Insurers Seeking Book Yield Plan Shift to Private and Structured Debt and Alternatives


Insurers Seeking Book Yield Plan Shift to Private and Structured Debt and Alternatives


Insurance institutions are growing increasingly concerned about the extended corporate credit cycle. Third-party asset managers working with insurers stand to benefit.

October 2019, BOSTON - According to new research from Cerulli Associates, U.S. insurance companies, which have more than $4 trillion in mostly investment-grade bonds in their investment portfolios (and more than $6.2 trillion in total invested assets), view the late stage of the credit cycle as “very concerning” as compared to other investment concerns such as the low-interest-rate environment, market volatility, and market liquidity.

A prolonged period of historically low long-term rates has proven extremely challenging for insurers from a business perspective, both making it difficult to reach annual book yield goals and raising the present value of longer-term liabilities. “Insurers are weighing their options,” says Alexi Maravel, director at Cerulli. “They are under more pressure than ever to meet income or book yield goals as long-term rates persist unabated and investment income plays a larger role in profitability.”

Nearly two-thirds (64%) of survey respondents plan to increase their allocations to private debt and half (50%) expect to add to structured or securitized debt during the next 12 months. Among alternatives investments, which are limited in insurers’ general account investment portfolios due to regulatory capital constraints, a majority of insurers plan to add to infrastructure investments (75%), alternative fixed-income strategies (63%), and private equity (55%).

A massive shift in allocations could make waves in the bond market. “Insurance companies make up a large portion of the bond market. While they are very deliberate in making changes to their investment portfolios, their decisions have significant implications. With about $16 trillion globally in negative-yielding bonds, insurers are clearly looking far and wide for yield,” says Maravel.

Cerulli also finds significant implications for the institutional asset managers that work with insurance companies. “In this hyper-competitive area of institutional asset management, managers that can help insurers source investments in private debt, extended-sector fixed income, and certain types of alternatives investments may win the day in the long term,” suggests Maravel.

As such, a majority of institutional asset managers responding to a Cerulli survey anticipate receiving more mandates from insurance companies in private fixed income (87%), private equity (53%), and structured or securitized debt (53%). “Insurance institutions are clearly concerned about the credit cycle and how protected their investment portfolio is from credit downgrades (let alone actual defaults). Insurers have small allocations to high-yield bonds; however, they must constantly monitor credit events in the investment-grade space and account for any potential credit impairments. Therefore, asset managers working with insurance clients should be prepared to assist in this analysis of individual companies,” Maravel concludes.

These findings and more are from The Cerulli Report—U.S. Insurance General Accounts 2019: Targeting Institutional Investment Opportunities.


Looking for more information? Contact Us