Boise, Idaho, is undoubtedly one of the most attractive cities in the United States but not a place where you would expect to find a technology company that specializes in monitoring global investments for institutional asset managers. Sure enough, though, Clearwater Analytics operates from Boise (the state capital, pop. 211,473) and, as a company that offers web-based reporting and analytics, is a great example of how the Internet has opened up many geographical choices. Clearwater also has an office in New York City. This year, Clearwater has expanded the services it provides to insurance companies and third-party investment managers with the launch of a platform called Insurance Analytics, and we took the opportunity to call Boise and speak to Courtlandt Gates, Clearwater’s chief executive officer, about the firm and its insurance channel strategy.

IAM: When was Clearwater Analytics formed, and what were the main factors behind starting the company?

Gates: Clearwater Analytics was founded in 2003 as an independent provider of transparent, web-based investment portfolio reporting and analytics. The functionality was originally developed by Clearwater Advisors, a registered investment advisor focused on corporate operating funds. The founders of Clearwater Advisors had deep domain knowledge of corporate treasury and fixed income securities sales and trading.

An important part of the story concerns one of Clearwater’s four founders, Chris Growney, who found himself working in the corporate treasury department at Cisco Systems. It happened that he was on a global investment team with direct responsibility for managing the internal portfolios and reporting on all of Cisco’s cash and short-term fixed income investments worldwide. Among the challenges were aggregating and comparing information from multiple investment managers, adjusting for Cisco’s off-cycle accounting close, generating accounting entries on a timely basis, and creating analytics on compliance, risk and performance.

Chris and his team looked for a third-party solution to meet these challenges and found that none existed. The other three founders – Dave Boren, Mike Boren and Doug Bates – after successful careers on Wall Street - were running a number of hedge funds and pioneering portfolio transparency for their clients, an unprecedented approach at the time. They formed Clearwater Advisors in 2001.

The evolution to Clearwater Analytics occurred in three separate phases. In the first phase, Clearwater Advisors attracted assets by offering transparency into its own investment management activities. Second, the same transparency was offered into the assets managed for Clearwater clients by other investment managers. Then, finally, in response to demand for a technology-only solution, Clearwater Analytics was created as a separate entity. At that point, Clearwater Advisors became a client of Clearwater Analytics.

So what are the basic ingredients of the Analytics platform? I would say accounting, compliance, risk and performance reporting, built on a foundation of aggregated and reconciled holdings, and delivered as a service bureau.

Currently, we offer reporting directly to investors and through 30 strategic partnerships, consisting of seven custody banks and 23 investment managers. This adds up to nearly $400 billion in assets for more than 2,000 institutional investors globally. Ten percent of the assets on the system are owned by insurance companies, and we are confident this percentage will grow rapidly.

IAM: Does the Clearwater web-based reporting service cover all asset classes on a daily basis, or are there some asset classes that are impossible to update daily, and does this cause problems?

Gates: We receive and report daily information on the vast majority of assets on the system. The web-based platform is both multi-asset class and multi-currency. With that said, we rely on independently verifiable security master information and we sometimes run into situations where daily data is not readily available from standard market sources. Private placements and thinly traded securities, for example, can offer challenges. In these cases, we collaborate with clients and/or their asset managers to obtain the accurate data we need to properly reconcile positions in these securities on a daily basis.

IAM: Do you mainly work with corporations or with third-party asset managers and what arrangements do you make when a corporation handles some asset classes in-house and outsources others?

Gates: Our client base is made up of investors, investment managers and custody banks. Investor categories include corporations, insurance companies, family offices, foundations, pensions and central banks. One of our core skills is the ability to aggregate investment data from multiple sources in order to provide end-users with a daily, global view of their investment activity, regardless of whether portfolios are internally managed, externally managed, or both. Clients can choose to view each account individually or they can choose to aggregate accounts in meaningful ways (i.e. evaluate accounting, compliance, risk, and performance reports by asset manager, by legal entity, or by internally managed vs. externally managed). Of course, clients can also view their investment assets at a global level regardless of the asset manager or custodian.

I want to emphasize that we don't just aggregate. We also reconcile. Clearwater extracts cash, positions and transactions from safekeeping entities on a daily basis, including CUSIP information at the tax lot level. To this core information we add security master characteristics from third-party data sources and we reconstruct each investor portfolio on our servers. Then we reconcile for discrepancies and exceptions. Among the most common exceptions we identify are errors in price, accrued interest, and coupon payment amount. We also see errors in basic security master fields, such as day count basis. Data errors of this nature directly affect accounting, compliance, risk and performance.

As I mentioned previously, Clearwater currently has relationships with 23 asset management firms. The asset management firms with whom we work re-brand our reporting solution as their own, and it becomes integrated with their own proprietary asset management services. The increased transparency that results undoubtedly helps to attract and retain assets for these managers. A number of managers, by the way, offer reporting on assets beyond those they manage.

