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Professional investors turning to illiquidity and alternatives in search of returns

Insurance funds offer leading indicator for client portfolios

Leading investment consultancy bFinance this week released its Insurer Investment Survey, which seeks to understand the investment intentions of the holders of about US$5 trillion ($6.9 trillion) in global capital. With insurance statutory funds among the most powerful investors in the world, the survey provided unique insights into their intentions and strategy.

Running a profitable insurance company hasn’t become any easier in recent years. Traditionally, insurers could generate strong returns using prepaid premiums by investing solely into traditional fixed-income investments like government bonds. This all changed when global bond rates neared zero and the threat of capital losses and underfunding became real.

Such has been the turnaround in bond rates and the economy that bFinance reports more than 62 per cent of insurers now plan to cut their fixed-income allocations further in the next 18 months. It is a similar trend to that which is occurring in the wholesale market, with financial advisers faced with the conundrum of how to find a new home for investments nearly guaranteed to deliver 0 per cent returns.

  • The challenge in delivering on return objectives is most harshly felt by insurance companies, with many now accepting higher levels of risk and illiquidity to do so. In fact, some 74 per cent of the 90 insurers surveyed around the world expect to increase the illiquid component of their portfolio in 2022 and beyond.

    In an interesting shift, after dominating capital flows in recent years, new entrants to corporate private debt, such as high-yield, has slowed significantly, likely a result of tightening spreads in many of these markets. As an alternative, insurers have elected to loosen the credit risk lever and turn back toward equities. This obviously comes with its own risks, given that insurers must maintain a level of solvency at all times; hence, a market correction could result in capital raisings.

    The average insurance company now has 10 per cent in equities, 7 per cent in real estate and 8 per cent in other alternatives, with cash also making a comeback, hitting 7 per cent in the latest quarter. Of particular interest to advisers is the “unfamiliar” asset classes where funds are being deployed, which may well act as a leading indicator for the rest of industry.

    Infrastructure equity is now held in more than half the portfolios, up from 36 per cent and likely due to the perceived inflation hedging benefits. Emerging market debt has also garnered significant capital flows, with 62 per cent of funds now invested, seeking to capitalise on the globally attractive yields on offer.

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