BlackRock: Insurers to boost private asset allocations

Global insurance firms are shifting away from fixed-income investments and into private assets, with real estate currently the most popular option.

Amid concerns over the global economic recovery, insurers are planning to make a major push into private assets over the next few years, according to a survey released yesterday by BlackRock. Real estate, particularly real estate debt, stands to be one of the largest beneficiaries from this allocation shift.

The shaky global economic recovery has led insurers and reinsurers to rethink investments in both fixed-income and private assets. More than half of survey respondents cited the weak global economic growth as the most serious macroeconomic risk to their fixed-income portfolios, while a similar percentage saw low interest rates as another risk to their fixed-income investments.

In fact, David Babbel, professor emeritus of insurance and risk management at The Wharton School at University of Pennsylvania, who was interviewed for the report, noted: “If interest rates stay low for much longer, insurers will not be able to support their distribution fees and administrative expenses.”  Moreover, as low rates persist, many firms are seeking higher-yielding investment opportunities outside investment-grade fixed income, such as private assets, which are often hedged against inflation and come with a higher risk premium because of their lack of liquidity.

Over the past three years, insurance firms have been overweight in investment-grade fixed income, but they have been gradually shifting more of their allocations to private assets. Three years ago, just 6 percent of insurers invested more than 15 percent of their total portfolios in private assets, but today that has risen to 26 percent and, in three years, that percentage is expected to grow further to 46 percent.

Within private assets, the two largest asset classes to which investors plan to increase their allocation over the coming year are real estate, which received 36 percent of respondents’ votes, and infrastructure, which attracted 34 percent. Within real estate, the largest segment where firms currently are investing capital is commercial real estate senior debt, followed by commercial real estate mezzanine debt and real estate equity.

“In many countries, new opportunities are opening up in infrastructure and real estate, with banks scaling back their exposure to these asset classes and many governments revising policy and regulation to make them more attractive to insurers,” the report stated.

Investing in private assets, however, comes with high barriers to entry. Respondents expected that access to opportunities and portfolio pricing and transparency would be the most significant challenges to making such investments over the next three years. Meanwhile, insurance regulations, which typically favor liquid and simple traditional assets, also pose an obstacle in that firms need to create special structures to hold private investments in order to comply with regulations.

BlackRock's report, Driving returns: Global insurers reconsider fixed income and private assets, reflected the responses of 243 insurers worldwide, with a total of more than $6.2 trillion of assets under management. Respondents included life insurers; health; property and casualty; multi-line; and reinsurers.