IAM: How long have you been working with insurance companies and/or their independent asset management firms?

Gates: In 2008, a significant investment management client invited us to partner with them to address a series of critical reporting needs in the insurance industry. Our strong foundation of aggregated and reconciled tax lot level holdings and security master information, served us well in scoping out and addressing the special reporting needs of insurance companies. The result of that work is Clearwater Insurance Analytics. We are very pleased with the response we’ve received.

IAM: What are the most challenging aspects insurance companies are dealing with today? How does Clearwater Analytics help address these challenges?

Gates: A lot of insurance companies have limited resources and they are now being asked to do more with less. They frequently lack the internal bandwidth required to identify and address critical issues in their investment portfolios. Our system is designed to give insurance companies the information they need in an integrated and easy-to-use reporting solution that requires no work on their part. At the same time, it saves them from having to react to incomplete, inaccurate or dated information.

One of the investment officers with whom we work recently gave us an example of a story we hear frequently. He said last fall he had a request from his CFO and investment committee to quantify the company's exposure to a particular issuer that was on the verge of default. With Clearwater's system, the investment officer was able to click on the risk report we provide to obtain a summary view of exposure to the issuer mapped to the ultimate parent across all of the company’s portfolios, as well as, the individual holdings comprising the exposure. He downloaded the reports into PDF and e-mailed them to the CFO and investment committee members within a matter of minutes. Prior to using Clearwater's platform, it would have taken him days to organize and aggregate that information with the manual processes they had been using. Using Clearwater reporting, they had access to their exposure daily and they could distribute that information to key stakeholders at a moment’s notice.

IAM: What are the typical benefits a client gains from using your service?

Gates: To give you a brief run-down, Insurance Analytics aggregates and independently verifies investment information daily to deliver timely and actionable GAAP and Statutory reports. Automated financial statements (including balance sheet, income statement and statement of cash flows) are prepared in accordance with Financial Accounting Standards Board (FASB) guidelines. And statutory accounting reports, including quarterly and annual Schedule D, DA, and E reports, are prepared in accordance to National Association of Insurance Commissioners (NAIC) standards.

The system is unique in that it provides web-based, daily, integrated investment accounting (both GAAP and Statutory), compliance, risk, and performance reporting and analytics. Clearwater clients don't have to deal with disparate systems that waste time and resources. Instead, clients can generate automated reports that can be imported into NAIC software packages to optimize budget and resources. Additionally, as an authorized third-party administrator with the NAIC, Clearwater has a direct link to the NAIC's Security Valuation Office (SVO) to obtain the most up-to-date pricing and designations for investments each reporting period.

Ultimately, our solution is designed to benefit both the accounting and asset management groups within an insurance company. In today’s environment, most insurers want to increase collaboration to create efficiencies and to optimize resources. Clearwater's system allows accountants to get book of record GAAP and STAT reporting complete with automated feeds into their general ledger and into their annual report software package. Additionally, automated footnote disclosures (i.e. FAS 115-1, FAS 157 and FAS 95) can streamline and facilitate compliance. The platform also provides asset management groups with an automated process for monitoring compliance against the investment policy on a daily basis. Performance and risk metrics are also measured and tracked daily against client-defined benchmarks.

IAM: If a company decides to convert to web-based reporting, what kinds of training and technology are needed, and does Clearwater provide all of this?

Gates: A web browser and Internet access are all that is required from a technology standpoint. Clearwater offers a variety of training opportunities for clients to meet their individual requirements. Overall, our platform is very intuitive and simple to use and we have people dedicated to helping clients use the system.

IAM: Finally, how do you structure your fees, and how would you indicate to a potential client the long-term advantages and savings to be gained from your web-based service?

Gates: Fees are typically calculated based on the value of the assets on which we report and can be influenced by the total asset size, number of positions, number of accounts, asset types, etc. Clients see three key benefits from using our system:

First, by eliminating manual, time intensive processes through automation, insurance organizations can free-up much needed resources to focus on more value-added activities such as investment analysis. Second, by having access to current, actionable and timely data, investors can make better decisions about their portfolios and improve their returns. Lastly, with actionable information at their fingertips, investors are better positioned to mount an offensive attack when market issues pose a challenge.

For instance, by using Clearwater's reporting capabilities, one of our clients was able to quantify and analyze their exposure to Auction Rate Securities, and mount an immediate campaign to sell that security type. In the end, they didn’t lose any money and they credit our system for helping them understand their exposure early enough to sell before it was too late.

In his 25-year career to date, Courtlandt Gates was a financial analyst at Morgan Stanley and a high-yield bond trader at Goldman Sachs before acquiring private equity and corporate management experience until, in 1997, he founded Vesper Investment Company Inc. in California, a company providing M&A, strategic planning and advisory services. He was appointed CEO of Clearwater Analytics in 2006.

Clearwater Analytics
950 W Bannock Street
Suite 1050
Boise, ID 83702
(208) 433-1200
www.clearwateranalytics.com

 

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