Evening Brief – 05.01.24
“No Going Back”
Fresh off a J. P. Morgan report that revealed family offices have increased their exposure to alternative assets comes a KKR report that shows insurance companies are doing the same thing.
While elevated interest rates and a new market regime are causing concern among many investors, insurance companies believe that today’s markets are closer to normalcy, and their investment success has given them confidence in how they built their portfolio.
KKR surveyed about 50 CIOs from organizations with a combined total of over $8 trillion in assets under management to determine how large insurers are adjusting their asset allocations to weather volatility.
The last time KKR conducted the survey in 2021, there were $15 trillion in negative-yielding fixed income assets combined. “Today, by comparison, that number is zero,” the research stated.
“The clear message we drew from our 2024 insurance survey participants is that there is ‘no going back’ to more traditional approaches to asset allocation,” said lead author Henry McVey, CIO of KKR’s balance sheet and head of global macro and asset allocation.
“Having endured huge fluctuations in central bank policies in recent years, CIOs are now more comfortable embracing investment strategies outside of traditional fixed income instruments that are helping to not only generate better returns but also diversify their risk profiles in today’s increasingly complex world,” added McVey.
Insurers typically have more prudent portfolios than other institutional investors to protect their bottom line if claims exceed risk models’ expectations. In a low-rate environment where less risky assets, such as fixed income, yielded less, insurers were unable to issue as many policies as they could have done previously.
However, elevated interest rates allowed CIOs to amass larger pools of liquid assets, including government and other investment grade bonds, to satisfy their overall return targets. It also allowed insurers to keep boosting their allocations to alternative assets.
“The reality is that having successfully weathered the aftershocks of a global pandemic that at first brought negative interest rates and then was followed by an epic tightening campaign during inflation’s ‘transitory’ period, CIOs are now more comfortable embracing both complexity and illiquidity,” McVey said.
According to the report, allocations to investment grade debt have increased but have not yet returned to their 2017 highs. Meanwhile, insurers’ allocations to alternative assets and other non-traditional investments fell from 31.8% in 2021 to 28.9% in 2024, but they remained much higher than the 2017 level of 20.3%.
Commitments to structured credit instruments, such as collateralized loan obligation (CLO) debt and asset-based financing, climbed the most among alternative asset classes, from 5.9% in 2017 to 8.3% in 2024.
Private credit commitments peaked at 7.7% in 2021 but fell back to roughly 5.3% this year as CIOs shifted their allocation to more liquid products in response to rising interest rates. Nonetheless, most CIOs ranked private credit as their primary preference for future allocations.
Infrastructure and private equity are also high on the list of prospective allocations, with CIOs believing real estate equity is going to turn a corner after a period of declining values.
KKR discovered that asset allocation priorities change depending on the type of insurer. Life and annuity CIOs prefer structured credit and real estate credit, but property and casualty CIOs tend to allocate more private equity, public stocks, and bank loans with higher yields than average.