Insurers to Embrace Non-Core Assets
Challenges Posed by Low Rates, Profitability and Regulation to
Drive Re-allocation
NEW YORK--(BUSINESS WIRE)--
Insurers are likely re-examine their allocations to fixed income assets
and invest in new financial instruments in 2014 in response to prolonged
low interest rates, regulatory changes, and profitability worries,
BlackRock’s annual insurance industry outlook suggests.
Insurers need predictable cash flows to meet underwriting liabilities,
but are struggling to generate enough income through traditional fixed
income investments to meet their liabilities and provide competitive
products. Because of this squeeze on income streams, BlackRock believes
insurers will relax investment guidelines and embrace more alternative
investment products.
David Lomas, Head of BlackRock’s Financial Institutions Group, “This is
a critical time for insurers. Profitability is being hurt by intense
competition on the liability side while poor returns from traditional
fixed incomes assets and costs to comply with impending regulation are
adding to the pressure.”
Alternative income sources
BlackRock predicts risks in traditional markets will prompt firms to
increase exposure to more alternative sources of income like
collateralized bank loans and infrastructure debt, as well as real
estate debt and mezzanine debt instruments. Insurers will have to
embrace less liquid and alternative investment strategies that offer
attractive risk-adjusted returns.
Conservative insurers have generally avoided these types of investments,
but in the last three years the assets BlackRock manages for insurers in
alternative fixed income products has increased fivefold to $11.4billion
from $2.1billion. Additionally, a recent client study of 20 large
insurers with $2 trillion of assets found 60 per cent intended to
increase allocations to real estate; 50 per cent intended to increase
allocations to real assets like infrastructure, and a third intended to
increase allocations to private equity.
“Insurers are looking for uncorrelated returns in diversifying assets
and are interested in harvesting proceeds from investing in less liquid
asset classes. Being generally flush with liquidity, they are willing to
take more illiquidity risk to get the returns they need,” Mr. Lomas
commented.
Regulation challenges
Preparations for regulations like Solvency II in Europe or the Own Risk
and Solvency Assessment in the US will see insurers further upgrade risk
management systems and add compliance staff to cope with increased
regulatory and reporting requirements, BlackRock predicts.
Mr. Lomas said, “Efficient use of capital and optimizing asset
management strategies in a compliant fashion with impending regulation
will undoubtedly be a theme driving activity globally; but this will
have its costs.”
Profitability and business impact
BlackRock’s Outlook also warns stronger demand for and limited
availability of alternative capital like insurance-linked securities
will pressure reinsurance pricing, mounting further strain on insurers’
profitability.
Consequently, BlackRock expects further growth in insurers’ use of
exchange-traded funds for lower-cost, liquid exposures to many credit
markets.
Mr. Lomas added, “Ultimately, if insurers’ profit margins dwindle and
the costs of doing business keep going up, then those players that do
not fully exploit the return potential of their assets will have to stop
offering some lines of less profitable business. This could mean less
choice for end consumers of those products.”
About BlackRock Financial Institutions Group
BlackRock has unrivalled insights into the management of insurance
company assets. Its Financial Institutions Group manages $327 billion
for 159 insurers in 23 countries as at the end of December 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, risk management and
advisory services for institutional and retail clients worldwide. At
December 31, 2013, BlackRock’s AUM was $4.324 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 December 31, 2013, the
firm had approximately 11,400 employees in more than 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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