Insurance subsidiaries spreading their wings

More money managers that started life as insurance-company investment units are making a concerted effort to grow their in-house capabilities to increase the ratio of third-party assets.

These firms “are trying to structure themselves as professional asset managers, becoming players as well,” said Ben Phillips, New York-based partner at Casey, Quirk & Associates LLC.

“Insurers across the world are also trying to augment third-party assets. Publicly traded insurers with strong asset management capabilities tend to trade at about nine times EBITDA (earnings before interest, taxes, depreciation, and amortization), while those that do not trade around six or seven times,” he said.

In July, Euan Munro, who has been at the helm of Aviva Investors Global Services Ltd. since the start of the year, said he is keen to grow third-party assets under management at the £240.1 billion ($412.1 billion) money manager.

At a presentation in London, the London-based CEO said he has been reshaping the business. One part is launching multiasset funds — something he knows from his time as global head of multiasset investing and fixed-income teams at rival Standard Life Investments. There, he also was the architect of the popular global absolute-return strategy, known as GARS.

Mr. Munro said he thinks this will be “transformational” for Aviva Investors, which has been “largely focused on the insurance assets of Aviva.”

Mr. Munro was not available for a further interview, and other spokesmen for the institutional side of the business were not available to comment by press time.

However, looking at 2013 preliminary results of parent Aviva PLC published in March, the need to grow third-party assets is clear to management itself. “Aviva Investors grew its fund management contribution 74%, but at around 3% of group operating profit and with assets under management of £241 billion, this remains inadequate,” wrote Mark Wilson, CEO of Aviva Group PLC, in a note detailing the group's operating profits for the year. “Plans are in place to address these issues over the coming years, and Euan Munro brings much needed leadership and impetus to Aviva Investors.”

As of Dec. 31, total group operating profit before tax was £2 billion, with Aviva Investors contributing £68 million. External assets accounted for £48.1 billion, about 20%, of the total £241 billion. Aviva Investors was created following the merger of Morley Fund Management Ltd. and Norwich Union Investment Management Ltd. in July 2000.

Another firm that has been reaching for more is Legal & General Investment Management (Holdings) Ltd., owned by Legal & General Group. LGIM was established in 1970 to manage the parent company's assets but a decision was made in the early 1980s to extend these services to external clients to “diversify the client base,” said Ali Toutounchi, London-based managing director for index funds at LGIM. Several sources at money management firms singled out LGIM as an example of an insurer that has succeeded in moving to external money management.

“We focused on institutional clients, particularly pension funds, and we developed relationships with the consultants,” Mr. Toutounchi said, adding that he estimates “more than 90%” of the firm's $750 billion in assets under management is external.

For those that can make the leap to running third-party assets, the potential rewards are great.

In its Global Asset Management 2014 study, the Boston Consulting Group said insurers that have not historically focused on profitability and growth now “are tempted by the high returns on equity of third-party management.”

With insurers' asset growth squeezed — figures from the same study show total insurance company assets of $13 trillion at year-end 2013, a 7% rise for the year but lower than the overall historical average growth of 13% per year — this might be the time to take serious action.

But it is not easy. “Insurers ... are pretty good at asset allocation and portfolio construction,” said Craig Hapelt, partner at BCG in Toronto. But they have to consider the necessary expanded talent pool, bringing executives into the business to deal with consultants, face-to-face with pension funds and other external clients, and distribution.

There is also a concern over conflicts when it comes to securing investments. An insurer investing in private placement debt, for example, would have to “share the gems” between its general account and third-party clients, he said. That comes down to origination — either build teams to generate opportunities, said Mr. Hapelt, or share those gems. “We have found that a lot of clients moving in that (third-party management) direction have had that concern — as they get into the analytics they realize it is not a sustained worry,” he said.

And they have three potential advantages. Casey Quirk's Mr. Phillips said insurers generally have expertise in different strategies than more traditional money management, such as unit- and index-linked securities.

They are also focused on the long term. “Managing life insurance money, by definition, means very long-term investment, therefore the skill set we develop there is required for any long-term investors,” said Legal & General's Mr. Toutounchi. “Ultimately if you are a pension fund, you are long term, and a lot of the techniques used (in insurance asset management) can be used for them.”

The insurance asset management units also have their reputations.

Reputation is something on which the £191.7 billion manager Standard Life Investments Ltd. has capitalized.

Standard Life Investments' third-party assets account for about 55% of the total, compared with just 5% in 1998, when the money management arm was launched with total assets of £62.7 billion.

“There has been over the last five years a critical change of view — there was a belief (from) the late "90s (up to) the global financial crisis that insurance companies did not deliver superior performance,” said Keith Skeoch, Edinburgh-based CEO at SLI. The firm set itself the challenge of changing that mindset. “We won a lot of business as a third-party asset manager, post-financial crisis. The independence (from Standard Life Group, the manager's parent) combined with the access to a very strong balance sheet has been a source of comfort to clients.”

“(Insurers and their money management units) are seen as reliable, safe, investment-savvy investors,” said BCG's Mr. Hapelt.

Mr. Skeoch said the firm's experience in managing “large lumps of (in-house) money” made its investment performance scalable, while its investment approach also helped. “Rather than being an asset generator, we are set up and function as an asset manager. That means every now and then, when we believe a fund has reached capacity, we will close that fund to protect clients.

And the increased move to outsourcing assets, particularly in the insurance space, will benefit money managers that have grown out of institutional investors. “You want someone knowing the way it works,” said Mr. Phillips. “(Those investors) will be more comfortable talking to someone who has done it themselves.”