Standard Life Investments

Published Article

Standard Life Investments Q&A with InsurerAM News

Proposed Questions:

Q1. How does Standard Life Investments compare with other leading managers of outsourced insurance assets in terms of AUM, client numbers and global reach?

As at 30 June 2016, we had around £150 billion of insurance AUM and we believe this puts us in the top 3 of global insurance asset managers, although completely robust AUM data is not generally available in this sector.

We have over 70 insurance clients, primarily in UK, Continental Europe and with recent wins in many of the Asian markets, including China.

We are beginning to gain traction in USA with a number of exciting opportunities in the pipeline and Japan is also a large insurance asset management market where we are making very good progress.

So, we would feel that we compare favorably with other global insurance asset managers.

Q2. By comparison with 2015 and prior years, how is 2016 shaping up for Standard Life Investments with respect to investment performance of your insurer clients?

This very tough environment has given us the opportunity to evidence and prove the value that we can add to our clients through our market insights, insurance and regulatory expertise and the efficiency of our innovative insurance solutions that our clients have implemented.

So the difficult global environment for insurers does give us the opportunity to support and serve our clients and really add value for them.

Q3. What have been the important trends in the allocation of insurance client assets this year, and why? And which trends are likely to continue into 2017 and beyond.

It varies very much by region. In Asia we have seen increasing risk appetites leading to flows into equities and medium risk absolute return (including multi-asset) solutions, whereas in UK and Continental Europe it has been more about high yield fixed income and low risk absolute return solutions and with more than half an eye on capital efficiency.

In the USA, we have seen interest in structured products that help our absolute return solutions work more effectively under USA regulatory environments.

In UK and Continental Europe, the advent of the risk-based solvency regime, Solvency II, has meant that insurers are more constrained in the amount of asset risk that they can take on, as compared to regions, like Asia and USA, where risk-based regimes are more in their infancy.

There has been a strong global desire by insurers to invest in private market assets, like commercial real estate loans, although less asset allocation has occurred than might have been expected. This is because of shortages of insurer-eligible assets and also because regulators are often requiring insurers to enhance their risk modeling skills and tools before they will allow investment in what is still a relatively new asset class for them.

Looking forward we see major trends in absolute return, Private Market Assets, High Yield Fixed Income and Buy and Maintain mandates with the latter helping to reduce and manage trading costs.

Q4. Looking at the major regions of Europe, North America and Asia-Pacific, what differences do you see in the potential for growth in outsourced insurance assets, and why? Do other regions have appeal?

These are the three regions that we are focusing on at the moment and we would also see South America as a very attractive region, although more in the medium term.

In each of these three regions we see great potential, with perhaps the USA being the region that may present the largest short-term challenges. The risk and capital efficient insurance solutions that we specialize in can really add value in Europe and Asia where the regulatory environment is more market and risk based.

In USA, plain vanilla insurance asset solutions are more common and where competition is correspondingly stronger.

However, as the USA is moving in the same general regulatory direction as Europe and Asia, we can only see upside and accelerating interest and appetite for our insurance asset solutions and servicing capabilities.

Q5. In the past two years, Standard Life plc has taken two important steps in North America - the sale of its Canadian business to Manulife Financial, and the purchase of Ignis Asset Management from Phoenix Group. How have these initiatives impacted Standard Life Investments?

The purchase of Ignis brought with it a large book of insurance assets, around £60 billion, that we now manage on behalf of the Phoenix Group, the UK's leading consolidator of life insurance firms.

As a consequence, we can now evidence that Standard Life Investments has real hands-on experience of successfully on-boarding a fully-outsourced, large and highly complex insurance asset management mandate and we are definitely in the market for more of these in the USA and globally.

The sale of the Canadian business is consistent with Standard Life's capital-light insurance business model and, very importantly, has also given Standard Life Investments the opportunity to work in partnership with Manulife and its powerful distribution channels.

Q6. In Asia-Pacific, Standard Life has close relationships with HDFC Asset Management in India and Sumitomo Mitsui Trust Bank in Japan. How active in the insurance asset management field are these companies, and are you exploring similar relationships in other Asia-Pacific countries?

