Notes from a small island - on outsourcing by Bermuda's insurers

David Walker tells the story of how Bermudian CIOs opened up to independent fund managers

For a fairly diminutive island, Bermuda packs one hell of a punch when it comes to its insurers outsourcing investment duties.

Chief investment officers (CIO) there have an unmistakable taste for non-mainstream asset classes, primarily for diversification to their core debt investments and non-correlation of returns – but they are sometimes willing to target (or at least 'accept') some very high returns from delegations.

They are also accepting of illiquidity, as a 'cost' of accessing unorthodox classes, and frequently mention using limited partnerships and other structures requiring investments to be locked in, and then supplemented through capital calls.

Perhaps most importantly for asset managers, Bermudian CIOs seem thoroughly open to delegating the practice of investing beyond their walls.

In 2017 Bermuda's CIOs and the managers they engaged 'saved the day' for their insurers, as natural catastrophes led to sharp underwriting losses across the industry, but aggregate investment income more than offset the combined damage from forest fires, three gargantuan Atlantic hurricanes, and more.

And in two further years since 2015 – namely 2018 and 2019 - CIOs made the day "even better" for their insurers, insofar as the underwriters profited, while the investment departments profited even more.

Not since 2015/2016 did Bermuda's underwriters contribute more to their employers' total earnings than the CIOs – and outsourcing partners played no insignificant role to the superior performance from investing.

The spice of life

When a CIO at a Bermudian insurer picks an asset manager to work with, chances are that manager will be a new one, and not already being used by another underwriter there – or, expressed another way, 86 different managers sit on the rosters of 107 insurers analysed by Insurance Risk Data.

The diversity of investment experts being used is reflected in the 101 pages of Insurance Risk Data's Insurance Investment Outsourcing Opportunities & Performance - Bermuda 2022 report, which found that for every Bermudan insurer citing three or more managers as their outsourcing partners 10 insurers cited having only one outsourcing partner.

Given that the 'international financial centre' of Bermuda is not the actual home for many financiers, it is perhaps unsurprising that most managers being hired for general account work there are unaffiliated.

There are notable exceptions, of course, whose name generally 'betray' their affiliation - Arch Investment Management, Sunlife CM, Aegon USA IM, Third Point LLC, and Oceanview Asset Management, for example. But the use of these affiliates merely proves the broader rule.

One Bermudian CIO's comment echoes the sentiment felt and often voiced by his peers in industries of the UK, Ireland and at Lloyd's – "we do insurance, not investment management".

Looking at the general account composition of many Bermudians, however, one might question how true that actually is.

Across 21 groups on the island, most have some assortment of commercial-, residential- and/or mortgage-backed securities, as mainstays of their portfolios.

Others list hedge and private equity funds, also of not insignificant volumes, while managers are also engaged for foreign property, direct lending, intellectual property investments and infrastructure, among the slightly more esoteric allocations.

Deep understanding

If Bermuda's insurers do not themselves 'do' all these asset types, and delegate the duties instead, they still certainly seem to understand them.

How so?

For one thing, Bermuda's insurers have ranks of alternatives experts sitting inhouse either as decision-makers or the overseers of them sitting on the firms' boards and/or in board investment committees.

Among more than 60 investment professionals that Insurance Risk Data identified in its report, it found Samuel Liss at Argo, for example, chairing the investment committee but also bringing experience of managing principal at Whitegate Partners LLC, an advisor to private equity firms specializing in financial services sector.

At Ascot Bermuda, Katherine Chung is a non-executive director, and has been responsible for PE investments in Europe at the Canada Pension Plan Investment Board, and was principal at Crestview Partners, overseeing invest¬ments in insurance/specialty finance, and at Blackstone she was a principal in the private equity group, and worked at Capital Z Partners, too.

Other insurers have senior executives at GAM Investments, Soros Fund Management, Goldman Sachs and at family offices.

Bermuda's insurers are not lacking in 'alts' experience. And that also makes sense, given how many underwriters are directly linked by ownership, or close affiliation with non-mainstream asset managers, such as Apollo, Blackstone, and Third Point LLC.

Their private equity part-owners help with their investments, too. The increasing prevalence of such arrangements at insurers globally might have raised eyebrows at the International Association of Insurance Supervisors recently – for a possible tilting of portfolios to less liquid assets, and paying owners higher fees – but in Bermuda, it seems to work fairly satisfactorily for both parties.

But truly independent asset managers find plentiful work on the island, as well.

Most of the 86 managers identified by Insurance Risk Data were independents ranging from the 'usual suspects' of Goldman Sachs Asset Management, JP Morgan, Conning, BlackRock and Franklin Templeton, to less high-profile managers such as Goodman & Co, Vine Capital Management and Mangrove Partners hedge fund.

An active interest

Bermudian CIOs are also advocates of active investing.

Yes, there are also exceptions here – ABC Limited's investments include Vanguard FTSE XUS products, which took the proceeds from ABC liquidating the Orbis Optimal USD fund and Orbis Global Equity funds in Q3 2020.

One Canadian insurer's Bermudian unit has investments in the iShares Core S&P 500 Index ETF and in the SPDR S&P 500 – but also gives money to Invesco Canada, Franklin Templeton, Crestpoint Real Estate and Bentall GreenOak, for instance.

In the main, CIOs' investments are guided by human hand, not machines.

Sometimes, CIOs' hands are tied from retrieving their investments in a hurry.

Cica Life, for instance, faces six times the unfunded commitments to come as it has live investments. Its holdings range from structures focused on middle-market mainly North American privately-originated, performing senior secured debt with a 10-year life, to a late-stage growth/pre IPO LP with seven years to run, and another LP focused on renewable power, with a 12-year term.

The picture Bermuda's insurers paint of outsourcing is a vibrant one. The number of different managers they use seems unlikely to fall rapidly, including because of the locks on many investment structures they use.

And the diversity of investment strategies the CIOs will look for seems well matched to their experience in posting, assessing and committing to alternative assets.

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