Deeper Perspectives. A paradigm shift in Insurance Asset Management

Transcription

1 Number 43 March 2017 A regular analysis of strategic issues in the institutional investment business Deeper Perspectives A paradigm shift in Insurance Asset Management In the past, asset managers may have seen selling to insurers as pitching a range of products. In reality, due to the particular demands of insurers, outsourcing is an opportunity for asset managers to be active and help create a bespoke solution, unique to the issues faced by each insurer. Our continued research into insurance asset management including feedback from our interviews, third party survey results and our knowledge of the industry, has led us to a new way of understanding insurance firms investment decisions. We hypothesise that insurers investment decisions are not being driven initially by a desire to invest in particular products. Instead, insurers have outcomes that they seek, and problems that they wish to solve. Product selection is secondary in this process, and is dependent upon the outcomes and problems of the particular insurer. Understanding that the mindset of insurers is not product-driven but outcome-oriented, is crucial for asset managers looking to win mandates from insurers. Suite 501 Salisbury House London Wall London EC2M 5QQ UK T Spence Johnson is a Data and Intelligence consultancy focused on the global asset management business. It provides our clients with essential data analytics, market intelligence in close partnership with our clients, and strategic consulting through our team of experts

2 Insurers are outcomes-oriented institutions Insurers investment decisions are driven by the outcomes that they seek, and problems they need to solve. Each insurer will have their own different set of outcomes, making each one unique. Understanding this mindset is crucial for asset managers. Our continued research into insurance asset management including feedback from our interviews, third party survey results and our knowledge of the industry, has led us to a new way of understanding insurance firms investment decisions. We hypothesise that insurers investment decisions are not being driven initially by a desire to invest in particular products. Instead, insurers have outcomes that they seek, and problems that they wish to solve. Product selection is secondary in this process, and is dependent upon the outcomes and problems of the particular insurer. More on resulting product demand can be seen in the following section of this report. Understanding that the mindset of insurers is not product-driven but outcome-oriented, is crucial for asset managers looking to win mandates from insurers. On the right, we have listed the nine most important outcomes that European insurers seek, and sorted them into an order of priority. Insurers will not be equally impacted by all of these factors equally, or necessarily in this order of priority. Aspects such as the size and type of insurer will impact which outcomes are sought by which firms. More specific aspects, unique to the firm at hand, will also impact the problems insurers face and the outcomes that they seek. These are many and varied, and include: The preparedness of the insurer for Solvency II Whether the insurer had a good or a bad financial crisis, thereby impacting their ability to take risks with their investments now The age and experience of the CIO Recognising that each insurer will have a unique set of problems and outcomes sought is crucial if third party managers want to win mandates. The following pages explore the difficulties currently faced by insurance companies. It is these difficulties that have led to our identification of the nine investment outcomes listed in the table to the right. The investment outcomes identified are not targeted in isolation. Each insurance company will have its own mix of difficulties faced and outcomes sought. Investment outcomes sought by European insurers In order of priority 1 Improve yields 2 Improve market returns 3 Improving capital efficiency of the portfolio 4 Reducing exposure to market volatility 5 Protect against credit quality deterioration 6 Protect against a sharp rise in interest rates 7 Improved longevity hedging/matching 8 Ensuring adequate liquidity of portfolio 9 Inflation-hedging An insurer s risk profile, and its own internal capabilities and needs, will drive each company s specific requirement for outside managers. One insurance company might want a fixed income partner to supplement its in-house team while another might seek out a manager in a particular asset class, such as municipal bonds. Other companies could engage a service provider for enterprise risk management analysis, business modelling or investment accounting or statutory reporting services. Outsourcing in the insurance world is not driven solely by performance, which is why this market differs from others. Stewart Foley, Partner at Insurance AUM Institutional Investor, Playing The Field (IAM453) 1 1

