While interest rates remain low, so do insurance company investment returns, a trend leading to structural shifts in asset allocation across the industry.
In a survey of its top 50 insurance clients, global investment firm KKR found that respondents moved more money to alternative assets during the period 2017 to 2021. Allocations to non-investments traditional rose from 20.4% in 2017 to 31.8% in 2021, according to the survey.
Respondents made these changes largely by shifting their portfolios from investment grade fixed income, which fell 12.2 percentage points since 2017, and liquid stocks, which fell 3.6 percentage points during the same period. Beneficiaries included non-traditional investments like private credit, mortgage, infrastructure and private equity, which collectively grew from 12.1% of portfolios in 2017 to 19.2% in 2021.
“We believe CIOs are embracing the complexity and thoughtful use of illiquidity, as public market assets shrink and excess liquidity accumulates,” wrote the report’s authors, including Henry McVey, head of macro macro and asset allocation at KKR. “Better asset-liability matching and more robust risk management have also helped, in our opinion. ”
Over the next five years, KKR expects lower returns across all asset classes due to high multiples, low interest rates and strong margins. For insurance CIOs, switching to asset classes with higher expected returns may act as a buffer against these falling returns: KKR now expects the average insurance company in the survey reports 2.9% over the next five years, up from 2.6% in 2017.
The push towards alternatives is also expected to continue: “As many CIOs continue to catch up with their allocations and find that alternative returns exceed the capital charges incurred and that forward return expectations across all classes d ‘Assets Decline, Appetite For We believe illiquid and illiquid investments should continue to accelerate, ”the report said.
The evolution of asset allocations is part of a larger movement by beneficiaries towards “more strategic and thoughtful risk-taking”, according to the report. Due to low interest rates and the resulting low investment returns, 80% of respondents said they allocated more capital to illiquid products, high dividend stocks and private market fixed income securities. Respondents also said they were increasing their investments in private credit, executing “opportunistic risk-taking to the limit” and relying on “real estate assets more than before”.
“Accepting risk involves adding layers of complexity primarily through non-traditional asset classes,” the report says. “Have insurers done enough with their portfolios to compensate for the downward seismic slide in rates? The answer is apparently no.