February 2012
An IAM Exclusive
PIMCO’s Robert Young On The
Expanding Horizons Of Insurance Investment
Robert Young has been heading PIMCO’s US insurance business since 2009, a transformative time for
portfolio outsourcing during which his firm’s non-affiliated insurance company assets under management
have more than doubled and are now approaching the $200 billion mark.
Young landed at PIMCO’s Newport Beach, CA, headquarters after extensive experience in Morgan
Stanley’s global capital markets group, directing coverage and advising insurance companies on capital
raising, structured finance, risk management and investment strategy. He also spent considerable time
working in the insurance industry at MetLife and actuarial consulting firm Tillinghast, and altogether has a
total of 24 years in the investment field.
With PIMCO’s parent company Allianz SE based in Germany, Young’s insurance group has a strong
presence in Europe as well as North America, and in this interview with IAM editor Alex McCallum he gives
his assessment of the European crisis. But the scope of his answers encompasses a much wider field
including, for example, the low yield challenge and where BRICS fit into the Emerging Markets picture, as
well as the salient lessons that have been learned from the financial crisis, and the future prospects for
insurance investment outsourcing.
IAM: To get us going, how large is the PIMCO insurance group in terms of staff numbers, and
where are its main offices in North America, Europe and Asia-Pacific? Plus, who are the senior
executives managing the group, and their locations?
Young: In addition to our portfolio management group, PIMCO has more than 40 client service professionals in our global insurance group. Our team is split between Newport Beach, CA, New York, London and
Munich. The firm manages over $529 billion as of December 31, 2011, including insurance assets for our
parent company, Allianz Group. Of this, almost $395 billion is in general accounts, another $118 billion in
variable annuity, and $16 billion in bank owned life insurance (BOLI). I head PIMCO’s U.S. insurance business, Joe Fournier runs our variable annuity business, and Scott Millimet is the chief of our general account
business. Matthieu Louanges runs our European insurance business.
Reprinted from Insurance Asset Manager, with permission of the publisher.
Insurance Asset Manager LLC
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IAM: Ten years ago, PIMCO was managing less than $1 billion in outsourced insurance assets, and the total size of the market was about $250 billion. Today, you manage more than
$50 billion in a $1.75 trillion market. What triggered this sector’s growth? Was it the insurers
themselves, or was it asset managers like yourselves?
Young: It is definitely a combination of the two. Market dislocations resulting from the financial crisis
led many insurance companies to look for outside investment managers with a global investment platform
and a track record in risk management. Meanwhile, investment managers are quickly ramping up their skill
set in this specialized space and recognize the business opportunity.
IAM: Today, as the insurance industry starts its fourth year of the recovery phase from the
financial crisis, what are the chief factors – both opportunities and risks -- influencing the investment management strategies of insurers and their third-party managers and advisors?
Young: It’s not clear that we are out of the woods. PIMCO remains concerned about “left tail” outcomes,
and we continue to watch the European situation closely. A disorderly unwind of the European Monetary
Union, although not our base case, would have profound consequences not only for Europe, but also for all
global economies and markets. Understanding the risks and potential implications is a key portfolio theme
for 2012 and beyond.
IAM: In the same vein, when you look back at the investment performance of insurance
companies during and after the financial crisis, do you have any observations that might help
insurers and their advisors the next time round – in terms of positioning, strategy, staffing,
regulations and so forth?
Young: The lesson learned is that balance sheet strength matters, market volatility will persist for the
foreseeable future, and the probability of fat left tails is higher than normal market outcome distributions
would predict. This is evident in the European crisis today. The global economy is increasingly interconnected;
events in Europe (or in other regions of the world) have significant implications for domestic portfolios. In
2007, it was the real estate crisis. Maintaining staffing, technology and an investment process to handle
this complexity and fluidity requires significant scale and a range of expertise.
IAM: A confluence of factors made the third quarter of 2011 a wrenching time for the investment field, as reflected in the recent quarterly earnings reports. Nevertheless, do you think
insurers and their advisors would have done much worse if they hadn’t gone through the 2008
scare and learnt some lessons?
Young: Yes, market volatility and, in particular, low interest rates certainly make life difficult for insurance companies – especially in the third quarter of 2011 – hitting life insurance liabilities the hardest.
Since 2007, most companies have done a good job de-risking their investment portfolios. Consequently,
on balance, companies are considerably better positioned. The challenge ahead will be managing through
what will be an extended period of low rates. Companies will need to be thoughtful about exploiting the
global supermarket of fixed income for “safe spread,” or investment opportunities that they believe offer
the best potential for attractive returns across a wide range of risk scenarios.
IAM: As we come out of a difficult 2011, what are the prospects for 2012 in terms of building your insurer outsourcing business, and the kinds of strategies that are going to appeal to
insurance companies that have been hesitating to take the plunge?
Young: Yes, the interest in outsourcing should continue. Insurance companies will need to expand
their investment opportunity set to earn meaningful yields without taking on excessive risk. Investment
managers with the right combination of scale, breadth, global footprint -- as well as a firm understanding
of the industry -- will be well positioned. Regarding specific strategies, we expect to see continued interest
in emerging market debt and other strategies that offer attractive risk-adjusted yield prospects.
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IAM: On the matter of investment strategies, alternatives have been receiving a lot of attention, on the basis that they can offer better returns than traditional investments, especially
if interest rates stay near the floor. Is this a view that is likely to hold true for the next year or
two -- or longer?
Young: Yes, despite higher capital charges for many of these sectors, we should see growth in the use
of non-traditional sectors given low interest rates. Adding alternatives and global investments may allow
for both higher potential returns for long term investors and improved portfolio diversification albeit these
investments can come with additional risk.
IAM: Still on the subject of alternatives, where do you think the best opportunities currently
lie in the emerging markets field? Do the BRICS (Brazil, Russia, India, China and South Africa)
still qualify as EMs, or have they passed this appellation down to another group of smaller countries, in the eyes of institutional investors?
Young: As guidelines allow, PIMCO generally looks to allocate capital to the fastest growing parts of the
world – countries that fundamentally have the strongest balance sheets. As developing countries increasingly gain economic importance on the global stage, their debt dynamics appear increasingly more favorable than their developed country counterparts. PIMCO is currently pursuing value for clients in countries
such as Brazil, China, Mexico and Russia.
IAM: Finally, as insurance companies continue to outsource more of their core assets, how
important are non-alpha-related factors such as accounting and analytics becoming, and does
PIMCO have a handle on these specialized support services?
Young: Yes, non-alpha related factors are important to our insurance clients. We definitely recognize
the need to collaborate and partner on the various corporate finance and risk management dimensions that
affect insurance company investment strategy. Consequently, we have built a team of investment professionals who, in many cases, “grew up” in the insurance industry either working for or on behalf of insurance
companies. As a team, we are well versed in asset-liability management, accounting, rating agency and
other matters that typically arise. To be fair, though, we lead with our investment management capabilities. We aim to optimize client portfolios in the context of their liabilities, but also in the context of a world
of “fatter tails.” After all, history has shown that the biggest factor that can compromise the health of an
insurance company is deterioration of the investment portfolio and that is where our focus is most intense.
IAM: Thank you, Robert.
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All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including
market, interest-rate, issuer, credit, and inflation risk. Investing in foreign denominated and/or domiciled securities
may involve heightened risk due to currency fluctuations, and economic and political risks, which may be
enhanced in emerging markets. Diversification does not ensure against loss.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject
to change without notice. This material has been distributed for informational purposes only and should not be
considered as investment advice or a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This
material is published by Insurance Asset Manager. Date of original publication February 2012.