Alternative Investments: Insurance Company CIOs Between a Rock and a Hard Place

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On the one side, chronically low yields. On the other, a regulatory bar on alternative investments.

Natixis Investment Managers commissioned a survey of 200 Chief Investment Officers (CIOs) at insurers in Asia, Europe, and North America. Nearly 75% said that it was essential to include alternative investments in their portfolios.

Their view emerged from current trends that make it very difficult for CIOs to earn alpha.

Insurers and alternative investments: The pressure from persistent low rates of interest

Low-interest rates after the 2008 crisis have crushed bond yields, a bread-and-butter source of income for insurers. Further, the trend also pushed up their liabilities and exacerbated duration mismatches. Therefore, many insurers are struggling to meet their commitments to policy-holders and honor their investment guarantees.

It’s bad enough that 73% of CIOs rank low-interest rates a key portfolio worry. Unsurprisingly, 75% said they struggled to balance the objectives of generating alpha and containing risk.

Moreover, the high degree of correlation in traditional assets makes their task even more unenviable.

Insurers look for relief in alternative investments

As a result, insurers have been increasingly looking to invest in alternatives to diversify portfolio risk as well as improve alpha. Therefore, expectations from alternatives are:

  • Diversify portfolios and lower correlations (62%).
  • Replace fixed-income assets in their portfolios (53%)
  • Help provide alpha (51%)
  • Risk and volatility mitigation (40%)

A difficult tradeoff

Unfortunately, alternatives are easier said than done for insurance CIOs. This is especially true for alpha. “Raising the stakes are the numerous market and regulatory factors that must be balanced in the pursuit of this critical goal. Three-quarters say they find it increasingly difficult to balance the need to generate alpha, protect assets, and monitor the cost of capital. It is this final tradeoff that may be inhibiting insurers’ efforts to implement the strategies they see as instrumental to meeting these critical investment objectives, “ says the report.

Regulatory barriers

A commonly expressed view is that regulatory norms put in place after the financial crisis orientate portfolios towards low-yielding fixed-income assets. Further, capital and valuation requirements crimp diversification in insurance portfolios.

For instance, in the US, 75% of CIOs say it is hard to produce alpha while adhering to regulations.  And this is a significant finding:

“Nearly all insurers (89%) say regulations are de facto stopping them from investing in higher-risk assets. In both Germany and France, some 97% of insurance companies complain that regulation deters them from investing in the alpha-producing assets they need to meet liabilities.”

Juggling conflicting priorities

However, CIOs may not have the expertise to invest in alternatives, derive additional alpha, and yet operate within regulatory confines.

There is thus a new trend emerging: Outsource to external fund managers.

“Insurers with a flexible mindset are taking advantage of this external expertise, rethinking the shape of their portfolios and harnessing strategies that respond to their particular needs and constraints,” observes the report.

Insurers that outsourced to alternatives were as follows:

  • Private equity – 58%
  • Private debt – 40%
  • Real estate/REITs – 39%
  • Hedge fund strategies – 35%

[Related Story: Private equity is the top gainer for the Iowa Public Employees’ Retirement System (IPERS)         ]

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