As a consequence of local Indian regulations, Indian asset managers, including HDFC AMC, are not able to manage the assets of HDFC Life, or other large Indian insurers. However this is an exciting and fast growing market that we are keeping a close eye on.

Insurance asset management is a priority for Sumitomo and we are working with them on a number of insurance solutions ideas that will add to their existing capabilities.

We are always interested in strategic alliances as these have worked very well for us in the past and add an extra dimension to our business. We are considering potential opportunities in China, and also USA, where we have seen great interest in risk-transfer ideas involving a heavy insurance solutions component.

Q7. In Europe, Solvency 11 and Brexit have both helped to encourage insurance investment managers to increase their share of riskier assets. How much longer do you see these two major developments affecting investment decision-making?

In our view, Brexit has not had much impact on insurers' asset allocations yet, despite the short term volatility that arose post the Brexit vote. However, we feel that it is really too early to understand if Brexit will result in insurers amending strategic asset allocations in the medium and longer terms.

We would say that Solvency II has encouraged insurers, and their asset managers, to be more thoughtful about the asset risks they take on. As a consequence of Solvency II's risk-based solvency requirements, insurers are seeking out capital efficient ways of taking on more risk in order to increase returns.

So the trick is to find insurance solutions that generate good returns, after having allowed for the costs of holding that solution's Solvency II risk capital requirements and this is an area where Standard Life Investments has, we feel, a very good track record.

In our opinion, it is actually more the current low interest rate environment that is driving insurers to increase their share of riskier assets. However, as our European Insurance Survey published this year found, Solvency II is acting as a constraint on this desired up-risking as a consequence of its risk-based capital requirements.

Q8. With risk appetite in Europe on the increase, and elsewhere too, how has Standard Life Investments responded asset-wise tactically and strategically, for itself and for its insurer clients? And how do the choices you have made compare with those of other insurance asset managers?

We have seen great interest, and real asset flow, into our insurance solutions that generate good returns in a risk managed and controlled manner. These solutions reduce and control risk, and so capital, without compromising returns and work especially well under Solvency II.

We have carried out a lot of work with independent advisers evidencing the efficacy of our solutions and also building and enhancing the very demanding operational and servicing capabilities that insurers require.

Absolute return funds and Private Market Assets are areas which have been successful and where we see potential. Buy and Maintain and High Yield Fixed Income are also important areas where the special requirements of insurers can challenge asset managers without dedicated insurance asset management capabilities.

The choices that we have made are broadly consistent with what we see other insurance asset managers planning and aspiring to achieve, although it can actually take many years to build the robust investment processes and intellectual capital needed to support these choices.

Q9. Fixed income assets, of course, are the vital center of an insurance company's portfolio, and alternatives in this sphere are every bit as important as in the outside world of equities, bank loans, infrastructure, private equity, real estate, etc. Which fixed income alternatives has Standard Life Investments been favoring, and why?

Low risk absolute return funds constructed primarily using multi-asset portfolios of global sovereign and corporate bonds in a risk managed manner, have performed extremely well in investment return terms and, additionally, are very efficient under risk-based solvency regimes, like Solvency II, where the true economic asset risks are reflected.

Private Market Assets is the other asset class which is a good alternative to traditional fixed income. These assets allow insurers to earn the illiquidity premium in a low risk manner, although very specialized investment and underwriting experience and capabilities are required to source and risk-assess these assets. Insurance supervisors are also taking a very keen interest here to ensure that insurers understand the risks they are taking on.

Q10. Finally, with calendar 2017 approaching rapidly, what does Standard Life Investments expect for the outsourced insurance asset management market next year, in terms of growth and performance for the industry, and for your company as well?

We can see a large global opportunity in insurance asset management provided, of course, that asset managers have the dedicated and specialized insurance teams, solutions and operational capabilities in place needed to support insurers.

This was confirmed by our European Insurance Survey, published this year, which found that insurers are planning to do more outsourcing across all asset classes and that they perceive a shortage of asset managers with the requisite insurance skills needed to support them.

2016 has been a good year in terms of net insurance asset flow for Standard Life Investments and we expect 2017 to be even better!

Bruce Porteous, Investment Director, Insurance Solutions

First published in InsurerAM News.