FRANKFURT -- German insurance companies with newly established asset management operations are starting to challenge domestic investment banks' dominant position in institutional money management.
Aachener Munchener Gruppe, Cologne, is the latest German insurer poised to launch an asset management company, or KAG (Kapitalanlagegesellschaft), within the next few months.
Once AM Generali KAG is established, it will consider managing in-house almost 7 billion deutsche marks ($3.64 billion) of parent AM Gruppe investment funds now managed externally by a range of German banks, including Dresdner Bank AG and Commerzbank AG, said Heinz Gawlak, managing director of AM Generali KAG, Cologne.
The roughly 10% of the group's total investible assets earmarked to be brought in-house likely will be transferred to the KAG over the next 12 to 18 months by which time the group also hopes to be able to win third-party institutional mandates, he added.
AM Gruppe is the most recent in a long line of insurers that have set up asset management operations in the past two years. The others include Axa Colonia Konzern AG, Cologne, and Ergo Versicherungsgruppe AG, Dusseldorf.
Capital gains effect
Plans by the German government to introduce a capital gains tax on life insurance products have put a rocket under local insurers that are attempting to diversify their offerings and include mutual fund-linked savings instruments. Domestic insurers have realized they need credible, marketable money managers in order to tap this potentially lucrative market. But the newly established KAGs are not simply focused on winning retail business. Increasing numbers of insurers are likely to transfer the management of their assets from investment banks to their newly established asset management operations and begin searching for third-party business.
Wolfgang Plum, managing director at Commerz Invest, the KAG of Commerzbank AG, Frankfurt, said the expected loss of assets to the AM KAG is not "a development we like to have," but added it is inevitable as insurers attempt to improve their asset management operations. He believes Germany's institutional funds investment market is growing fast enough to absorb the overall effect of losing some of the insurance money.
The institutional market has mushroomed in the past five years. The latest figures from the German central bank put the institutional funds market at 836 billion marks in October compared with 257 billion marks in October 1994.
Axa Colonia KAG was established in 1998 to run the assets of its parent insurance company, AXA Colonia Konzern AG. But it has been managing third-party assets since early 1999 when AXA Investment Management SA, Paris, took a 51% stake in the business. The group is in the process of relaunching in order to increase its share of third-party institutional mandates, said Guenther Skrzypek, chief executive of Axa Colonia KAG.
The KAG has 16 billion marks under management, of which only 14 billion marks is institutional money. Just 20% of its institutional assets are from third parties. The balance is assets managed for AXA Colonia.
"In the market we hear that insurance companies setting up KAGs have withdrawn mandates from other managers. But it is very hard to say at this stage how much the insurers have repatriated to their own KAGs. This business is very sensitive," said Mr. Skrzypek.
Typically, a newly established KAG will begin life by managing its parent company's assets, said Peter Koenig executive director for Morgan Stanley Bank, Frankfurt, and executive director for Morgan Stanley Dean Witter's European pensions group. Once they have built a base of assets to manage, they will begin to pitch for third-party institutional business before launching a retail business.
This is causing great concern among some of Germany's investment groups. Assets held by insurance companies are a major source of business for Germany's institutional money managers.
"Our clients are becoming our competitors. It is very delicate," said Hans-Dieter Bauernfeind, head of investment management at Dresdner Bank AG, Frankfurt.
Research by Datamonitor PLC, London, found that German banks saw the threat posed to both their retail and institutional business by the German insurers as bigger than that posed by foreign money managers. "Insurers place a great deal of money with investment banks and the banks stand to lose this as well as third-party mandates if the insurance-linked money managers are successful," said Antony Kelsey, an analyst who conducted the research for Datamonitor.
But building a suitably qualified and competitive group of money managers will be a key problem for the insurers to solve.
"The insurers' own asset managers have to date just dealt with domestic bonds. It is in equities and international investments that the investment banks have the upper hand," said Mr. Kelsey.
The recent acquisition by Allianz AG Holding, Munich, of Pacific Investment Management Co., Newport Beach, Calif., for example, gave the group much needed access to a broad range of fixed-income management skills that will enable it to compete with Germany's largest banks.
Not all of the KAGs set up by insurers have the capacity to take on the establishment, said Philip Nash, director of institutional business for Barclays Global Investors Ltd., London. Those that succeed in challenging established money managers will need strong back-office support and a broad range of products, which implies a link to an international money manager.