At least 40% of North American life insurers now have affiliated asset managers

By James Langton |

Life insurer-owned asset managers have matured into significant operations with name brands and assets under management, which rival pure-play peers, Moody's Investors Service says in a report published on Tuesday.

Asset management businesses provide life insurance companies with revenue diversification, but also add volatility to their earnings, says New York City-based Moody's Investors Service in a report published on Tuesday.

At least 40% of North American life insurers now have affiliated asset managers, the Moody's report nots, which in many cases represent a substantial portion of their overall balance sheet. Life insurer-owned asset management contributed about 20% to consolidated group earnings in 2016, according to the report.

"Life insurers are, in essence, asset managers by virtue of their business — investing policyholder premiums in largely high quality assets in order to pay future claims. With approximately US$8 trillion 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," says Laura Bazer, vice president at Moody's, in a statement.

In particular, Prudential Financial, Sun Life Financial, and Ameriprise, are major competitors in the retirement asset space, the report says. Each company has assets under management (AUM), which include insurance plus pure asset management AUM, in the US$500 billion to US$1 trillion range, Moody's says.

While these forays into asset management provide diversification, they also pose added risks, the report notes. "Because life insurers already have sizable exposures to the equity market through their variable annuity, pension, and other separate account products, pure asset management will increase an insurer's overall exposure to the equity markets, adding volatility to consolidated earnings," the report says.

About half of these diversification efforts have involved acquisitions, according to the report, and it expects this to continue. "We believe acquisition activity will continue, as life insurers continue to build out their fund offerings and scale. Any fallout from the active to passively-managed fund trend in the next 18 months will also help, increasing the availability of acquisition targets," Bazer says.

The credit impact of asset management on life insurers ranges from negative to somewhat positive. "However, because the credit profiles of North American asset managers are currently weaker than those of their life insurance owners, North American life insurers that pivot away from life insurance to a pure asset management business model will likely have weaker ratings and/or credit profiles over time," the report says.