Posted on 22 June 2020
A New Take on Direct Investments for Insurance Companies
Insurers have traditionally invested in equities, bonds, real estate debt and other fixed income assets for their own portfolio, while allocating capital to outside managers for the more non-traditional asset classes like private equity, infrastructure, bank loans and PERE to construct their portfolios. But as insurers’ price sensitivity to management fees grows, the prospect of directly sourcing deal flows and outside capital has pushed many to look to direct investments in real estate, debt, and equity to complement their externally managed strategies.
The direct investment approach comes with significant advantages, allowing insurance companies to gain more control and transparency over their investments, and freeing them from management fees. But this new approach does have its challenges, as most insurance companies don’t have the back-office framework to support these types of loans, especially when it comes to reporting.
According to Luke Newcomb, Managing Director, the challenges go beyond reporting to outside entities. “Many insurance companies also struggle with the complexity of direct investments and the requirements of corporate reporting. And because of the nuances of the private debt market, many of their accounting teams don't have the right tools to be able to effectively make those deadlines.”
It’s all about the systems
Insurance companies often use technology systems that are designed to automatically reconcile bond-based assets or equity portfolios linked to a trustee, custodian or prime broker. But investing in other assets, such as direct bank and real estate loans, requires different technology. For instance, direct investments are not traded via a common depository (DTCC or Euroclear) or a stock exchange (NYSE, NASDAQ, etc.). Instead, ownership is often evidenced via legal agreements as opposed to shares tracked by stock or bond transfer agent, so the existing framework cannot automatically reconcile the loans. The bottom line? Direct investment loans and real estate debt don’t fit into their existing systems.
In addition to reconciliation, insurance companies who participate in direct investments must satisfy their own internal accounting, management reporting, and regulatory reporting requirements as well. These challenges leave insurers with few options: either make a hefty investment in hiring additional staff and deploy new systems and technology, or partner with a service provider that can help manage and minimize those challenges in a low-risk and cost effective manner.
Fund management for direct investments
Instead of paying to build up these capacities in-house, Alter Domus allows insurers to augment their staff and systems with the professional and experienced services they require. No more manual reconciliations—and no need to bring on additional staff or revamp their technology systems. Instead, they can keep their focus on what’s important: managing and monitoring their investments.
Greg Myers, Managing Director, says using one platform for all their data increases productivity. “Many insurance companies hire multiple investment managers and have internally managed portfolios or specially managed accounts (SMAs). They then have to figure out how to incorporate that varying data into their system, making for a logistical nightmare,” Myers said. “But by using our debt capital market services, they’ll have access to one platform where they can consume and share data, irrespective of who the manager is.”
Never lose sight of your data
Real-time access to data and reporting is critical for insurers making direct investments. CorPro, Alter Domus’ proprietary web-based portal system, provides them with nonstop access to their fund and asset-level financial data. It also makes sharing that data easy. Data and communications—with customizable branding—are easily distributed through the secure portal.
This constant ability to access their data and securely share it gives insurers the information they and their partners need to make informed decisions. It also provides company-wide transparency about operational workflows, which gives everyone the data they need to make informed decisions.
Tools for success
“At Alter Domus, we want to give our clients the tools that will contribute to their success,” Myers said. “After insurers began coming to us asking for a solution that makes direct investing more efficient for them, we analyzed the need and pinpointed the problematic areas. Through our Cortland DCM Solutions, insurance companies making direct investments are able to conduct loan trade settlements on behalf of their managers, and receive ongoing loan administration, loan agency services, reporting, compliance, and fund administration from a single source.”