Insurers Weigh Riskier Investments

Insurers plan to raise their holdings in cash, noninvestment-grade fixed income assets, equities and liquid alternative investments over the next two years, a survey by the asset manager BlackRock found.

The survey of 315 global insurers gives retail financial advisors a glimpse of investment strategies insurance companies count on to deliver on income guarantees, also found that insurers plan to decrease their holdings in investment-grade fixed income and illiquid alternatives.

“Insurers have historically offered products with guaranteed minimum levels of income, and the ability to deliver that income has been getting more challenging in the prolonged low-interest environment,” said Zach Buchwald, head of BlackRock’s insurance asset management business in North America.

The extended period of low interest rates has made it difficult for insurers to reinvest maturing bonds into similarly-yielding assets without taking on more risk, which explains why insurers are “considering more expansive investment opportunities,” Buchwald said in an interview.

BlackRock manages over $400 billion dollars of assets on behalf of insurance companies.

The survey found that 50 percent of insurers said they planned to increase their cash holdings over the next 12 to 24 months, up from 36 percent last year, and in North America the percentage of insurers intending to increase cash holdings was even higher.

Every dollar an insurance company keeps in cash means one dollar less to invest and the higher cash positions mean insurers see fewer opportunities to buy the kind of investments insurers want to hold.

The report, titled “In the Eye of the Storm: Global Insures’ Investment Strategies 2016,” was published last month and called cash “the reluctant king.”

Survey data, collected by the Economist Intelligence Unit and commissioned by BlackRock, was based on responses from 315 senior executives in the insurance and reinsurance sectors during May and June 2016.

A Contradiction Emerges

This year’s report, the fifth in as many years, paints something of a contradictory investment tale as insurance companies plan to increase their cash positions – a safe and highly liquid haven – but also take on more risk in search of higher yields.

Investment grade fixed income assets, which insurers consider the staple of income generation and capital efficiency, is losing out to cash and government bonds and to risker and less liquid forms of credit, wrote David A. Lomas, managing director and global head of the Financial Institutions Group – Client Business.

In addition, new regulations “have brought different capital charges to bear on weighting decisions, and the attractiveness of various asset has fluctuated,” Lomas wrote.

Government bonds are “a natural match” for many types of insurance liabilities, wrote Jeff Jacobs, a managing director in the Financial Institutions Group – Portfolio Management.

In search of higher yielding assets, 41 percent of insurers said they plan to increase their noninvestment grade fixed income weightings, compared to 26 percent in 2015, the survey found.

In addition, 21 percent of insurers plan to increase equity allocations, compared with 13 percent last year, the report found.

More Appetite for Private Equity

Within private market asset allocations, the survey revealed the largest year-over-year increases in insurers’ asset allocations to direct mortgage lending, commercial equity, infrastructure equity and private equity.

Recently enacted European capital requirements known as Solvency II means that infrastructure debt is enjoying reduced capital charges. Similar regulatory treatment is “potentially in the offing” in other regions including in the U.S., wrote Jim Barry, managing director and global head of the BlackRock Real Assets Group.

The survey found that 53 percent of insurers plan to increase their exposure to direct commercial mortgage lending, compared with 38 percent last year, the survey found.

In commercial real estate equity, 48 percent of insurers planned an increase compared with 30 percent last year, the survey found.

Interest in private equity highlights this shift as well, with 49 percent planning to increase allocations compared with 27 percent last year, according to the survey.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].