3 Outcomes sought determines assets outsourced In the past, asset managers may have seen selling to insurers as pitching a range of products. In reality, due to the demands of insurers, outsourcing is an opportunity for asset managers to be active and help create a bespoke solution, unique to the issues of the insurer. European Insurance Investment Outcomes and Products Map Traditio Income nal equities equity (Europe & Global) Equity Fixed Income Loans Cash Alternatives Solutions Volatility Govern Investm High Converti Multisectomaintain Buy-and- Commer Corporat Desposit Infrastru Infrastru Private Hedge Multi- targeted ment ent yield ble cial/resi e loans s/ short cture/ cture/ equity funds asset equities and Grade fixed bonds fixed fixed dential (Direct duration Real Real Agency Corporat income income income Mortage & CLOs) securitie Estate - Estate - Debt es strategie Loans/ s Equity/D Direct s ebt Securitie s 1 Improve yields 2 Improve market returns 3 Improving capital efficiency of the portfolio 4 Reducing exposure to market volatility 5 Protect against credit quality deterioration 6 Protect against a sharp rise in interest rates 7 Improved longevity Spence Johnson analysis hedging/ matching 8 Ensuring adequate liquidity of portfolio 9 Inflationhedging As shown in more detail in the report itself, insurers are not product-led in their investment decisions, but are instead focused on achieving certain outcomes. This chart reveals the products that can be used to help insurers achieve those outcomes. For example, an insurer that needs to improve its capital efficiency position should look to invest in those fixed income classes which are treated favourably under Solvency II (Convertibles, Multi-Sector, Buy and Maintain), Loans, Infrastructure, or Solutions. Third party managers become relevant where insurers are unable to make these investments in-house. Rather than merely offering a range of products, the role of the asset manager is far more focused on providing a bespoke solution, dependent on the unique outcomes of the particular insurer. This highlights the importance for the asset manager of understanding the mindset of the insurer coming to them. There are numerous implications for viewing insurance outsourcing in this manner. First is the lack of scalability of product solutions. Instead, asset managers will have to scale competency, rather than scale products, adding another layer of difficulty. Second, this demonstrates why the role of consultants in this market is minimal. With no products that are in demand by all insurers, there are no one-stop solutions that can be sold to everyone. Finally, as the sale procedure is complex, time-consuming and expensive., insurers are looking to reduce the number of asset managers they outsource to, even if they are looking to increase overall outsourcing. The expensive, time-consuming process also means that relationships that develop between insurers and asset managers tend to be sticky, and remain in place for longer. LDI & 'Other' Solution s 2 2

4 Product demand is varied and erratic Money in Motion trends in product demand reveal that there have been no overarching trends in recent years, and that flows have been varied and erratic. This is further proof that third party managers role in outsourcing is more complex, requiring a bespoke, unique solution. These two charts show the top three and bottom three fund sectors by net flow, according to Spence Johnson s Money in Motion. As can be seen, there are no clear trends in the products being demanded. For example, Corporate/Credit Fixed Income was in the top three from , but has been in the bottom three since then. LDI was in the top three in 2012 and 2013, but in the bottom three in 2014 and in H This matches our expectation that what insurers desire are not particular products, but particular outcomes. The result of this is that the asset class is secondary in their decision making, and that there is no one-stop product for all insurers. This also matches with our interview feedback, in that there do not appear to be any industry-wide trends to certain products that are universally accepted. However, this makes the role of the third party manager a more complex one. Lacking a product that will appeal to all insurers means that the outsourcing process becomes more complex in creating a bespoke, unique solution. This is also indicative of a market in which a small number of very large mandates can determine entire market trends. Large-scale relationships, such as that between Aberdeen and Scottish Widows, can indicate a market trend whilst actually being more of a one-off. Top three fund sectors by net flows, H Corporate/Credit Corporate/Credit Spence Johnson Money in Motion multi-asset solution Money market LDI Money market LDI multi-asset solution Corporate/Credit Bottom three fund sectors by net flows, Other/undefined fixed income Property Other/undefined Absolute Return fixed income Fiduciary management Money market H Other solutions Equity - Fundamental/ other active Equity - Passive Government LDI multi-asset solution Equity Passive Fixed Income Aggregate Corporate/Credit Corporate/Credit Fixed Income Aggregate Aggregate LDI multi-asset solution Equity- Fundamental/ other active Spence Johnson Money in Motion 3 3

