~ 73 per cent of insurers say low yields are biggest driver of change
for industry
~ 80 per cent say change needed to produce adequate shareholder
returns over three years
~ 52 per cent plan to diversify into new fixed income investments, a
third with riskier assets, and a fifth with more illiquid assets
NEW YORK--(BUSINESS WIRE)--
Quantitative easing (‘QE’) and uncertainty around tapering of asset
purchases by the Federal Reserve and other central banks is limiting the
ability of insurance companies to generate returns, and driving them to
diversify towards riskier assets, according to new research into the
investment strategies of over 200 insurers globally.
Unveiled in a report called Global
Insurance: Investment strategy at an Inflection Point?, produced
by BlackRock, Inc. (NYSE:BLK) in partnership with The Economist
Intelligence Unit (‘EIU’), the results highlight insurers’ changing
investment attitudes in response to central bank policy. With last
Wednesday’s decision to continue QE at its current pace, the report
suggests insurers need to consider how this uncertainty affects their
overall strategic asset allocation and the potential impact on their
businesses.
Low yields on investments were identified as the most critical driver of
change affecting the industry with 73 per cent of respondents citing
this. 80 per cent agreed their business will have to change to produce
adequate shareholder returns over the next three years.
When QE ends or tapers, however, insurers are expecting rising interest
rates, but there are widely divergent views on when QE will end. The
majority of insurers internationally (52 per cent) believe QE will end
within one and two years, while 35 per cent think it will continue for
more than two years. 13 per cent, however, see QE ending within a year.
In a ‘QE-infinity’ world before potential tapering was discussed by the
Fed, insurers said they were highly likely to increase allocations to
riskier, higher-yielding fixed income instruments such as bank loans and
lower rated debt (73 per cent), and illiquid strategies (68 per cent).
In an environment where QE tapering was expected, however, insurers
changed their investment approaches and risk appetite. After the Fed’s
introduction of an unofficial tapering timeline in late June, just 52
per cent said they were looking to invest in new, diversifying fixed
income asset classes; only 33 per cent were willing to take on more
investment risk; and just 17 per cent were seeking illiquidity premia.
The report shows that despite the uncertainty in markets and concerns
over restrictive regulations, many insurers see opportunities and are
confident of growth prospects. Of note, insurers are using
exchange-traded funds (ETFs) to diversify out of cash and access certain
asset classes, while remaining liquid. ETFs also help insurers deal with
supply issues, allowing them to invest in assets classes through ETFs
that may be difficult to access directly. 83 per cent of survey
respondents agree or strongly agree that more insurers will use ETFs
over the next three years, while 70 per cent agree that these vehicles
are suitable as a long-term strategic holding for both core and
satellite holdings.
Most respondents identified home markets as offering the best potential
for growth, with organic growth (75 per cent) and product innovation (63
per cent) identified as the chief catalysts for growth.
David Lomas, global head of BlackRock’s insurance business, comments:
“‘QE or not QE?’ - That is the question insurers need the Fed to
answer definitively as the implications for portfolios, investment
returns and ultimately their businesses are so dramatic. As the Fed
continues with asset purchases, our research shows insurers are much
more likely to buy higher yielding fixed income assets, invest in less
liquid assets and increase duration risk. However, tapering or even the
suggestion of tapering is ‘risk-off’ with firms seeking to reduce
duration in fixed income instruments.
“The market will continue to be dominated by several major themes -
reduced liquidity, constrained supply, idiosyncratic credit risk and the
unwind of unprecedented monetary stimulus. This study demonstrates the
incredible challenges insurers face in the coming months and the
nimbleness required when determining asset allocations.
“No matter the direction of central bank policy, insurers are opting
to increase allocations to illiquid assets like infrastructure debt and
real estate debt to meet long-term liabilities. We also see the appeal
of ETFs growing as they provide cost-efficient access to markets and are
suitable both as long-term strategic investments and interim beta for
core and satellite holdings. Lastly, risk management is clearly an area
where insurers are strengthening to handle market volatility and a more
diverse set of products. This increased focus on risk is giving them the
confidence to grow their businesses organically and innovate with new
products – even whilst some product lines are being challenged.”
The full report can be accessed at www.blackrock.com/intlfig.
About Global Insurance: Investment strategy at an Inflection Point
The Economist Intelligence Unit surveyed 206 insurers worldwide in April
and May 2013 on behalf of BlackRock. 102 had more than $25bn in assets,
20 had AUM of $11bn to $25bn, 22 with $6bn to $10bn, 24 had AUM of $2bn
to $5bn, 11 reported assets of $500 to $1bn and 27 insurers had
$100m-$500m AUM. Life companies accounted for 53 responses, non-life for
61 and composite amounted to 75 respondents. Seventeen were reinsurers.
Regionally respondents were split as follows: 103 from Europe, Africa
and Middle East; 63 from North America; and 40 from Asia-Pacific. An
additional survey was conducted in July 2013, of 100 respondents with a
similar demographic to the main survey. Additionally, in-depth
interviews were conducted with 17 experts from insurance companies,
regulators and trade bodies.
About BlackRock Financial Institutions Group
BlackRock has unrivalled insights into the management of insurance
company assets. Its Financial Institutions Group manages $306 billion
for 151 insurers in 20 countries as at the end of June 2013. In addition
to these asset management relationships, BlackRock also provides risk
management services to 56 insurers through BlackRock Solutions,
BlackRock’s risk management and advisory business.
About BlackRock
BlackRock is a leader in investment management and risk management
services for institutional and retail clients worldwide. At June 30,
2013, BlackRock’s AUM was $3.857 trillion. BlackRock helps clients meet
their goals and overcome challenges with a range of products that
include 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 June 30, 2013, the firm had
approximately 10,700 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.
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Tara McDonnell, 212-810-5337
Media Relations
Tara.McDonnell@blackrock.com
Source: BlackRock