London & Capital
London & Capital’s new indices could provide an invaluable edge for owners and managers alike, as William Dalziel explains...
What are the primary uses of London & Capital’s new suite of proprietary indices for captive insurers?
It is not always easy for captive owners to see how their portfolios fare compared to how the market is doing. It is easier to see, for example, what the equity markets such as the S&P 500 are doing, but not so obvious as to how short duration bonds fared. What we are trying to do is make information more accessible and more relevant. I am surprised how often captive owners don’t seem to have a sense of what a reasonable return might be.
Perspective is often difficult to achieve. For those who have investment portfolios, it will give them an independent view of what those portfolios should to be doing.
A lot worry that their investment managers pick and choose benchmarks that are not entirely appropriate. I am convinced that well-managed portfolios will make a meaningful difference to the performance of the business over time, yet I see relatively few captives take that option.
Can you give some insight into the development of the indices? Why release it now?
We have been working on the indices for about a year following conversations with some insurance consultants. Their issue was that, as they were looking at different types of business, they didn’t have one source of data that would give them and the potential captive owners a sense of the return they could expect.
By May, we had tried a number of different approaches, both passive and dynamic, to create an index. We then tested the data going back 10 years and realised we had a useful tool.
The next month or so was spent thinking how we could get this into the hands of the wider industry and confirming that we had the resources to publish the results consistently.
I get the sense that there is increasing pressure on boards to demonstrate good governance and on the industry to demonstrate that is delivering value to orders. That means there is a lot of demand for benchmarking services of all sorts, in terms of the operation of captives.
Every year there are a couple of big surveys published by the industry that are very helpful in that area, but everything that comes out on the investment side is very weak and doesn’t seem to be particularly consistent. It also tends to be very dated and, as a result, does not provide much insight.
We thought, rather than trying to produce benchmarking data from captives’ performance, we would look at the indices of the assets they hold. This enables us to be more accurate, complete and up-to-date.
What logistical support and human capital is necessary for these indices to function? Are all three run independently?
We recognise that, while publishing one set of numbers might be interesting, it does not really help anyone. To give a full picture we need to publish updates on a regular basis, and that is exactly what we intend to do.
We have the resources and captive expertise in-house already, so we are very fortunate. The other thing is that the investment industry is very data-rich. We have granular data that goes back decades—it shows us market trends and how they related to the economy as a whole.
While getting data is not a problem, how to assemble it in a relevant way is. Part of what we are planning to do is publish a concise quarterly analysis that can explain what the numbers mean in a wider context.
Captive owners are very keen to understand what is a reasonable return under very constrained risk conditions and that is what we will try to do.
If a board has an unrealistic expectation of what an investment portfolio can deliver, they should be freed of that notion pretty early on. By the time they see the results, it is usually too late to take action. Eventually we will get to that further down the road.
When can the first quarterly report be expected?
The data we have published so far takes us up to Q1 2014 and the first update of the entire series will be during the second week of October. That will include the updates for Q2 and Q3.
After that, we expect to publish the updates within two weeks of the end of each quarter. We believe that it lends itself to being accessed online, so that is what we are doing via our website.
We also have a mailing list of industry contacts that will receive it and have had many more sign up following the original announcement.
Are you aware of any competition in the market? If so, what is London & Capital’s edge?
There are no benchmarks specifically geared towards captives. The Barclays aggregate benchmark is a very well-understood and reputable source of information about bond holdings.
The problem about this is it has some components that captives would not be happy to invest in, while the duration of this benchmark seldom matches that of a captive portfolio.
The duration of the Barclays aggregate index might be five to seven years. A property and casualty captive with a short-duration portfolio will need a benchmark that has a duration of two years.
Our edge is that we understand and have experience of working with captives and are a well-resourced firm.
What kind of feedback have you had from the industry following the announcement?
We launched the London & Capital indices at the Vermont Captive Insurance Association Conference in August and people were very welcoming of it. What has been interesting to see is how different people plan to use it.
We have spoken to insurance managers that have asked us whether we will provide a one-page quarterly update summarising both data and analysis, which we intend to do. They are planning to use that as part of their reporting packs for their clients.
The other useful feedback has been from our direct competitors as asset managers. We have already had a few calls from firms wanting to explore how the indices are constructed. I got the impression that some are looking to use them as part of their captive offering.
Even on the first run through there are people suggesting how this can be developed in the future, and we see this as a real sign of acceptance.
Some captive owners have even enquired as to whether we could provide a personalised index for their particular portfolio and, of course, the answer is yes.