5 Total assets nearly 10 trillion 2015 saw total assets held by insurers reach nearly 10trn for the eleven countries we are looking at. General account assets have increased to 6.6trn, accounting for 68% of total assets. Total balance sheet assets in the 11 European countries analysed are 10.0trn. This is made up of 6.6trn in general account assets (68%), 2.3trn in unit-linked assets (24%) and 0.8trn in other assets (8%). The total assets invested in general accounts has increased from 6.4trn last year, to 6.6trn this year. Included in our unit-linked assets are all assets for unit-linked insurance contracts, where the investment risk and yield sits with the policy holder as opposed to the insurance company. These assets are invested based on the guidelines of the investment product purchased. We discuss growth in unit-linked assets later in this chapter. Unit-linked assets increased from 2.0trn last year to 2.3trn. Other assets includes fixed business assets (e.g. property for offices), unrelated to policyholders and insurance clients. The bottom chart shows the breakdown across the same categories by country. While the European average has 65% of assets in the general account, the UK is the only country with a lower share than this. If the UK was to be removed, the share of assets in general accounts would increase to 73%, and the share in unit-linked would fall to 12%. European insurance balance sheet assets 2015 % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EIOPA, FINMA, SNL, Spence Johnson analysis Total asset breakdown by country, 2015 % 0.8trn, 8% 2.3trn, 24% 6.6trn, 68% 2015 trn General Account Unit-linked Other United Kingdom Netherlands Denmark Sweden Italy France Spain Belgium Norway Germany Switzerland 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% General account Unit-linked Other EIOPA, FINMA, SNL, Spence Johnson analysis 4 4

6 Leading providers offer additional services The leading third party managers in the industry all provide many additional services to insurers. These services should be seen as normal to provide, if not mandatory, rather than as additional as they often are at the moment. Additional services provided by asset managers to their insurance clients Actuarial/ ALM Analysis DFA Capital Tax Modelling Asset Allocation Analysis Income/ Cash Flow Modelling Quarterly Account Reviews Performance Attribution Portfolio Risk Reporting Regulatory Compliance BlackRock Deutsche AM Goldman Sachs PIMCO J.P. Morgan Wellington Service offered by asset manager The map above shows that the leading asset managers to insurers also provide a full range of additional services. While performance attribution and risk reporting are more operational services, there are also a number of services that draw on a manager s underlying investment skills such as ALM modelling and asset allocation analysis. While some managers have set up separate advisory teams offering services such as ALM on a paid basis, for many managers the ALM services they provide are part of their sales/client servicing process. ALMs conducted for insurers by asset managers are not done as an alternative to the insurer s own modelling, but rather as a way of helping assess the potential impact of investing in new products and asset classes. Being able to help prospective insurance clients understand the impact of investing in a particular product/solution can form a key part of a distribution strategy. Someone with insurance actuarial skills may be required for this capability. Gaining access to asset allocation expertise remains one of the key reasons why insurance firms are seeking outsourced partners for their portfolios. While asset managers do assist with asset liability modelling, building economically-optimised portfolios remains their primary function. Evidence suggests that services need to offered on an open architecture basis. Despite the increase in the cost of sale, the upside of winning clients in this manner is that they tend to be stickier. Interviewees highlighted the necessity for asset managers to take capital considerations into account when building portfolios through capital tax and capital efficiency modelling. Hedging is an important risk management tool, and it is likely that insurers will have specialised hedging needs. Derivatives teams within asset managers may need to acquire insurance-specific skills. Finally, the need to be able to speak insurance is important in successfully distributing products to clients. Experience can be built by working with clients over time, but a jumpstart can be made by hiring people from an insurance background. At least three of the nine respondents we interviewed recently at asset managers were ex-insurance CIOs. Further evidence of the services that third party managers may need to provide is offered on the next page

7 16% of GA assets to be outsourced by 2025 Third party asset managers currently manage 12% of European general account assets: 9% comes directly from insurers and 3% from insurer affiliated asset managers. By 2025 third party asset managers will manage 16%: 12% directly from insurers and 4% from affiliates. Given the regulatory environment, the trends in asset allocation among insurers and the trend towards outsourcing asset management services, we predict a combination of key changes in the future market landscape. The most important changes will be: European insurance company asset flows 2025 % 48% Affiliated asset managers 44% 1) Today insurers give 9% of their assets directly to third party managers, but this will increase to 12%. Third party managers (those not directly affiliated with an insurance company) will increasingly become better equipped to take on insurance general account business directly, partly because some affiliates are developing their offerings and client management capabilities to court third party insurance clients and partly because several non-affiliated asset managers are also developing teams and offerings to serve the insurance market. European insurance company GA assets 12% 4% Third party asset managers 16% Securities 2) Affiliates outsource 3% of IAM assets, but this will rise to 4%. Affiliates (asset managers directly linked to insurance companies) will, wherever possible, seek to avoid the use of third parties to help them invest, again driven by their own economics. But to an increasing degree, they will find the need to obtain third party manager help for their own specialist challenges due to the more esoteric asset classes and strategies the search for yield is pushing the towards. Spence Johnson analysis Direct investment 40% European insurance company asset flows 2015 % 3) As a result, third party managed general account assets will rise from current 12% to 16%. Thanks to a rise in assets flowing from affiliates and overall growth in outsourcing by insurers, there will be an overall increase in the assets outsourced to third party asset managers. 4) In terms of how the remainder of general account assets are invested we predict that there will be a slight increase in the assets entrusted to affiliates, from 47% to 48%, and a decrease in direct investment, from 44% to 40%. Both these movements will be driven by insurers looking to find solutions for the investment outcomes listed in previous pages. European insurance company GA assets 47% 9% Affiliated asset managers 3% Third party asset managers 44% 12% Securities Direct investment 44% Spence Johnson analysis 6 6

