European insurers’ extensive pools of assets have become the latest battleground for investment managers, leaving some insurance-owned fund businesses struggling to compete.
With €10tn in assets, European life insurers represent an eye-watering market opportunity for fund groups. Assets managed on behalf of insurers are projected to grow further as low interest rates push insurers to diversify away from their traditional fixed-income books and seek riskier assets.
Insurer-owned managers such as Generali Investments, Axa Investment Managers and Aviva Investors traditionally served as the default manager for their parents’ assets, placing them in pole position to scoop up new insurance business.
However, tectonic changes taking place in the European insurance industry are posing dilemmas for insurers’ in-house asset managers. Most insurer-owned asset managers lag behind more nimble independent fund houses and have struggled to establish themselves as competitive businesses in their own right.
While this was sustainable for as long as in-house asset managers benefited from a constant flow of assets from their parents, these groups are at risk of losing business to external competitors who are better equipped to address insurance companies’ changing needs.
Paris-based asset management consultancy Indefi forecasts that the amount of assets outsourced by European insurers to unaffiliated asset managers will surpass €1tn by next year. “Insurance-owned asset managers tend to be conservative,” says Richard Bruyère, managing partner at Indefi. “They have struggled to adapt to the new deal and as a result they are losing business.”
This deal is a profound shift in the way insurers invest their money as a result of low interest rates and higher capital requirements. “Asset allocation for insurers is evolving significantly,” says Francesco Martorana, chief executive of Generali Insurance Asset Management.
Paper-thin or even negative yields are forcing insurers to diversify their general account investments, which used to comprise mainly government and investment-grade bonds, plus some listed equities. They are adding more esoteric fixed-income assets or private assets, real estate and alternatives. A recent survey by Natixis Investment Managers found that three-quarters of insurers say allocating to alternative assets was “essential”, while more than half described using such investments as a “replacement” for fixed income.
However, these types of investments are far removed from the traditional offerings of insurance-owned asset managers. The glaring gaps in their product ranges are more exposed, leaving them scrambling to compete. Nearly a third of the insurers surveyed by Natixis IM said they lack the necessary expertise in-house for their desired asset allocation.
“Insurer-owned asset managers were typically focused on public markets,” says Mr Martorana. “Now that public markets are not enough, we need to equip ourselves with sourcing and management capabilities focused on private debt, private equity and real estate.”
Some groups have been more reactive than others in rising to this challenge. Allianz Global Investors, the in-house asset manager of German insurer Allianz, has built its alternative asset management unit in recent years, growing it from virtually nothing in 2013 to about €70bn today.
Rivals are racing to catch up. Last year, Aviva Investors brought together several businesses to form a dedicated real assets unit, which manages £42bn. “Our ambition is to become the pan-European leader in the sector,” says chief executive Euan Munro.
Meanwhile, Generali has set aside €4bn to expand its businesses including its fund arm. This will involve making acquisitions as it seeks to fill gaps in its product range. Having already bought stakes in alternative and multi-asset boutiques, Generali is looking to add private asset expertise via M&A and organic growth, says Mr Martorana.
Another big change for insurers is their increasing move away from guaranteed savings vehicles, which have become more expensive to operate in the wake of EU regulations known as Solvency II.
“Solvency II means that insurers have to earn higher yields to generate an adequate margin for clients,” says Farooq Hanif, an analyst at Credit Suisse. “When yields were high they were able to offer guaranteed savings products through their life business [but] the problem right now is there is no yield anywhere.”
As a result, many European insurers are turning to unit-linked vehicles, tax-friendly savings products that use funds as their underlying investments. While the shift towards unit-linked is an undeniable opportunity for asset managers, insurer-owned groups face stiff competition in having their funds selected.
“Moving to a unit-linked model makes it harder for insurance businesses to differentiate themselves with standalone asset managers,” says Mr Hanif. Increasing investor sensitivity to cost and whether funds justify their charges has accentuated this pressure. “It is harder for insurers to get the same margins on selling funds so they are more attentive to fees,” he says.
Unless insurers’ asset managers have a niche that makes them stand out — such as LGIM’s expertise in passive investments — they risk being sidelined in favour of independent asset managers with more competitive offerings.
Keith Skeoch, chief executive of Standard Life Aberdeen, notes that some in-house asset managers lack a “performance culture” because they do not compete day in, day out for business in the same way independent groups do.
Mr Skeoch’s focus on this while at Standard Life Investments, which later merged with Aberdeen Asset Management and pivoted to being a pure asset manager, helped to transform the business into a competitive asset manager. “Culture eats strategy for breakfast is the overused but accurate assessment. At SLI we recognised early that we had to build a self-standing investment culture,” says Mr Skeoch.
Yet insurer-owned asset managers have an edge over their independent counterparts in having “skin in the game” in their investments. “The advantage we have when pitching to external clients is we can offer a pretty unique alignment of interest with them, because when we launch a strategy, Generali typically invests a lot of its capital as well,” says Mr Martorana.
As consolidation gathers pace among asset managers and unprofitable groups are squeezed out, competitive pressures facing insurer-owned managers raise questions about their future. Some insurance companies are considering whether to offload their fund arms following disappointing results. Axa received takeover proposals for its asset management arm from two French rivals in 2017, and a recent reshuffle of the division’s top ranks has ignited speculation about its strategic direction.
Generali Investments is one of the few insurer-owned asset managers that is receiving significant buy-in and investment from its parent to embark on a growth drive. However, the fund unit is expanding from a low base. For a long time it was not a source of growth for the Generali group and did not contribute a significant amount to group profits. “We realised we were not leveraging our skills enough,” says Mr Martorana.
Mr Hanif believes that most large insurers will hang on to their fund management arms because they want to have close control over a function is vital to manage their assets and liabilities. A bigger question is whether insurers give these businesses the resources and freedom to grow externally, or whether they keep them solely to manage in-house assets.
Despite their efforts to attract external clients, progress has been slow for the likes of Aviva Investors, Axa Investment Managers and Generali Investments. Assets managed for external clients make just up 19 per cent of Aviva Investors’ asset pool. For Generali Investments, they represent 15 per cent.
“Some groups are scaling back from targeting third-party assets, and focusing on serving their parents after finding third-party growth is hard to come by,” says Mr Bruyère.
Aviva Investors, which is to be merged into a wider retirement, savings and investment unit within its parent company, suffered £914m of net redemptions from external investors in the first half of the year, and registered a 17 per cent fall in operating profit.
Mr Munro attributes the profit decline to the cost of investing in its real assets capabilities and equity capabilities, adding that the company is “starting to see the benefits of that investment coming through in the second half of 2019”.
Mr Hanif notes that while the immediate priority for most insurer-own asset managers is to build up capabilities to improve yields for their parent, they may open up again to external clients in the future. “Ultimately insurers can differentiate themselves externally by marketing their skills in liability-driven investment or illiquids, they just haven’t focused on this yet,” he says.
Generali Investments, for example, believes responding to the demands of its parent can help it earn credibility in the wider market. “As an asset manager, we have to react to the pressures facing our clients, but they are also an opportunity for us, given the size of the European insurance market,” says Mr Martorana.