Asian insurers pouring into illiquid assets

Insurance firms in Asia Pacific are moving more quickly into private-market assets than their North American peers as they look to boost risk exposure and diversification, according to BlackRock survey findings* to be released today.

At the same time, they are partnering less with asset managers for core fixed income investments than they used to, and less than their peers globally.

Almost one in two insurers in the region (45%) intend to raise their allocation to more than 15% to private markets over the next three years, nearly doubling the proportion that do so now (25%). This is in line with the global trend, but ahead of that in North America, where only 25% of insurers have 11-15% allocated to private markets, compared to 40% in Asia.

This is part of a drive to boost yields. One-third (34%) of Asian insurers plan to increase their risk exposure over the next three years – that is more than in the US (27%) and Europe, the Middle East and Africa (30%).

The shift into private markets will create opportunities for managers of certain investments, particularly infrastructure and property, which were the most popular asset classes in which to boost exposure. These were particularly strong preferences among Korean insurers, noted David Lomas, global head of insurance asset management at US fund house BlackRock.

Commercial real estate mezzanine debt was cited by the most respondents (45%) as the private asset class they would start investing or increase allocations to in the next three years. This was followed by energy (38%) and infrastructure debt (36%).

Mezzanine debt offers higher yields (of 8% to 9%) than senior debt, Lomas told AsianInvestor, but also good protection from default given its loan-to-value ratios of 70-80% on average.

In markets such as China and Korea, 10-year government bonds offer higher yields than their counterparts in Europe or the US, he noted, so it makes more sense for insurers in those countries to look at private assets in the West rather than bonds.

But respondents noted the challenges of investing in private assets. The most significant challenge/risk was seen as portfolio pricing and transparency (cited by 45%) followed by access to opportunities and modelling risk factors (jointly 36%).

Globally, BlackRock is seeing a growing number of private-market mandates allowing more manager discretion over asset allocation, within certain constraints. Lomas has not seen this happening so much in Asia yet, but he said discussions were starting to take place.

He pointed to the benefits of such an approach. In a traditional portfolio, a manager might be given $100 million to deploy and after a year have invested half of it. By then, there might be more value in other types of assets, but the manager will continue to deploy under the contracted mandate. A more flexible approach could allow the manager more freedom to invest where it sees greater value.

Another feature of the survey findings was rising concern among Asian insurance firms about risks to fixed income portfolios. Weak economic growth was cited (50%) as the biggest macro risk to debt investments over the next three years, while 41% indicated worries about inflation. Credit and liquidity risks were also cited by 50% and 48%, respectively, of Asia respondents as concerns.

Concerns about the effect of persistent low interest rates was lower in Asia Pacific (41%) than in the rest of the world (54%), reflecting that GDP growth in the region, Japan aside, has remained relatively healthy since the 2008 financial crisis.

*The survey polled 44 insurance executives in Asia Pacific responsible for $1.3 trillion in assets under management. This was part of a global survey of 243 executives managing $6.2 trillion in assets.