8 Deeper Perspectives Number 4243 January March 2017 We use Money in Motion and our Intelligence Spence Johnson s mission is to put data and intelligence at the heart of successful asset management businesses. This Deeper Perspectives is drawn from both our Money in Motion data, and latest Market Intelligence report focused on Insurance Asset Management. Data Money in Motion empowers asset managers to make better decisions by generating essential Asset, Flow, Revenue and Fee data at a unique level of detail Intelligence Our MI service is based on annual reports but delivered via a service in close partnership with our clients. It s designed to embed the detailed distribution, product and competitive intelligence required to be effective now and in the future Consulting Driven by our data analytics, intelligence and advice from our team of industry experts. Our work here requires a deep understanding of our clients and is focused on generating a specific strategic outcome Money in Motion Intelligence Reports $6 trillion Institutional AUM 50,000 accounts 500,000 Institutional Mandates >100 Managers Included 600,000 Investment Products 64% Market Coverage Spence Johnson 2017 Circulation or referencing only by permission 7

9 March 2017 Previous editions Previous editions Available from January 2017 Number DGF s Diversified growth funds have traditionally been focused on the UK institutional market, and DB pension schemes in particular. However, with lower forecast growth of DB for DGFs relative to DC, DGF providers are re-thinking their proposals. December 2016 Number Special Edition In this special edition of Deeper Perspectives we look at three of the major themes prominent in the global institutional asset management business in 2016 September 2016 Number 40 UK DB: LGPS Reforms Local authority pension schemes are merging into at least 6 pools. This means that asset managers will have to adjust to a vastly different competitive environment September 2016 Number 39 UK DB: A market looking for solutions As a result of the difficult situation faced by schemes, providers of solutions have been the main beneficiaries of the continued growth in private DB assets. September 2016 Number 38 APAC Institutional opportunity doubles by 2025 Strong growth from existing investors and emergence of new investors mean the region could see a close to doubling of addressable assets in the next 10 years. August 2016 Number 37 Smart Beta: multi factor vs alternative index Smart beta growth reflects a face-off between more active multi-factor strategies and more passive alternative index approaches June 2016 Number 36 Asia Pacific institutions strength in numbers Partnerships, co-investments and asset pooling on the rise as Asian institutions take a more collaborative approach towards investments March 2016 Number 35 Trends in client relationship management: In depth research into the trends in institutional client relationship management over the period. February 2016 Number 34 Insurance Asset Management Outsourcing growth 6% pa to 1.1trn by 2024 December 2015 Number 33 Unconstrained Fixed Income The future of fixed income investing in a low yield environment? November 2015 Number 32 The changing UK retirement income market The retirement income market moves from an era of compulsion to an era of choice November 2015 Number 31 UK DB Pensions -Winter is coming Only 13% of schemes are still open, net contributions are falling and the investment needs of DB schemes are fundamentally changing. October 2015 Number 30 DGF, New Players win Market Share The DGF market grew 15% last year and sits at the heart of the growth portfolios of many UK pension funds. July 2015 Number 29 Smart Beta - Our fastest growing MI segment The rapid expansion of the Smart Beta market in 2014 makes it the fastest growing market segment covered by Spence Johnson s Market Intelligence Service. June 2015 Number 28 Targeting growth markets in European Institutional We project future annual growth rates in institutional assets varying from -0.5% to 31%. 8 8