U.K. money management firms owned by insurance companies are set to capitalize on their existing client relationships and expertise when it comes to winning retirement business as the market changes and regulation forces insurers to diversify their sources of revenue, said Moody's Investors Service.
The credit ratings, research and risk analysis firm said in a sector comment published on its website Wednesday that these firms, whose owners are counted among the U.K.'s biggest providers of occupational retirement offerings, have developed a broad range of strategies aimed at the retirement market. “This should help them attract more business from external pension funds, while also converting some of their parent companies' pension customers into investment management clients,” a news release said.
Moody's said U.K. retirement reforms in 2015, which introduced freedom and choice and removed a requirement to purchase an annuity to provide income, along with the Solvency II capital requirements for insurance companies, have pushed insurers to expand their money management businesses. “Regulatory changes have led insurers to broaden their asset management offering, which in turn diversifies their revenues at lower capital cost, a credit positive,” said Alexandra Aspioti, an associate analyst at Moody's, in the news release.
However, depending more on revenues from money management activities will increase insurers' exposure to “tough conditions in the asset management industry, where margins are under pressure due to intensifying competition, increased regulatory scrutiny and mounting technology costs,” the release said.
The mergers between Standard Life and Aberdeen Asset Management, and between Janus Capital Group and Henderson Group were cited “as defensive responses to intense competitive pressure across the asset management industry,” added Marina Cremonese, a vice president at Moody's, also in the release.
Moody's said insurers and money managers are increasingly competing for the same pool of assets, which is intensifying competitive pressure on fees and leading to cost convergence in some cases. It said Legal & General Investment Management is well-positioned given its low-cost index offering, and said the merger between Standard Life and Aberdeen will bring benefits of scale and strategy diversity.