Buy-side Awards 2016
When BlackRock first launched its BlackRock Solutions risk management division in 2000, the firm envisioned the unit would operate as a separate business line to sell its proprietary investment management tools. Fifteen years later its spinoff business is central to BlackRock's ability to give institutional investors an edge on the competition.
Today, BlackRock is drawing on its BlackRock Solutions risk management division to help clients understand their assets and liabilities in direct comparison to their peers. This is especially critical for insurers following the implementation of Solvency II and given the low yields forcing them to take on more risk to match liabilities.
In a recent research paper on the insurance industry, In the Eye of the Storm, (September 2016) BlackRock found 59% of insurers polled were most concerned about low interest rates, and 57% about price volatility amid risk events like Brexit and the US election. Even so, 92% said they would maintain or increase exposure to investment risk in search of return.
To help in this quest for yield, BlackRock has been making a co-ordinated effort with its analytics and risk reporting function to provide Peer Risk Study reports for clients on their investment profile, asset allocation, performance and risk metrics, making comparisons to every other investor in their cohort group.
Insurers represent the largest client segment for BlackRock Solutions, with $3.6 trillion of assets monitored on behalf of 65 clients in its Aladdin enterprise investment system. Currently, more than 50% of large US insurers are using BlackRock Solutions for analytics and reporting.
The asset manager scrapes public information from US insurance company statutory filings – which contain data at the portfolio level on what each single US insurer is invested in – then uploads the Cusip-level data to the Aladdin platform, where it can be sliced and diced to produce the reports.
The original dataset includes all US insurance companies across the P&C, Life, and Health industries which totals approximately $5,000 billion of assets spread across 800,000 Cusips. It takes approximately a month from when the raw data is available to upload the holdings to Aladdin, quality check the information, and compile presentations.
Zach Buchwald, head of BlackRock's Financial Institutions Group for North America, says the reports allow clients to see whether they are taking an appropriate amount of risk and being rewarded for doing so, compared to their peers. The data shows insurers are responding to the low yield environment, by assuming greater spread risk in their fixed income portfolios and extending their allocations to asset classes outside of core fixed income.
Our scientific view of risk – a holistic, bottom-up, cusip level, VAR-based approach – has proven that idiosyncratic risks can help mitigate absolute risk through the diversification of risk factors
Zach Buchwald, head of BlackRock’s Financial Institutions Group for North America
Allocations to risk assets have proved to be "strong diversifiers" of portfolio risk, especially when combined with an insurer's core fixed-income portfolio, which is often concentrated in rate and spread risk factors, Buchwald says.
Analysis of the data suggests a nominal view of risk – approximating portfolio risk solely based on a company's allocation to investments outside cash and core fixed income – is no longer a suitable approach to measure portfolio risk.
"While a portfolio with a relatively large allocation to 'risk assets' may appear to be more risky through the nominal lens, our scientific view of risk – a holistic, bottom-up, cusip level, VAR-based approach – has proven that idiosyncratic risks can help mitigate absolute risk through the diversification of risk factors," Buchwald says.
Bill Tomljanovic, chief investment officer and treasurer at Radian Group, a private mortgage insurance and risk management provider headquartered in Philadelphia, says BlackRock's Aladdin system gives the firm a big edge in helping investors manage risk by providing information on how securities interact, as well as stress testing as to how a portfolio will perform in a crisis.
Of BlackRock's $4,890 billion total assets under management, $409.3 billion are managed on behalf of insurers, while more than 260 staff within BlackRock's Financial Institutions Group are specifically dedicated to insurance asset management, including 102 relationship managers and 34 portfolio managers. This year the group delivered 13% revenue growth.