (PIMCO) was founded in 1971 and has been part of Allianz SE since 2000. The company is headquartered in Newport Beach, CA.