Battling low interest rates while hunting for higher returns, insurers had been stacking on the risk to ensure they got a return on their investments. A new study by BlackRock, the world’s largest asset manager, says those same insurers are now worried about financial instability but instead of bailing out of higher-risk opportunities, they’re reshuffling their holdings to create a safety net.
“In recent years, insurers have been increasingly willing to take higher risks in favor of investment success,” said Patrick Liedtke, head of the European insurance business at BlackRock. “That is now over.”
Faced by a growing fear of external dangers, most insurance companies are no longer willing to take on any fresh risks for their investment portfolios, Mr. Liedtke said, summarizing a key finding of the global survey of 315 top managers in the industry. The survey was commissioned by BlackRock and conducted by the Economist Intelligence Unit in July.
This marks a turning point for the industry at a time when the German blue-chip DAX index hit an all-time high while its Spanish peer is at seven-month lows because of worries over Catalonia’s potential secession from Spain. While 46 percent of insurers were willing to take higher risks in 2016, the figure is only 9 percent in 2017. In contrast, 91 percent of respondents said they want to reduce or stabilize their investment portfolio’s risks (see graphic below).
When it comes to investments, insurance managers are increasingly worried about financial stability with liquidity risk, interest rate risk and asset price volatility each mentioned by more than 70 percent of the respondents for the first time since the survey was launched in 2012. The report’s authors wrote that the numbers indicated “considerably heightened concern about the outlook for financial markets.” A year ago, between 49 and 57 percent of managers saw these items as one of the most serious market risks to their company’s investment strategy.
The report, called “Battling the big squeeze: How insurers are protecting profitability,” does not imply that the companies are now fleeing from risky assets. Instead, they are continuing to reshuffle their portfolios. “The risk budget of many insurers remains constant,” said Marcus Severin, head of asset management in Germany for BlackRock in the insurance sector. “But the mix of asset classes in which assets are being invested is changing.” Many companies are now saying: “If I’m already taking a risk, it should be where I’ll be rewarded for it”, – and that’s often private equity, infrastructure equity and real estate equity, Mr. Liedtke said.
The approach is not without risk, because insurers have been relatively late to discover the trend. “It’s true that the market for private equity has already come quite far,” Mr. Liedtke conceded. “We are now seeing volumes as in 2007 – and that’s certainly something.” But, according to Mr. Liedtke, we should not overlook the fact that the financial market has also matured. However, independent experts are not quite as unperturbed by this development.
“Historically, we have achieved an average annual return of 19.8 percent for our clients with private equity investments,” said Armin Eiche, head of Wealth Management at Pictet & Cie in Germany. However, he assumes that in view of increased company valuations for private equity acquisitions, the expected average annual return will decline to about 10 to 12 percent in the future. “Some private equity funds will run into difficulties if interest rates rise and the economy slows down,” said a Frankfurt investment banker.
Carsten Herz covers insurance for Handelsblatt, while Peter Köhler covers asset and money managers. Both are based in Frankfurt. Gilberg Kreijger adapted this story into English for Handelsblatt Global. To contact the authors: firstname.lastname@example.org and email@example.com