InvestmentsMar 28 2018

How providers of insurance are changing their make-up

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How providers of insurance are changing their make-up

The UK’s life offices have long had an image as lumbering corporate giants, slow to change but offering a –  relatively – safe place for one’s money. 

But over the past two years, that image has slowly been changing. Several regulatory events, along with long-standing industry trends, mean the UK’s life offices have had to transform themselves as investors have developed a different relationship with their savings.

This process has hastened over the past few weeks with the news that Prudential, long seen as being slow to change, is to split in two and sell off its annuity book, and prior to this Standard Life Aberdeen began offloading its insurance business to Phoenix.

Transformation

Against this background Aegon has also been turning itself into a platform-focused business while Legal & General has made disposals to refocus itself.

Trevor Moss, senior analyst at Berenberg Bank, says: “I think companies are facing up to the fact that they need to refocus their business and they’ve got capital supporting businesses facing in the wrong direction to where the industry is going. It’s waking boards up to the fact that they need to do something about it.

“I think it’s basic Economics 101; it’s focusing on what you’re good at. The Standard Life Aberdeen and Prudential decision are evidence of companies waking up to the realities they need to focus their business on what they’re good at and make the right returns on capital.”

A big catalyst for change has been Solvency II, which has changed companies’ relationships with their use of capital. Fundamentally, to prevent insurance companies becoming insolvent, the European directive required insurers to put aside more capital against their insurance contracts. 

This has made insurance firms reassess the lines of business they are focused on. Mr Moss says: “It has identified the returns between capital light business and capital intensive business.” 

In addition, according to Ned Cazalet, chief executive of Cazalet Consulting, it has focused executives’ minds on the risks they are taking on. “Solvency II has been a massive driver for all of these organisations to determine what risk they are holding and how they are diversifying that risk.

“There’s much greater visibility on how to run this stuff – there’s better reporting, better risk management, and this has contributed to companies being much more aware of the liabilities they’re exposed to.”

The other driver has been pension freedoms. Releasing  people from the necessity of buying an annuity when they come to retire, has made many life offices rethink the need to  offer annuities. 

Prudential and Aegon have sold their annuity book, while Standard Life Aberdeen has sold its pension book and taken a stake in Virgin Money’s investment business. Other companies, however, have built up expertise in this area, with Rothesay Life buying  a large part of the annuity business from Aegon and the whole annuity business from Prudential, and Phoenix Life doing the same with Standard Life Aberdeen.

Accumulation

But firms have now seen that the growth area is in accumulating assets rather than decumulating.

Mr Moss says: “Pension freedoms has opened up a very significant change to the industry in terms of products and where people want to focus their business. Pensions could be considered to have an extremely high level of returns because most pension products could develop into being a drawdown product. 

“If you’re a 45-year-old saving for retirement, whereas you might have bought an annuity when you’re decumulating, that would go to another insurance company in decumulation. 

“Following pension freedoms that pension product is one and the same – you will keep invested for as long as you use drawdown.”

Key Points

  • UK life offices are undergoing a dramatic transformation
  • They have to specialise to stay in the game long-term
  • Different companies are adapting in different ways

This has meant that the future for many life offices is much more about being an asset manager and asset administrator.  

Mr Cazalet says: “Aviva has taken some key people from Standard Life Investments. It’s taken these people and said: ‘We’re going to turn this into an investment management business.’ But it’s extremely difficult – Standard Life succeeded; when you look at what they’ve done with Standard Life Investments it’s quite exceptional. Aviva is taking steps in that direction.

“The other company that has succeeded was Legal & General Investment Management (LGIM). They had in-house asset management doing active equities and they took a radical decision to focus on trackers, and that’s a highly credible standalone business.” 

LV, a smaller insurer and also a mutual, went the opposite route and moved out of asset management, transferring the management of its retail funds to Threadneedle in 2011.

Ian Smith, a partner in the global strategy group at KPMG, focused on asset management, has worked with large life offices trying to transform themselves into asset managers.

He says: “Organisations are taking decisions to specialise, so vertically integrated models of being all things to all men, means you need to be a very agile organisation, and have the behaviours to enable you to manage all of those things that are subtly different businesses.

“Organisations have history, and every organisation is unique, and it is often very difficult to change the DNA. You can change to an extent the infrastructure and set up new businesses, but it’s the people and the DNA that are the most critical aspects to focus on.”

He says the most successful companies were those that either focused on a particular product, promoted it and made it very successful, such as the way Standard Life did with Gars, or buying it through acquisition, such as Prudential buying M&G. Building a fund manager organically, turning from an insurance company with a few limited funds to a more outwardly focused asset manager, is much harder.

So what is the long-term future for the main players in the pension sector? Standard Life’s deal with Phoenix is not simply a straightforward disposal. Firstly, it has taken a 19.99 per cent stake in Phoenix Group, and while the latter will run the pension book, providing underwriting, and administration capabilities, the asset management will be done by Standard Life Aberdeen.

It will still be working with IFAs and the branding of its workplace pension products will be Standard Life. 

Mr Cazalet says: “They’re building up 1825 (their advice arm), but with this recent move it’s the sort of thing they would be reviewing regularly – are you really in the advice business? Are you really in the platform business? If you look three years from now and they decided to sell to someone, I would not fall off my chair.”

Refocusing

The Prudential deal is also all about focusing attention on the fund manager, now that the Asian, US and Africa business is self-contained, and not diverting management attention and resources away from the UK business.

Mr Moss says: “The UK business has a future, but it’s future is not in annuities. It’s a capital intensive business, it’s very long term and very low return on capital, that’s not where the business is heading.” 

He added that M&G was a “premier” fund manager, and keeping it in the UK business was sensible as the pension business could generate assets for it to manage.

The question for many is what happens to Aviva. Some think it has not adapted to the new environment.

Mr Moss says: “Aviva is the odd man out – it has not refocused its business – it’s a concern for me and a concern for shareholders. It is a Jack-of-all-trades and master of none.” One area of weakness, he says, is Aviva Investors – it is smaller by comparison, with £353bn of assets under management. In contrast LGIM has £983bn.

A spokesperson for Aviva said: “In a digital world, the advantages of being a true customer composite become more tangible. We have a greater opportunity to provide customers with a wide range of products to meet their specific needs. We can improve customer loyalty, increase multiple product holdings and cut costs which we can then pass back to the customer.”

Mark Wilson, chief executive of Aviva, said: “In 2017, Aviva Investors kept up its momentum, growing profit by 21 per cent and revenues by 14 per cent.  There were net inflows, in an industry that had some pretty big outflows, of £1.6 billion for the year.

“Asset management is a strategic priority for us and we have been investing in this area.”

Overall, the life insurance industry is undergoing huge change. Those that do not adapt will get left behind.

Melanie Tringham is features editor of Financial Adviser