Insurers are likely to re-examine their allocations to fixed income
assets in 2013 as continued low interest rates challenge business models
and profitability, according to BlackRock’s
global insurance industry outlook, “2013: The Year Ahead.”
David Lomas, Head of the Financial Institutions Group within BlackRock’s
Institutional business, said, “This is a crucial time for insurers as
persistently low interest rates will challenge their income prospects
and stress their business models. We expect them to embrace new ways of
achieving profitability to meet the increasingly complex challenges of
the global investment environment and the post-crisis regulatory regime.”
The Year Ahead analyzes the key drivers that BlackRock believes will
shape the insurance industry, including the sector’s income prospects,
profitability targets and capital allocation techniques and provides
insight into the evolving regulatory landscape.
Mr. Lomas added: “Not only is profitability being squeezed, but the
investment returns insurers generate from traditional fixed-income
assets – to match their underwriting liabilities – are now harder to
access at attractive risk-to-reward levels. Central bank purchases of
quality fixed income assets, coupled with a global thirst for yield and
safety, has created an environment where newer bonds are being issued
with lower interest rates, but longer maturities. As a result, interest
rate risk is increasing significantly. Faced with the dilemma of needing
predictable cash-flows to pay client claims and policy guarantees,
insurers will need to be more selective and opportunistic with their
fixed income allocations than ever before.”
The current market volatility, regulatory changes, and increases in
capital are forcing banks to deleverage by exiting businesses, selling
assets and transferring risks. Mr. Lomas predicts larger insurers will
help to fill the void as they seek higher yields, some inflation
protection and superior risk-adjusted returns.
“We expect that some insurance companies will take advantage of the
situation and increase their exposure to illiquid assets, particularly
those assets with predictable cash flow, such as infrastructure project
finance,” said Mr. Lomas.
BlackRock recently established a European Infrastructure Debt investment
team in Europe to meet demand from insurers seeking long-dated and
predictable income at attractive levels. In addition, BlackRock also
expects increased inflows into areas such as opportunistic credit, real
estate debt (senior and mezzanine), social housing, high-yielding bank
loans and equity dividend strategies. Insurers are also expected to
begin to look beyond high-yield bonds and find attractive opportunities
in leveraged loans and collaterized loan obligations.
“Insurers may look to growth and higher investment returns in emerging
markets in order to increase and diversify revenue,” said Mr. Lomas. In
addition to emerging market sovereign hard currency debt, BlackRock
expects demand for emerging market corporate debt and local currency
denominated debt to increase.
BlackRock also expects insurers to increasingly implement their
investment strategies through exchange traded funds (ETFs). For example,
Mr. Lomas believes insurers in the developed world, seeking to diversify
away from the historically low levels of domestic sovereign fixed
income, will look to deploy assets in flexible credit oriented ETFs.
Mr. Lomas added: “The firm's success has always focused on having both
the foresight to anticipate its clients’ changing needs and developing
innovative product solutions to meet them. ETFs provide an efficient and
effective manner for insurers to deploy cash or tactically allocate
assets. For example, the inventory of emerging market fixed income is
limited – which may reduce the effectiveness of investing through
traditional means. ETFs can make this process more efficient. We’re
eager to work with our clients to show them how to more strategically
implement ETFs to their investment portfolios, and we’ll look to further
innovate products that meet their unique investment and regulatory
needs.”
Assets in fixed-income exchange traded products currently stand at
$339bn, just 0.3% of the overall $98 trillion global bond market.*
“The outlook we are releasing today reflects BlackRock’s insight into
the management of insurance assets globally and the firm’s commitment to
supporting insurers that are seeking independent advice and solutions in
the current low yield environment,” added Mr. Lomas.
*Source: BlackRock, ETP Landscape Industry Highlights, as at end
December 2012; Bank for International Settlements
About BlackRock
BlackRock is a leader in investment management, risk management and
advisory services for institutional and retail clients worldwide. At
December 31, 2012, BlackRock’s AUM was $3.792 trillion. BlackRock offers
products that span the risk spectrum to meet clients’ needs, including
active, enhanced and index strategies across markets and asset classes.
Products are offered in a variety of structures including separate
accounts, mutual funds, iShares® (exchange
traded funds), and other pooled investment vehicles. BlackRock also
offers risk management, advisory and enterprise investment system
services to a broad base of institutional investors through BlackRock
Solutions®. Headquartered in New York City, as of
December 31, 2012, the firm has approximately 10,500 employees in 30
countries and a major presence in key global markets, including North
and South America, Europe, Asia, Australia and the Middle East and
Africa. For additional information, please visit the Company's website
at www.blackrock.com.
About BlackRock’s Financial Institutions Group
BlackRock’s FIG business is dedicated to servicing the asset and risk
management needs of insurance firms, and provides solutions tailored to
their specific economic circumstances, the regulatory framework they
operate in, and their accounting balance sheets. The group manages $309
billion globally in unaffiliated sub advisory and general accounts for
144 insurers in 23 countries, as at the end of December 2012.
About iShares: iShares is the global product leader in exchange
traded funds with over 600 funds globally across equities, fixed income
and commodities, which trade on 20 exchanges worldwide. The iShares
Funds are bought and sold like common stocks on securities exchanges.
The iShares Funds are attractive to many individual and institutional
investors and financial intermediaries because of their relative low
cost, tax efficiency and trading flexibility. Investors can purchase and
sell shares through any brokerage firm, financial advisor, or online
broker, and hold the funds in any type of brokerage account. The iShares
customer base consists of the institutional segment of pension plans and
fund managers, as well as the retail segment of financial advisors and
high net worth individuals.
Carefully consider the iShares Funds’ investment objectives, risk
factors, and charges and expenses before investing. This and other
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obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com.
Read the prospectus carefully before investing.
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This material represents an assessment of the market environment at a
specific time and is not intended to be a forecast of future events or a
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