Faced with low returns, insurers deepen links with investment capital managers and asset managers, turning to alternative investments in the midst of regulatory opposite winds.
The life insurance companies were conservative investors.
For decades, they have relied on long -term – back, stable and predictable obligations – to correspond to their political obligations. But as interest rates plunged after the 2008 financial crisis, traditional investment models no longer provided sufficient yields.
Insurers now adopt alternative investments such as private debt, infrastructure and real estate – in partnership with asset managers and investment capital companies to increase yields. This change transforms the industry, increasing both profit opportunities and regulatory concerns while insurers take risky and more difficult assets to increase investment yields.
“With the lower interest rates after the major financial crisis, the cost of pre-2008 responsibilities of insurers was still high,” said Ramnath Balasubramanian, a worldwide co-leader in life insurance and retirement industry at McKinsey & Company. “Insurers had to find ways to go beyond their balance sheets and more effectively deploy capital.”
Slowly but surely, they find means. The solution for most insurance companies has been double: selling bond bands inherited at high cost towards reinsurers to free up capital and invest more of their premiums in alternative assets: in particular private debt with higher yields and risks than superior quality obligations. Insurance companies in the global markets have built, bought and associated with their path to better investment returns in the last decade.
Private Equity pushes change
In the United States, investment capital companies were a major catalyst for the transformation of the insurance industry worldwide. Large companies like Apollo Global Management, Brookfield Reassurance and KKR have launched or bought insurance companies since the financial crisis; Others, like Blackstone and Carlyle, have taken minority stakes in other insurers.
The operating model is simple: buy books inherited from insurance responsibilities and reinvest the underlying assets in higher yield investments. Since the financial crisis, investment capital companies have carried out more than $ 900 billion in transactions acquiring insurance liabilities worldwide, according to McKinsey Research. They now hold 13% of the American insurance market – up to 1% in 2012 and represent 35% of new sales of annuities with fixed index and fixed index, reports the consulting firm.
“The search for yield was motivation,” explains Meghan Neenan, CEO of Fitch Ratings, who provides notes to asset managers. “The success they have experienced in terms of yields was important, and migration in the insurance portfolio profiles is still underway.”
Investing more in private markets and alternative assets undoubtedly hooks the diversification of insurance companies, but it also increases risks. “Their investment portfolios are generally less liquid,” notes Neenan. The demand of private loans insurers – most of which are floating interest rates – continued to grow as rates have increased.
“In the end, it depends on what the investor is looking for,” explains Neenan. “If [an insurance company] is underfunded and requires higher yields that they cannot only obtain in public procurement, they could switch higher alternative assets to respond to this return obstacle. »»
The migration of insurance portfolios to alternative investments is now occurring in global markets. Some insurers have themselves constituted placement constraint capacities, others have joined forces with asset managers to provide these capacities, and others have further transmitted their asset management to third parties. “There is a wide range of models on the market now,” says Balasubramanian. “The choices that insurers make depend on their starting position.”
The French multinational insurer Axa decided that it was better to get out of the asset management sector. In December, the group sold AXA investment managers to BNP Paribas for 5.1 billion euros (around 5.5 billion dollars) to manage its assets in the future.
The Italian insurance giant Generali, on the other hand, increases its asset management operations. The company recently made several major acquisitions, including an agreement to buy an investment manager Conning in Cathay Life Insurance last year. Generali also paid $ 320 million for a 77% stake in MGG Investment Group earlier this year. The American firm focuses on direct loans to intermediate market companies. Like an increasing number of insurers, Generali builds its own direct direct loan platform.
In January, Generali announced a transformational agreement, agreeing to merge its asset management operations with the Natixis investment managers, belonging to Group BPCE. The 50/50 joint venture will manage 1.9 euros of assets of assets, making it the ninth largest asset manager in the world.
“The new entity would be ideally placed to further extend its activities for third -party customers,” the insurer said in a January press release, “also thanks to Generali’s engagement to contribute a total of 15 billion euros in so -called seed funds in the first five years to launch new initiatives and investment strategies in the alternative investment sector (especially on private markets).
While the private debt markets are evolving towards new areas such as asset loans and equipment rental, large asset managers will increasingly open the way. Large transactions recently between insurers and asset managers in Europe are only the most obvious sign of consolidation and restructuring of the industry. Smaller transactions to reassure the risks of responsibility and extend insurance investment platforms occur in global markets.
Japan directs the growing market in Asia
Asia is the next border, especially Japan, which has around 3 billions of dollars of life and rent reserves in force, according to the Society of Actuaries (SOA). To date, most of the activity there have been the responsibility of the balance sheets of insurance companies while Japanese insurers become more comfortable with block reinsurance transactions. Recent notable transactions include reinsurance by Global Atlantic belonging to KKR of a block of nearly $ 4 billion in Manulife Japan Whole Life policies, and a block of 700 billion yen (approximately 4.7 billion US dollars) of post-assurance japan post by Reinsurance Group of America.
The SOA estimates that up to $ 900 billion in Japanese insurance bonds could be reassured in the coming years thanks to new regulations requiring higher capital reserves that come into force this year.
The global insurance industry is still on the path of transformation. “I think we are somewhere in the intermediate sleeves of this evolution,” said Balasubramanian from McKinsey. “Many insurers still determine if they build, buy or associate with new investment capacities, and the offers are now performing in both directions.”
Regulators follow the risk of risk
All activity makes job regulators much more difficult. Insurance bonds supporting assets have become more opaque and more difficult to assess as companies have expanded their investment landscapes. In the United States, the National Association of Insurance Commissioners (NAIC) launched a working group in February to establish principles for updating capital solvency based on industry risks.
“The low -extensive interest rate period which followed the great financial crisis has created an industrial tendency to seek performance in investment portfolios, resulting in a major change in the complexity of insurers’ investment strategies, resulting in more liquidity risk than historically,” said Wisconsin insurance commissioner Nathan Houdek, a co -president of the operational force, Nais.
The Bank of England, in which the prudential financial regulator Regulation Authority operates, warned in its financial stability report last year of increasing risks in insurance companies belonging to investment capital and in larger industry due to the transition to private debt investments. “This business model, although promising advantages, has the potential to increase the fragility of the world’s parts of the insurance sector and to pose systemic risks if vulnerabilities are not discussed,” said the bank.
For the moment, insurers see the opportunities for alternative investments as worth risks. Insurance companies and asset managers are increasingly competing to build better investment platforms, but they also make natural partners. The first generates a lot of money while the latter focus on obtaining better investment returns in public and private markets.
“Transactions will continue because they are beneficial for both parties,” explains Neenan. “Insurers with long -term investment horizons obtain higher yields for patient investment and alternative managers receive costs on assets.”
A match made in paradise … for the moment.