Life companies are increasingly becoming prospects for investment banks' structured product business for their own accounts and as a conduit to their clients. "This is a very large opportunity," enthused Giles Rothwell, global head of investor solution sales at Barclays Capital in London. Rupert Barrett, in the U.K. structured products team at Citigroup, said, "This is a new strain of business."
On the client side, the move is sparked by the downturn in the so-called with-profits business. With-profits instruments are long-term savings policies that aim to smooth out stock market volatility. Interest has recently plummeted because of their poor performance and subsequent bad publicity. On the asset side, the interest is largely being driven by a Financial Services Authority rule known as CP195.
Friends Provident, a FTSE100 life, pensions and asset management company, issued its first alternative with-profits products earlier this year and is developing its second, according to Ian Jefferies, head of investment marketing at Friends Provident. The investment banks have been heavily pushing protected products, added Jefferies.
The success of Zurich Financial Services, which recently announced it has over GBP340 million (USD622 million) under management in its protected profits fund launched just a year ago, highlights the potential for growth.
Clarification of life company regulation by the Financial Services Authority this year is also likely to push life companies out of equities. Ed Reardon, v.p. in structures products research at JPMorgan in London, said the rule will change the way insurers view credit. "Single-tranche CDOs will be perfect for this," he added.