Insurance CIOs See Alternatives Driving Portfolio Returns

Insurance CIOs are increasingly seeking to increase their allocations to alternative investments, and to many of them, there is no turning back to traditional, liquid asset allocations. These were the key takeaways of KKR’s 2024 insurance survey, which surveyed roughly 50 insurance companies and their CIOs.

Insurers see a new regime emerging for asset allocation, according to KKR’s survey. With a rise in interest rates, insurers want to increasingly add alternatives and uncorrelated assets into the mix, creating “all weather” portfolios that can absorb different types of shocks.

Approximately 64% of surveyed insurance CIOs said they envision alternative investments driving portfolio returns in the future, according to KKR.

“CIOs are increasingly embracing the notion that there will be ‘No Turning Back’ when it comes to creating all-purpose portfolios that can thrive in this new macroeconomic environment that we now all find ourselves navigating on a global basis,” the report concludes.

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Asset Allocation

Insurers are increasing or plan to increase their allocations to alternatives, at the expense of cash and public equities according to KKR. From 2021, allocations among all insurance AUM to domestic equity fell from 7.2% in 2017, to 4.2% in 2021, to 4.0% in 2024.

In comparison, allocations to private equity increased from 2.4% of all insurance AUM in 2017, to 3.2% in 2021, to 4.1% in 2024, representing a reallocation of $100 billion to $150 billion to the asset class during these years.

“More and more CIOs are again turning to private equity, despite its higher capital charges, to boost portfolio returns. The diversification benefits and extra returns were cited by multiple participants, particularly when compared to public markets. The asset class is also viewed as less volatile,” the report states.

According to the survey, 55% of surveyed CIOs said they plan to increase their allocations to private credit, 46% said they plan to increase private equity allocations. Infrastructure ranked third, with 32% of CIOs planning to increase allocations to this asset class. Bank loans and high yields were fourth, with 27% of respondents saying they plan to increase allocations in these asset classes.

Public equities were the lowest, with only 5% of respondents intending to increase these allocations, and 27% of respondents said they intend to decrease their allocations to cash, the only asset class where CIOs intend to reduce allocations, according to the survey.

Fixed income still has the highest allocation among insurers, although it, like liquid public equities, is also declining. Total allocations to fixed income among insurers fell from 66.8% in 2017, to 56.3% in 2021, to 61.5% in 2024.

While insurers are decreasing their fixed income allocation, KKR writes that they want their managers to own more high-quality fixed income instruments, and/or non-traditional assets that can match, or exceed liabilities with little risk.

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Tags: Alternatives, Asset Allocation, CIO, insurance, KKR, Private Credit, Private Equity

What commercial real estate sectors will pay the most to comply with greenhouse gas emissions rules globally, and what CRE sectors will be least affected? Answers: offices will pay the most and warehouses the least.

That assessment was part of a recent webinar conducted by Green Street, the real estate analytics firm. The session covered the cost of compliance aimed at reducing climate change globally. Daniel Ismail, Green Street’s co-head of strategic research, described how companies’ rising capital expenditures to control GHG and other such outlays, such as insurance, will affect profitability.

In 2024, Ismail said, these expenditures are relatively small. Trouble is, the costs will mount over time, he pointed out. Eventually, if current trends continue, more commercial properties will be totally electrified via renewable sources, leaving their oil or natural gas-fed furnaces a memory, which likely would be cheaper. But that could take a while.

Ismail cautioned that climate costs should hardly be the deciding factor for investors in choosing what kind of real estate to put money into. Long-term growth expectations and other factors will be more important, he noted.

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Example of a CRE climate cost: New York City enacted a new fine on buildings that exceed emissions limits, starting in 2025. Ismail said most landlords will opt for the fine ($268 annually per ton of carbon dioxide over 2024 levels) rather than pay the far weightier costs of retrofitting their properties to comply. It is unclear, at this stage, what the average fine would be, but information from the city states 11% of buildings required to comply with the law exceeded emissions limits for the first compliance period, 2024 to 2029.

Offices and shopping centers will shoulder the biggest outlays complying with climate regs, both in the U.S. and around the world, according to Green Street. Over the next five years at a minimum, office building owners will need to boost their capital expenditures by 3.5% of net operating income and shopping centers by 2.1%. The costs for self-storage sites (1%) and industrials (0.9%), mainly warehouses and factories, will be lighter.

Some sectors, though, will be able to pass along their new costs to customers, particularly self-storage and industrials, Ismail said. Offices and malls will find that much more difficult.

The pandemic and high interest rates have punished CRE economically, most notably in the office sector. In this year’s first quarter, the U.S. vacancies for offices hit 19.8%, a new record, from 17% at the end of 2019 (right before the pandemic), data from Moody’s Investors Service shows. Meanwhile, for industrial properties, vacancies are less of a problem, around only 5%, only slightly higher than 2019’s final quarter (3%), data from commercial real estate services and investment firm CBRE indicate. The industrial sector has expanded to meet pandemic remote-buying demand, but new construction is tapering off.

Investors in real estate investment trusts have suffered in general, but offices were down the most last year, losing 23.7%, per data from NAREIT, the trade association for real estate trusts.