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Banks, Financial

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Banks

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Categorized | Insurance

Insurers expected to sit on more cash


Posted on September 26, 2016

©Reuters

Insurers expect to sit on more cash over the next year as they struggle to find attractive opportunities for their money.

Research from BlackRock shows that half of insurers are expecting to hold more cash in the next 12-24 months, despite the low interest rates on offer. That is up from 36 per cent when the same survey of more than 300 insurance executives was carried out last year.

    “The insurers are finding that they are concerned about valuation,” said Patrick Liedtke, head of BlackRock’s European insurance asset management business. “A lot of markets are expensive. They hold cash waiting to move opportunistically when there’s value to be had.”

    Low interest rates are posing big challenges for the insurance industry. They push down returns on their investment portfolios and, for the life insurers, make it hard to offer products with attractive guaranteed returns.

    Their response has been to increase risk — and hence expected return — in their portfolios wherever possible, and that looks set to continue.

    “Insurers are taking on significantly more risk compared to historical norms as they widen their search for additional sources of yield and returns,” Mr Liedtke said. The BlackRock survey suggests that 47 per cent of insurers are likely to increase their investment risk over the next year. Although that is slightly down on last year, it is well ahead of the 8 per cent which are planning to cut risk.

    The question of where the insurers will find that additional risk is challenging, given the increase in asset prices everywhere.

    “Private investments are popular,” Mr Liedtke said. “The insurers are looking at places they can invest where others cannot follow, so they are going illiquid.” Because insurers have long-term liabilities, they can invest in assets that may tie their cash up for many years or even decades at a time.

    “The biggest change is the interest in private equity. Half of insurers want to increase their private equity exposure. They have started to make more calculations about the amount of capital they need to hold [for private equity investments]. Private equity allows them to take on more risk in a very smart way.”

    And there are changes in the way that insurers invest in other private, long-term assets such as real estate and infrastructure. BlackRock’s data show that insurers are planning to shift from debt to equity in these areas. According to Mr Liedtke, the extra return available from the equity more than offsets the higher capital charges.