North American life insurers are targeting their wealth management businesses for revenues, due to challenges in their more traditional business lines. Life insurers are also moving into the wealth management arena both as fund manufacturers and wealth managers. Robin Arnfield explains
Lower life insurance sales combined with low interest rates are acting as a driver for insurers to expand their wealth management businesses.
According to LIMRA’s 2016 Life Insurance Ownership Study, 37.5m of the 125m US households own no life insurance.
The overall US household life insurance ownership rate dropped from 83% in 1960 to 70% in 2016, though the total number of households owning life insurance grew from 43.8m to 87.2m in the same period, LIMRA says.
Michael Burt, The Conference Board of Canada’s Director, Industrial Trends says: “Canadian life insurers face challenges associated with an ageing population, including an increase in death benefit claims and shrinking premium collections.”
“Canadian and US life insurer-owned asset managers have matured into significant operations with name brands and AUM, which rival pure-play peers,” Moody’s says in its North American Life Insurers: Asset Management, a Complementary Business with Pros and Cons report. “With approximately US$8tr of general and separate account assets on their balance sheets, third-party asset management is a natural extension of North American insurers’ in-house expertise.”
At year-end 2016, at least 40%, or 21, of Moody’s 53 rated North American life insurers, owned US asset managers, or were members of global insurance groups that own them.
“Prudential Financial, Sun Life Financial, and Ameriprise are formidable competitors in the retirement asset space,” Moody’s says.
The ratings agency says each has AUM, which include insurance plus pure asset management AUM, in the $500 billion to trillion dollar-range.
At the end of 2016, third-party AUM for publicly-reporting insurer-asset manager groups, including these companies, averaged 50% of their total AUM, and about 30% on a weighted average basis (although both percentages include some insurance-related AUM), according to Moody’s.
Acquisitions have been key to growing life insurers’ third-party asset management business, as at least 11 of the 21 companies have purchased one or more asset managers over time, Moody’s says.
In 2016, life insurer-owned asset management contributed about 20% to consolidated group earnings.
“We believe acquisition activity will continue, as life insurers continue to build out their fund offerings and scale,” Laura Bazer, a Moody’s vice president, says.
“Any fallout from the active to passively-managed fund trend in the next 18 months will help, increasing the availability of acquisition targets. Asset management can also serve insurers as long-term strategic investments, which supplement their core insurance business and diversify their asset holdings.”
Aite Group Research Analyst Bill Butterfield notes that several US insurers have sold their brokerage or advisor businesses due to US systemic risk regulations.
Butterfield says: “MetLife sold its retail advisor business to MassMutual (Massachusetts Mutual Life Insurance Company) in 2016 and spun off its US life insurance and annuities business to a separate entity called Brighthouse Financial in August 2017.
“AIG sold its independent broker-dealer business AIG Advisor Group to private equity firm Lightyear Capital and Canada’s PSP Investments. AIG and MetLife were seen as systemically risky due to their size, so had to sell some parts of their businesses.”
Butterfield explains that other insurers like John Hancock have retained their distribution arms.
“John Hancock manages its own mutual funds and has its own distribution arm, the John Hancock Financial Network, which owns the Signator Investors independent broker-dealer/advisor business.
“Signator’s network of independent advisors sell products from multiple carriers. However, Prudential isn’t so big on the distribution side and is more of a manufacturer of products that are sold via third-party broker-dealers, says Butterfield.
Moving into WM
In Will Trout’s opinon, who is Celent’s head of wealth management research, life insurers have moved into the WM arena, both as fund manufacturers and wealth managers.
He says: “In addition to their push into the taxable investments space, mostly via the traditional agent model, insurers now have particularly robust presences in the defined contributions business, marketing funds and wrap platforms through dedicated employee retirement portals.
“Expanded reach in the funds and managed account space has offset some of the decline in the annuity market that resulted from the US Department of Labor’s Conflict of Interest Rule (AKA Fiduciary Rule) and the UK’s Retail Distribution Review
“The shift from contract- and commission-focused business is likely to accelerate consistent with the growth of fee based platforms and propositions more broadly.”
Department of Labor Fiduciary Rule
The DoL introduced the Fiduciary Rule in June 2017 for financial advisers selling investments and fixed or variable annuities for 401(K) and IRA retirement accounts. The Rule will come fully into force in January 2018 when the Best Interest Contract Exemptions take effect.
The Rule elevates the compliance status under which they operate from ‘suitability’ – ensuring clients’ funds are invested in suitable accounts – to ‘fiduciary,’ where advisors have to put clients’ best interests first.
It requires advisers to move to fees from commissions, unless they commit to providing unconflicted advice under the Rule’s “Best Interest Contract Exemption,” which potentially opens them to lawsuits from disgruntled investors – a matter of concern for insurers, advisors, broker-dealers and distributors.
The Rule faces opposition in Congress, where the House of Representatives has approved the Financial Choice Act which would annul it. President Trump has asked the Secretary of Labor to review the Rule to see if it harms retirement plan sales.
“The uncertainty caused by the introduction of the DoL’s Fiduciary Rule and potential for litigation down the road has depressed sales of variable and fixed annuities for IRAs and qualifying retirement plans by life insurers,” Moody’s Bazer says.
“The legislation has a depressing effect on fee and commission income for the affected products. But, even without the legislation, there is a trend toward lower-cost fee income, as retail investors increasingly opt for low-cost passive investments rather than active investments.”
Bazer adds there is a possibility that the SEC could intervene to extend the requirements of the Fiduciary Rule to all types of investment products, irrespective of whether or not they are in retirement plans.
She says. “Advisers may feel that they should act in a fiduciary capacity for all categories of investments, treating them all in the same way, because of the possibility of legislation making this mandatory or of lawsuits from disgruntled investors.”