Standing at a Crossroads
For life insurers, moving into asset management requires facing new options and decisions about where to invest and grow the portfolio, where to harvest and which areas to exit.
- Antonio Rodrigues, Jed Fallis and Andrew Schwedel
- February 2020
- The Situation:
While life insurers are saddled with financials that lack transparency their competitors prioritize cash flow visibility.
- Eyeing a Change:
Life insurers see asset management as a business that can pump up company value by growing revenues thereby attracting investors.
- The Reality:
Success for life insurers will likely stem from combining asset management with their unique protection capabilities and providing innovative solutions, for such matters as retirement income and drawing down assets.
Many life insurers are eager to move into asset management, where revenues have been growing faster than life insurance, generally with a higher return on equity as well. Equity investors also find it easier to assess earnings projections in asset management, so for a given growth rate, asset managers tend to be rewarded with a higher multiple than with straight life insurers.
Spurring the existential reflection are major challenges for life insurers in mature markets. Publicly listed insurers subject to quarterly earnings pressures have been facing competitors with more visibility to underlying cash flows and returns, as well as with longer-term investment horizons. For instance, private equity and pension fund investors such as Guggenheim and Blackstone have crowded into life insurance.
The fact is, life insurers globally have lagged in shareholder value creation in recent years compared with overall market performance, and often have not covered their cost of capital. Since the financial crisis, investors have increasingly balked at the opacity of life insurance financials, because much of what gets booked as earnings is subject to assumptions about interest rates and customers' longevity. Investors are placing greater emphasis on “intrinsic” measures of value such as free cash flow, dividends and the value of in-force and future business.
But while the grass might seem greener in asset management, that industry comes with its own substantial challenges. Fees have steadily eroded as low-cost passive strategies continue to gain market share at the expense of active strategies. In some countries, investor-protection regulations have cut commission revenues, while stricter compliance requirements have created significant costs for client advisers.
To create and sustain value in asset management, insurers will have to develop some new capabilities and make fundamental decisions about their strategy and operations. A focus on underwriting and manufacturing requires product innovation and actuarial chops. Alternatively, a distribution-intensive business requires knowing how to use technology to enhance advisers' productivity in sales and assets under management. The first set of decisions involves where to play, including the mix of products; where to participate along the value chain; and which customer segments and countries to target. Success will likely stem from combining asset management with their unique protection capabilities and providing innovative solutions, for such matters as retirement income and drawing down assets. With those strategic choices made, the next set of choices will determine how to win. To these ends, insurance companies can choose one of the five archetypes that we see standing out in the market.
This archetype emphasizes product design and capital management. An example is Jackson National, which focuses on variable annuities in the U.S. Jackson's suite of products offer varying investment options, benefit options and fee structures to address investors' needs, such as annuities targeted to ultra-high-net-worth clients. As a leading company in the market, Jackson also ranks first among variable annuity providers in its Net Promoter Score (a key metric of loyalty) from advisers. Jackson has a focused product strategy and a clear sense of how to win: adviser-centered distribution with product leadership, backed by the industry's largest and most productive wholesaling force.
Risk-Focused Investment Manager
Besides the obvious capability of investment management, this archetype tends to succeed through adept mergers and acquisitions, joint ventures and other forms of partnership. A unique partnership with private equity firm Apollo Global Management allows Athene Holding, an annuities firm, to invest in more specialized, higher-margin securitized assets and eventually move to direct origination.
While distribution is the key capability, customer service and relationship management also matter. This archetype comes in two forms, the first being a career agency model focused on protection. For instance, MassMutual is prominent in the U.S. whole life market, but has diversified into a range of protection and advisory products to individuals and employers. In recent years, MassMutual has seen the largest improvement in customer Net Promoter Score among U.S. life insurers. Customer relationships developed through a captive force of more than 8,000 advisers allow MassMutual to excel in cross-selling.
The second form focuses on broad financial planning, as exemplified by Ameriprise. The company started as a wealth manager and entered insurance through M&A. It distributes in the United States through a nationwide network of high-productivity captive and franchisee advisers. In recent years, Ameriprise has explicitly shifted its focus away from insurance and annuities, growing through a series of well-timed acquisitions in an extended bull market. Operating net revenue per adviser grew 8.5% in 2018, extending a history of continual growth
Data and Analytics Platform
Data and analytics capabilities form the backbone of this archetype, supplemented by product design, M&A and partnership skills. Discovery, based in South Africa, is perhaps the most successful example, through its digitally enabled platform called Vitality, a wellness program that rewards policyholders with discounts and perks based on healthy living. Discovery has been building scale globally for Vitality by partnering with incumbents in other countries. Investors have benefited with an average 16% total shareholder return over the past five years.
Platform Retirement Player
Both traditional insurers and asset-management-oriented companies compete in this arena. Here a company must master customer service and relationship management, data and analytics, and sustainable scale. Voya, for instance, divested its annuities business and exited life insurance in order to emphasize retirement products for companies of all sizes. Voya is using its employee-benefits business and focus on financial wellness to expand the platform of services offered in the workplace market. The strategy has reduced Voya's risk profile and increased free cash flow.
Each archetype poses distinct challenges. For example, some insurers relying on agent networks become detached from customers' priorities. Their cultures traditionally emphasized actuarial and distribution capabilities, and they invested to keep agents happy. Developing close customer relationships will require new muscles and habits.
Archetypes that depend on strong product design, by contrast, will have to step up their continual innovation by adopting recent technologies such as the Internet of Things, artificial intelligence to optimize risk profiling and price selection, and chat bots for client interactions. John Hancock has shifted to interactive policies that track fitness and health data through wearable devices and smartphones, in partnership with Discovery's Vitality platform. By creating a program based on preventive health and accrued benefits and rewards, Hancock increases engagement and contact with customers.
What's Your Value Creation Story?
An insurer also will need to succinctly communicate to investors how it will create value. More investors want to understand a company's approach to intrinsic value and nontraditional metrics such as free cash flow, not just the traditional metrics of revenue growth, return on investment and dividend growth. This explains why some insurers now incorporate cash metrics into their internal management and external communications. Prudential UK, for example, has made a string of structural changes to grow in a capital-efficient manner, and has spent considerable time educating investors on differing capital flows for new and in-force business.
Many life insurers are at a strategic crossroads, facing new options and decisions about where to invest and grow the portfolio, where to harvest, and which areas to exit. To successfully execute these choices, they must identify which capabilities are critical to develop and master, and which can be “good enough.”
Whatever their choices, insurers must do more than get the business basics right. They also must clearly communicate a compelling story to investors, so that investors understand why and how the business is performing and can gauge the model's sustainability. Choosing the right metrics to manage and communicate will give investors confidence that an insurer has made the right strategic and operational decisions through and through.
Best’s Review contributors Antonio Rodrigues, Jed Fallis and Andrew Schwedel are partners with Bain & Company’s Financial Services practice. They are based, respectively, in Toronto, Toronto and New York. They can be reached at email@example.com.