Life insurers are looking more like asset managers, and asset managers are facing structural changes.[@@]
Executives from Ernst & Young L.L.P., New York, gave that assessment today during the firm’s annual review of the state of the financial services industry.
The life insurance industry is shedding mortality risk and relying instead on fees and margins from assets under management, according to Peter Porrino, Americas director of Ernst & Young’s financial services practice.
While assets under management have contributed to strong performance, cost control has been a real driver of recent returns, Porrino said. General expenses as a percentage of total assets dropped 31 basis points to 1.11% in 2003 compared with 1.42% in 1992, Porrino said.
The improvement does not suggest that efforts to control distribution expenses could mean the end of the career agent, Porrino said. Rather, he predicted, there will be a “slow attrition” of career agents.
Acquisitions also will help improve earnings and expand distribution, and activity should pick up in 2005, Porrino said.
Porrino speculated that European insurers could return to the U.S. acquisition market and that some of the 2005 deals could could involves prices in the range of $10 billion to $20 billion.
- Porrino: In light of heightened regulatory scrutiny, insurers will have to be more aware of “reputational risk,” and the recent probes by New York State Attorney General Eliot Spitzer could lead to new compensation disclosure requirements for life insurers as well as for property-casualty insurers.
- Barry Kroeger, deputy director of E&Y’s Americas banking and capital markets practice: U.S. bank consolidation will continue.
- Robert Stein, chairman of E&Y’s Global Financial Services practice: Boards of directors are having more impact than they did even 18 months ago as corporate governance practices are revisited, and more board sessions are being held without the company’s chief executive officer. Meanwhile, he said, insurers and banks continue to separate the function of CEO and chairman. In 1998, 76% of banks and 85% of insurers had a combined post compared with a respective 68% and 60% in 2003.
But, even with the increased oversight, CEO compensation still remains relatively high. In 1993, the average compensation for the top 50 banks and insurance companies was $2.6 million, compared with $8.5 million in 2003.
- Steven Buller, E&Y’s Americas director and global co-director of asset management services: The changes initiated by Spitzer’s probes have resulted in the average compliance staff increasing from 2.5 people and 2 part-time attorneys in 2002 to a total of 6 staff and 3 full-time attorneys today, and “Eliot Spitzer and the SEC may not be done yet.”
A total of 42% of all fund groups had negative outflows, and the retail investor is putting less money in 401(k)s and more in bank investment products, separately managed accounts and hedge funds, Buller said.
Asset managers are going to have to attract both high-net-worth and middle-class investors, by, in effect, building a building with one entrance that says Neiman-Marcus and another entrance that says Wall Mart, Buller said.