Insurance firms are making a significant move toward private market
assets to diversify against the risks that have traditionally
underpinned their businesses, a new BlackRock-commissioned study of
insurers with over $6.2 trillion of assets has found.
The ability of insurers to maintain portfolio returns is critical to the
types of products they can offer consumers and their ability to meet
liabilities. Against the backdrop of anaemic economic growth, depressed
bond yields and loose monetary policy, many insurers are reconfiguring
their asset mix to ensure these liabilities can be effectively managed.
BlackRock’s research, conducted by the Economist Intelligence Unit,
found that the number of insurers with over 15 per cent of their
portfolio in private market assets had more than quadrupled to 26 per
cent from 6 per cent three years ago, and is expected to nearly double
again to 46 per cent by 2017.
David Lomas, global head of BlackRock’s insurance asset management unit,
said, “It used to almost be ‘buy your bonds in the morning and relax in
the afternoon’, but insurers are now faced with a far more complex
operating environment. This research shows insurers that are having to
make a great migration toward private markets to diversify income
streams and maintain returns on equity.”
Taking measured risks
Lackluster yield from traditional fixed income instruments is driving
many insurers up the risk spectrum. Globally, one in three insurers
intends to increase their risk exposure over the next three years
compared to 15 per cent who intend to decrease risk. Of the risk-takers,
68 per cent are hoping to replace or enhance investment income, while 66
per cent point to the diversification benefits it would afford.
Lomas added: “The fixed income challenge is well known, but what is
interesting is the level of conviction CIOs seem to now have towards
things like real estate debt and infrastructure assets. Industry leaders
seem to be much more comfortable with investing in illiquid private
market assets for income. Fundamentally, a shift up the risk spectrum
needs to be achieved in a measured and targeted way.”
Migration challenges
Re-allocating for yield is proving challenging, the study suggests, with
insurers having to assess and invest in previously unchartered
territories.
Two fifths of insurers cite lack of access to the right opportunities as
a challenge and the same amount have concerns regarding pricing and
transparency of private assets. A third of insurers (33 per cent) are
also uncertain over how regulators would treat such moves in allocation.
Lomas commented: “The risk characteristics of these investments are
different to the more main stream assets that insurers have typically
bought. The complexity of re-locating assets to private markets can be a
challenge for investors, but given the potential returns and inflation
protection, as well as the diversification benefits and risk profile
that they can bring to a portfolio, the challenge may be worthwhile.”
The research
The Economist Intelligence Unit, on behalf of BlackRock, surveyed 243
senior executives from insurance and reinsurance companies around the
world to understand how they were responding to the pressures their
fixed income portfolios are under, and how they viewed private market
asset classes such as real estate and infrastructure as an investment
opportunity.
The full report can be found here:
https://www.blackrock.com/institutions/en-zz/literature/brochure/driving-returns-fig-research-report-en-gb.pdf
BlackRock’s Financial Institutions Group is the leading asset manager
for insurance assets in the world, managing 337 billion in unaffiliated
general account and subadvisory assets for 201 insurers in 28 countries
as at the end of June 2014. It is a team of 80 client service
professionals located in New York, San Francisco, Princeton, London,
Munich, Copenhagen and Milan. BlackRock also provides risk management
services to 61 insurers through BlackRock Solutions, BlackRock’s risk
management and advisory business. 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 guarantee of future results. This
information should not be relied upon by the reader as research or
investment advice.
The opinions expressed are as of September 29, 2014 and may change as
subsequent conditions vary.
©2014 BlackRock, Inc. All rights reserved. BLACKROCK, is a
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Copyright Business Wire 2014