The multitrillion-dollar global insurance sector has joined the parade toward greater commitments to real estate and other real assets, and the industry is just getting started.
A new report commissioned by BlackRock that takes a look at insurers with more than $6.2 trillion of assets has found that the number of insurers with more than 15 percent of their portfolio in private market assets have more than quadrupled — to 26 percent from 6 percent three years ago — and is expected to nearly double again to 46 percent by 2017.
“The report was really further confirmation that the time for real estate and infrastructure has really come to the forefront in the current environment, and that real estate is really where insurance companies want to get invested,” says Simon Treacy, global CIO of BlackRock real estate.
The report was researched and written by the Economist Intelligence Unit on behalf of BlackRock, which has $337 billion of insurance companies’ assets under management from about 200 insurers in 28 countries. The significant move toward private market assets is being made to diversify their portfolios and reduce their risk, notes the report, titled Driving Returns: Global Insurers Reconsider Fixed Income and Private Assets.
David Lomas, global head of BlackRock’s insurance asset management unit, says, “It used to almost be ‘buy your bonds in the morning and relax in the afternoon,’ but insurers are now faced with a far more complex operating environment. This research shows that insurers are having to make a great migration toward private markets to diversify income streams and maintain returns on equity.”
Those complications include a lackluster yield from traditional fixed-income instruments. That is convincing insurers they need to move up the risk spectrum in search of more rewarding returns. Globally, the report says, one in three insurers intends to increase risk exposure during the next three years. Some 68 percent of those are hoping to replace or enhance investment income, while 66 percent point to the diversification benefits their rebalanced portfolios would provide.
Treacy recently traveled to Asia, where he met with a number of insurance companies. Regulations in several of the region’s countries have changed, opening the way for insurers to invest in a broader range of opportunities.
“They’re very interested in real assets,” Treacy remarks, “especially real estate. There was definitely a clear signal that over the next three to seven years you’re going to see a material amount of money flowing across border into real estate.”
Treacy indicated that real estate is a particularly appropriate investment for insurance companies because they have the luxury of a long time horizon, giving them the ability to buy and hold real estate during inevitably down cycles. What’s more, he says, real estate offers them a good hedge against inflation.
Lomas talks in the report about the “level of conviction” CIOs seem to now have toward real estate, real estate debt and infrastructure assets. Insurance executives are far more comfortable than in the past with investing in illiquid private market assets for income, Lomas says.
Three years ago, just 6 percent of insurers had more than 15 percent of their portfolios in private asset classes. That figure has risen to 26 percent today, and in three years, 46 percent of insurers are expected to have more than 15 percent of their portfolios invested in private assets. Some 56 percent of those surveyed strongly agree that private asset investments represent an attractive option, and 50 percent agree that they offer a diversified source of risk and return. Real estate (36 percent) and infrastructure (34 percent) are particularly popular among those planning to increase their exposure to private asset investments.
Treacy writes in the report: “We see them seeking opportunities ranging from properties in hard-hit European peripherals, where values are still around 30–50 percent below their peak, to plays in some Asian markets where long-term growth bodes well for investments.”
Time will tell if the insurers’ parade in this new direction will be marching to a victory song or a dirge.
Mike Consol is editor of The Institutional Real Estate Letter – Americas.