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In Its 100th Year, Conning Stresses Diversification

By SUJATA SRINIVASAN

December 17, 2012

A hundred years ago, William Smith Conning, office manager at investment firm Hornblower & Weeks, and his colleague William C. Goeben set out on their own and founded W.S. Conning & Co. in Hartford.

That same year — 1912 — two other iconic businesses were founded in the Northeast: the National Biscuit Co. in New York baked its very first batch of Oreo biscuits, as they were called then, and L.L. Bean began selling his Maine hunting shoe by mail order. And in Boston, the Red Sox got a new home at Fenway Park.

The new investment firm steadily gained expertise in municipal, government and public utility bonds and exposure in the insurance, banking and manufacturing sectors. Renamed Conning & Co., it became an early adapter of technology. For example in 1916, Conning informed clients by wire from New York of President Woodrow Wilson's re-election. William Smith Conning was already laying the foundation of a company whose responsiveness to the need of the day would become part of its DNA.

But even he might not have predicted that someday, one of his CEOs in the future would have a bilingual calling card in Chinese. Today, Woody E. Bradford is heading Conning's first expansion in Asia, a strategy put in place by predecessor Salvatore Correnti, now vice chairman and member of the board.

"Diversification is a critical tool to offset insurance companies' efforts to add risks to the portfolio. We took a decision over two years to build up our international presence," Bradford explained.

Through its global investment centers, Cathay Conning Asset Management, and its Goodwin Capital Advisers subsidiary, Conning managed nearly $91 billion in assets for the global insurance industry as of Sept. 30. That's up by seven percent from Nov. 30, 2011.

The bulk of Conning's assets under management are in North America, followed by the U.K., Bermuda, Continental Europe and Asia Pacific.

Now Bradford is steadily expanding across Europe and Asia to add to that number through new insurance clients in those regions as well as through asset diversification.

The company recently appointed Patrick Steiner in its London office as head of insurance business development for Germany, Austria and Switzerland. Earlier this year, Mark Konyn was appointed CEO of Cathay Conning Asset Management Limited, a joint venture, with plans to expand into Asian equities and fixed income. In his new position as chief data officer, Brian M. Baczyk will spearhead data governance across Conning's investment centers in U.S., Europe and Asia.

"We have the benefit of the investment insights that are being developed in Europe and Asia that we can share with our investment teams here and vice versa. But now we also have the ability to generate investment portfolios that clients in both places can invest in," Bradford said. "So on the one hand we have U.S. clients that have made decisions to invest in overseas securities and can invest in a portfolio managed by our team in London. The same is true the other way."

As Conning's U.S. clients continue to diversify their investments abroad amidst earnings pressure under a low interest rate environment, Bradford said Asian clients are increasing their dollar-based exposure here in 30-year Treasury bonds and long-dated corporate bonds. That's because their ability to invest in long-duration bonds in their own market is very limited.

"You don't have that type of depth of duration in many Asian markets. You have that in Japan, but not in Singapore, Hong Kong, or Mainland China," Bradford said. "The other factor is liquidity because the market is so shallow. So Asian insurers look to the U.S. and Europe for duration, liquidity and yield."

The past few years have been bumpy for the industry. Property and casualty companies have incurred substantial losses from various storms and hurricanes. Meanwhile, the life insurance industry is facing challenges related to pricing. The continued pressure on yields, increasingly complicated regulations and the need for risk management is driving insurers to find new ways to add more yield and, as a result, take on more risk.

Chief Investment Officer Richard L. Sega said insurers have the option of doing so in one of two ways: Add lower quality fixed securities to their portfolio by buying lower-rated assets, or extend the duration on the yield curve by taking more interest rate risk in exchange for more income.

Sega believes neither one of those paths is ideal, particularly coming out of the financial crisis of 2007-2008. Most companies were de-risking at that point and they'd been fairly careful about putting their toe back in the water with respect to a lot of risk exposure. So the pressure on insurers for more income and their reticence to take on a lot more risk led Conning to think about other kinds of investment structures.

"The problem is there's not a lot of income out there even in traditionally higher yielding types of assets. It's a low-interest-rate world right now and the problem is an asset-focused problem, but the solution cannot be just asset-focused. It has to be enterprise wide," Sega explained. "We have to look at product design, expenses, underwriting. It's just too big for investment management managers to solve."

It response to demand from clients, Conning is in the process of developing products that capture some of the benefits that ordinary fixed income has but can also protect insurers against downside risks.

"Some of these products are equity-based. Some are derivative products of existing fixed income structures. Convertible bonds, high-yield bonds — avenues insurance companies are looking at now because they need to pump up the earnings," Sega said.

The constraint across the board is that investments are bound by regulation in terms of the percentage of asset exposure and insurers must risk capital charges when they expand their asset base. "Both of these factors are working against insurance companies. One way to deal with this is geographical diversification," Sega said.

David F. Holmes, partner at Eager, Davis & Holmes in Louisville, Ky., has worked with Conning since the late 1980s to help enable the firm to communicate its strengths to insurers. Holmes' firm also conducts market research on the needs of Conning's clients.

"The key factor that differentiates Conning from other third-party asset managers is the accessibility of its portfolio team," Holmes said.

He said the challenge that Conning and other insurance asset managers face is that client needs have changed since the credit crisis. Asset managers must seek higher returns without incurring significantly higher risks.

"Conning has responded rapidly by expanding its risk management capabilities and by broadening its investment capabilities beyond core fixed income," Holmes pointed out.

But while many things change, some things remain the same.

Sega compares Conning's unchangeable aspect to one of his favorite things in the world, the Oreo cookie. "It's also 100 years old this year. And it's a simple, straightforward product that customers like and want. Companies last 100 years because they deliver value to customers and that's what we try to do here. At the end of the day, we're taking a lot of the product complexity and try to make it simple and accessible to our clients."