Art by Gizem Vural
Insurers that have historically stuck to less risky investments in fixed income markets are adjusting their risk tolerance levels to take advantage of key opportunities in the alternatives market, namely, real estate and private credit deals, according to experts.
In addition to alternative investment strategies, insurers are also shifting to outsourced investment management to access money manager’s technological capabilities.
Matt Armas, global head of insurance asset management at Goldman Sachs Asset Management, says that insurers are specifically interested in accessing technology that can enhance their investment risk analysis and accounting processes, as well as reducing costs associated with public– market investments.
“The second place that you see outsourcing is in cost reduction and cost containment,” Armas says.
BlackRock Inc. executives have also seen insurer clients seeking external help with technology-related services.
Lyenda Delp, head of the financial institutions group, Americas, for BlackRock, said in an email: “In a new regime of increased market volatility and complexity, more and more insurers are looking to explore outsourcing across their entire investment management operating model, including asset management, technology, and middle-office.”
Unlike many institutional asset owners, however, “insurers tend not to adopt a full OCIO model, but retain a core investment team which leads strategic asset allocation and manager oversight,” Delp adds.
Last March, BlackRock and American International Group Inc. announced a major partnership in which BlackRock would manage up to $60 billion of AIG’s global investment portfolio and up to $90 billion of AIG’s life and retirement investment portfolio.
Under the agreement, AIG also gained access to BlackRock’s investment management technology platform, Aladdin.
GSAM’s Armas notes that one asset class that has attracted life and non-life insurers in the Americas and Europe to outsourcing is investment– grade corporate bonds.
Insurers have sought to buy higher quality fixed income assets to rebuild the yield in their portfolios, he says.
GSAM has also seen that, while the demand for private equity strategies has been a little lower among insurers, “private credit demand remains very strong,” and is a driver of outsourcing, Armas says.
BlackRock’s Delp also said that the money manager has “seen a fair amount of demand from many insurers for outsourced private credit strategies.”
“Infrastructure debt is another area of interest, due in part to opportunities resulting from the Inflation Reduction Act as well as the [energy] transition economy,” Delp said.
In April, GSAM published the results of its annual survey of 343 insurance company chief investment officers and CFOs representing more than $13 trillion in global balance sheet assets. In the survey, 29% of global insurers said they planned to increase the overall investment risk within their portfolios. Furthermore, 34% of insurers planned to increase their allocation to U.S. investment grade corporates at some point this year.
This was despite most respondents (82% of insurers) expecting a U.S. recession to take place within the next three years, the report says.
Armas has seen some attitudes among insurers shift since the survey closed, as responses were collected in February. While insurers aimed to reduce their exposure to real estate in their investment portfolios at the time of the survey, GSAM is now seeing more interest in the asset class from investors.
“What we are seeing from clients is that, as the real estate market goes through repricing, there is interest in bringing more capital back to that market. That allocation from insurance companies is starting to rise,” Armas says.
Insurers are interested in multi-family residential, industrial and life sciences real estate, he notes. There is also interest in development and construction deals in the office real estate sector.
“The interest in real estate is increasing, and it’s continuing to increase as we move through the summer,” Armas explained, adding that investors had previously been uncertain of how various property valuations would look as the year progressed.
In January, CBRE Investment Management and Income Insurance, a leading composite insurer in Singapore, entered an agreement in which CBRE IM took over the management of the insurer’s $3 billion real estate portfolio, which contains direct and indirect holdings across the North America, EMEA and APAC regions.
Additionally, in October, Allstate tapped Voya Investment Management to manage its $850 million commercial mortgage portfolio.
Rich Sega, global chief investment strategist at Conning, has also seen that certain pockets of the real estate market are attractive to insurers.
Conning is an insurance asset management company with $201 billion in AUM serving property and casualty insurers and life insurers.
“In residential [real estate], there’s been a long-standing shortage of housing across the U.S.,” Sega says. “So there’s good demand for residential real estate, both single-family housing and multi-family. Both of those show a lot of opportunity.”
Insurers are still watchful, however, of how regulation could impact certain parts of the real estate market.
They are focused on “how much of the real estate market will be affected by increasing regulation on banks, and reduced liquidity in the banking system, [ now that we are] having to rebuild the Treasury account after the debt ceiling fight,” Sega explains. “Some channels of the real estate market are attractive from a valuation standpoint, but it may be a little too early because there’s so many uncertainties, particularly in commercial real estate,.”
Tags: Allstate, American International Group, BlackRock, CBRE Investment Management and Income Insurance, Conning, Fixed-Income, Goldman Sachs Asset Management, Lyenda Delp, Matt Armas, Private Credit, Real Estate, Rich Sega, Special Coverage: Managing Insurance Assets, Voya Investment Management