Insurers stung by declining returns on their investments in the zero-interest-rate era are throwing their customary caution to the wind and putting their money into higher-risk assets, according to a new survey.
Of the more than 370 senior insurance executives around the world polled by asset management giant BlackRock and the Economist Intelligence Unit, 47 percent said they planned to take more risks in their portfolios over the next 12 to 24 months.
A year ago, when respondents were more worried about macroeconomic concerns, it was just 9 percent – which now looks like an anomaly in the longer-term trend (see graphic below).
The latest swing in risk attitudes has huge implications for financial markets, because insurers have around €10 trillion ($11.8 tillion) invested in Europe alone. Even a small shift in investment strategy will send billions flowing into other assets.
“There’s a clear and sustained trend towards alternative investments like infrastructure, private equity or external financing of commercial real estate,” Patrick Liedtke, who heads the European insurance business at BlackRock, told Handelsblatt. “Managers hesitated in Germany at first but they’re catching up and freeing up resources here.”
A few days ago, the head of life insurance group Allianz Leben, Markus Faulhaber, got uncommonly specific about his plans to take more risk. He said that in the next three to four years, stock as a proportion of total investments would rise to between 13 and 18 percent from 10 percent now. The insurer also plans to pump money into renewable energy, private equity, real estate and infrastructure.
For years, insurers appeared to have resigned themselves to shrinking returns on their investments and made only very cautious adjustments to their portfolios. Mr. Liedtke said he had been surprised at the speed at which insurers have changed their approach in the last two to three years.
“One important reason is sure to be the mounting pressure to achieve an appropriate return because investments in fixed-income assets are delivering ever less interest income,” he said.
Another factor is that insurers have become increasingly optimistic about the global economy and geopolitical environment. “Donald Trump keeps tweeting but managers have become accustomed to it and the sector isn’t reacting as nervously,” Mr. Liedtke added.
The popular alternative
The Germans are comparatively late to the party. British and American pension funds have been investing in stocks for decades, achieving healthy returns of 20 percent and more.
One study by data firm Preqin showed that 79 percent of institutional investors have money in alternative investments. But the rising flood of funds into that market has led them to scale down their predicted returns. A total of $8.8 trillion is invested in alternative assets worldwide.
“There’s a big risk appetite for private equity among institutional investors,” said John Dickie of Aberdeen Standard Investments. “Demand is continuing to rise.”
Consultancy PwC estimates that big insurers will have some $35 trillion under management by 2020. Their fund managers are looking back wistfully at the easy days when they could just put the money in rock-solid government bonds and still report decent returns.
“We have the impression that a new era is being ushered in,” said Mr. Liedtke of BlackRock.
The shift into new asset forms is accelerating. That will cause problems for insurers who lack investment expertise. Allianz, the owner of US asset manager Pimco, has the resources to develop new investment strategies, but smaller insurers will likely struggle.
Mr. Liedtke said this know-how or lack of it becomes increasingly important. “The ability to face up to the new challenges will become a competitive factor.”
Carsten Herz covers insurance, while Peter Köhler reports on asset management. Both are based Handelsblatt’s Frankfurt office. David Crossland adapted this article into English for Handelsblatt Global. To contact the authors: email@example.com and firstname.lastname@example.org