July 24, 2021

Insurance prepares its arsenal to take more risks in its investments | Markets

Insurance prepares its arsenal to take more risks in its investments | Markets

The insurance sector is one of the great planetary investors. For the next months, his intention is to step on the accelerator and buy more risky assets (stock market, emerging debt, bonds of low quality companies, risk capital …). The managers of this industry consider that geopolitical risks have been reduced and seek new investments to achieve returns in a scenario of low interest rates.

These are the main conclusions of a study carried out by the firm BlackRock to 372 managers of insurers and reinsurers from 27 countries, representing a volume of assets under management of 7.8 trillion dollars (about 6.8 trillion euros).

According to the survey, conducted last August, only 30% of insurers' managers are worried about geopolitical risk (compared to 71% a year ago), and regulatory risk only concerns 30% ( compared to 64% a year ago).

Where will they invest?

  • Illiquid assets. Venture capital funds, or infrastructure funds can not be bought and sold at any time. They demand a period of unavailability but, in return, they have higher returns than other comparable funds and, moreover, are more de-correlated with the evolution of the stock market.
  • 'Hedge funds'. Alternative funds try to invest by distancing themselves from the behavior of traditional assets. Some seek income generation or obtain an absolute return in a certain period of time.
  • Raw Materials. 36% of insurers surveyed say they will increase their investment in commodities, such as gold or oil, in the coming months.
  • Loans. Some funds allow to invest in loans to companies. It is another formula to unravel the evolution of traditional funds.

This optimistic outlook for the coming months is encouraging many insurance companies to take more risks. 47% plan to buy more risky assets for their portfolios during the next 12-24 months. A year ago, that percentage was only 9%.

Specifically, they want to increase their exposure to the Stock Market (31%), low quality corporate debt (36%) and illiquid assets as venture capital funds (40%).

"Spanish insurers have less than 1% in alternative assets, when the average in Europe exceeds 3%"

"One of the clearest explanations is the pressure on margins. With strong competition, insurers increasingly get less money from the sale of policies, so they are considering increasing the income in the active part of their balance, going to investments that offer higher returns adjusted for risk, "explains Patrick M. Liedtke, director of BlackRock and author of the study.

Traditionally, insurers have invested almost all their portfolios in the safest assets, sovereign debt and bonds issued by the most solvent companies. Also in real estate. However, monetary policy of zero rates has strongly reduced the profitability of these assets, so the sector is looking for other alternatives.

Specialized firms

Faced with the increase in demand for this type of investment by insurers, several companies and lines of business have come up in Spain that want to keep part of the pie.

One of them is Dunas Capital. Its president, David Angulo, explained in the presentation of the project that, with the zero rates, the aging of the population and the increase in savings, "insurers are looking for formulas to be able to invest and achieve attractive returns without taking excessive risks". The firm has a fund that invests in aircraft leasing, infrastructure funds, absolute return funds … and they want to reach 5 billion of assets under management in 2020.

The Altamar group, specialized in venture capital companies, signed a few months ago to José Caturla, to market this type of products. "Among Spanish insurers there is a lot of interest in increasing exposure to this type of asset. Today the percentage of alternative investments is less than 1%, when the average in Europe exceeds 3% ", explains the expert. The vehicle that most insurers buy are funds that invest in a large group of international venture capital funds, to diversify.


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