Sage Advisory enters the 30-30 investment club – powered by captives

Greg Cobb, of Sage Advisory Services, describes the latest captive developments at the company, as it celebrates 30 years of business in Austin, Texas.

30 years ago, Sage Advisory Services opened its doors in Austin, Texas – a city hailed for its never-ending support of independent businesses, creativity, and an accepting and eclectic culture. 

With that comes the city’s rather unique mantra of “Keep Austin Weird!” As a proud member of the Austin community, Sage has been doing its fair share of keepin’ it weird and making investment management more fun than it deserves to be. We remain fiercely independent; striving for creative and innovative solutions to satisfy the ever-evolving needs of our clients; and forging an eclectic culture of purpose that most in the industry find unique. 

This independence, creativity, and culture of purpose have earned us recognition from both local media and the investment management industry at large as one of the best places to work.

The Sage culture – combined with our continuous alignment with the utility function of our clients; our ability to remain agile in the financial markets and our consistency in meeting client expectations in terms of market performance and service – has led us to cross the $30 billion mark in assets under management. So, today, we can proudly say we have entered the 30-30 investment club with 30 years of service and $30 billion in managed assets.

“The risk management process has evolved into a more holistic, three-tiered application: corporate governance, enterprise-wide initiatives and portfolio management.”

Along the way, the insurance industry has played a key role in our evolution, and today, it represents our largest corporate line of business. Our growth in insurance over the past decade has been powered by the world of alternative risk transfer, the captive space. So, looking back and maybe a little ahead as well, we asked ourselves a few questions about our enduring relationship with the captive insurance industry. 

How have we assisted our captive clients in making more informed decisions over time? With 30 years of experience in managing investment portfolios for the captive industry, we understand the ecosystem of the captive space and are uniquely positioned to assist captive managers, risk consultants and boards of directors to manage successfully through the unique life cycle of each captive. Throughout this period, the balance of risk evolves – whether through offered lines of coverage, underwriting standards, reserve development, tolerable levels of surplus volatility or regulatory regimes. As such, we take a disciplined and collaborative approach in the pursuit of portfolio solutions continuously and properly aligned with evolving risk agendas and overall enterprise-wide objectives.

Each individual captive or risk-bearing entity requires its own unique investment solution. Successful investment solutions demand a disciplined and collaborative approach fully to understand the role of investment risk as it relates to overall enterprise-wide objectives. We bring to bear our insurance investment expertise, risk management capabilities, insurance-dedicated service team, and association, regulatory and rating agency engagement for the benefit of all our captive partners.

So no matter where a captive might be within its own unique life cycle (de novo, reserve, mature) or where the balance of risk might lie (insurance vs. investment vs. regulatory), Sage serves as an informed and engaged partner in the pursuit of all enterprise-wide objectives. 

How has our risk management process evolved for the benefit of our captive clients? The risk management process has evolved into a more holistic, three-tiered application: corporate governance, enterprise-wide initiatives and portfolio management. This ensures proper oversight, appropriate matching of capital to risk and an informed understanding of market dynamics. 

Governance: Committees provide oversight of specific activities: executive (firm); investment (investments); operating (day-to-day); brokerage (trading/brokerage); GIPs (performance); vendor (service providers). This ensures our continuous operation in the best interest of our captive clients.

Enterprise: We engage directly with senior management and staff for a thorough understanding of the business, growth objectives, total available capital and capital capacity (capital willing to be put at risk). Engagement ensures a deeper understanding of the balance and culture of risk within the enterprise. We seek the joint development of liability/asset-driven risk budgets (matching capital to risk). From there, we determine the balance between book yield vs. total return. 

Generally, we will apply a “buy-and-maintain” approach – a more strategic orientation but with market/value-driven tactical overlays to maintain the structural integrity of duration profiles vs. liabilities; desired credit metrics (avoid downward migration); capital efficiencies (regulatory, rating agency); and sufficient liquidity. 

Portfolio management: this is a layered approach to risk management. First, holdings-based measurements represent traditional risk measures of fixed-income: key rate durations, sector exposures, quality distributions and spreads (all relative to market-based indices or custom liability-driven benchmarks). Second, we employ statistically based analysis across key factors that impact fixed-income portfolios (rates, volatility, spreads, etc.) and their contributions to active risk / tracking errors. Third, factor-based stress testing involves dynamic scenario testing across simple, historical and more complex hypothetical factor events to determine expected surplus volatility and tail risk sensitivities.

Finally, we couple this layered approach (measurement, analysis, testing) with cash flow analysis, asset-liability studies and specific LDI approaches to develop a thorough understanding of overall risk exposures relative to markets and the enterprise (balance sheet, capital availability/capacity).

What is the best advice we have given our captive clients? Do not underestimate the importance of selecting the right investment manager. Within the ecosystem of a captive, investment management, in many cases, is almost an afterthought. Do not be that captive. Start the discussion in the early stages of formation (or even revisit it now) and make it a more informed decision. 

When selecting an investment manager, make sure they:

 - Have demonstrated knowledge of the captive space

 - Are adept in managing the ecosystem of captives

 - Can effectively integrate with senior management

 - Are fully engaged with the industry for insight / perspective

 - Deliver solutions across the full life cycle of the captive

 - Are capable of highly customised solutions

 - Have delivered consistent outperformance across cycles

 - Possess asset / liability, asset allocation, and sustainable capabilities

 - Have industry-dedicated service professionals

What lies ahead in the captive space? Well, mostly new endeavours in new markets. We have responded to market inquiries from our captive clients regarding the development of alternative products. As a result, we are now entering the world of insurance-linked securities via a partnership with a Bermuda-based ILS manager – seeking to generate durable streams of return that are lightly correlated to the financial markets. We view the market as a true diversifier that enhances overall portfolio resiliency.

There is no denying that the world of North American insurance company portfolio management has become more saturated over the past decade. So, further afar we go! We have initiated a relationship with a third-party global investment platform that will allow us to leverage long-standing insurance relationships in Puerto Rico for a springboard to captives in LatAm (Mexico, Panama, Colombia) and will provide for an operational base in Asia (Singapore).

To some, it may seem weird for a $30 billion fixed-income specialist to be entering the world of insurance-linked securities and traveling half way around the world for a new captive client – but then again, we opened our doors 30 years ago in Austin, Texas. Welcome to the 30-30 investment club – Austin style!

Sage Advisory Services, Ltd. Co. (Sage) is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Gregory H. Cobb is director of insurance solutions at Sage Advisory Services. He can be contacted at: gcobb@sageadvisory.com

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