Insurers Eye Riskier Investments, One-Third Make Major Changes

One financial services sector has long favored investing in bonds: insurance. That made sense, even when interest rates were low. The carriers always need to be sure that their assets are on hand to pay out to policyholders and beneficiaries, and a strong dollop of stocks (inherently more risky than fixed income) could endanger that guarantee.

But now insurance companies are eyeing shifting their allocation more into riskier bonds and also into impact investments—those aimed at improving social and environmental conditions. This year, one-third of insurers globally are making “big changes” in their portfolios, according to a survey of 200 companies by investment manager Nuveen, a unit of financial planning giant TIAA.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Why the changes? Joe Pursley, Nuveen’s head of insurance for the Americas, wrote that “the prolonged inflationary environment” has prompted a re-think. As a result of higher inflation, interest rates are rising, which has shaken up asset prices. Higher rates also provide insurers more interest income from their bonds, which gives them greater leeway to strike out for new horizons. The Nuveen report, called “EQuilibrium,” said the allocation shifts are the biggest in Europe.

Profitability and revenue expansion are solid in the insurance industry. Life insurers saw a 3.4% increase in premiums for 2022’s first nine months and boast “strong capital positions” as credit losses remain “benign,” per S&P Global. Property-casualty companies are doing even better, with premium growth around 6%, a McKinsey & Co. report found. Health insurers show similar results.

All three types of insurers have heavy bond concentrations, a tally from asset manager Income Research + Management indicated: 72.5% for life, 58.4% for P&C and 61.1% for health.

Longer maturity bonds carry a greater risk than shorter-term paper that interest rate movements will torpedo their prices. But long-term fixed income typically pays higher yields.

What’s more, 76% of respondents plan to boost their private investments over the next five years, which runs the risk that they will not be able to cash in those assets quickly or easily, if needed.

Impact investing is becoming increasingly popular among insurers, up 61% last year after a 17% increase in 2021, Nuveen reported. Battery storage, direct carbon capture and commercial buildings using clean energy are among the favored areas. To be sure, these new areas’ earnings potential remains untested.