Anticipated rates rise drives insurers into alternatives

20 August 2014   Category: News, Asia, Global   By David Macfarlane

New research from Boston-based global analytics firm Cerulli Associates finds that insurance general accounts' increasing usage of alternative investments is accelerated by the anticipated rise of interest rates.

“Although they comprise a relatively small portion of total assets, large insurance companies have been known for their direct investments in private equity, real estate, and infrastructure," states Alexi Maravel, associate director at Cerulli. "Much like other institutional investors, insurance chief investment officers and other investment professionals are using alternatives for diversification of investment risks, as well as seeking non-correlated sources of returns.”

Many of Cerulli’s findings were paralleled in a survey of the global insurance market conducted by Goldman Sachs Asset Management (GSAM) entitled Risk On… Reluctantly, which came out in March this year. In July, Asia Asset Management co-hosted a roundtable with the firm, which was attended by CIOs and other senior executives from some of Asia-Pacific’s top insurance players, who were there to discuss the survey and provide insight as to current investing trends and themes.

At the event, New York-based John Melvin, global CIO of GSAM’s insurance unit, indicated that insurers, both worldwide and regionally, were seeking to increase their allocations to riskier and alternative assets amid a lower yield environment for traditional asset classes.

When it came to those asset classes that insurers said they were seeking to raise their exposure to over the coming 12 months, private equity again came out on top, Mr. Melvin pointed out. Overall, alternatives were an obvious theme, according to the GSAM survey, with 33% of those that took part saying they were seeking to raise their exposure to private equity over the next 12 months; followed by infrastructure debt at 29%; and real estate equity at 28%.

In its Insurance General Accounts: Opportunities in an Underserved Market report, Cerulli assesses the management of insurance general account investment portfolios in the United States and insurance companies' increasing interest in outsourcing investment functions to institutional asset managers. The report examines the unique nature and constraints involved in managing insurance company balance sheet assets, outlines the evolution of insurers' asset allocation decisions over recent years, and analyses what changes may lead to the movement of billions of dollars in the coming years. 

“Alternatives managers that work with insurance companies privately cite regulators' lack of understanding of limited partnerships and other alternatives' structures, as well as the need for education among insurers' internal investment professionals and investment committees as barriers to adoption of alternatives in insurance investment portfolios,” Mr. Maravel explained. 

“The general adoption of alternatives among different types of insurers has steadily grown over the past few years,” he continued. “Several asset managers have made acquisitions to bolster their alternatives capabilities to better serve insurers as well as other institutional clients.”

GSAM’s survey discovered that the other class of alternative investment that has been gaining recent interest among Asian institutions is infrastructure debt – 30% of Asian respondents were seeking to raise their exposure to these assets. Mr. Melvin told delegates that the reasons for this were manifold: one, because infrastructure debt lends diversification to a corporate and sovereign credit rich portfolio; and two, because these are long-dated, illiquid assets that offer spread.

According to the GSAM survey, 24% of Asian insurers will over the next 12 months also seek to raise their allocations to real estate, another alternative asset class. Another senior GSAM executive at the event said there was already growing evidence of this taking place in the region.