Insurers are increasingly looking to make direct loans and finance commercial properties as central bank policies limit yields on traditional holdings such as government debt and investment-grade corporate bonds, according to BlackRock Inc., the world’s largest money manager.
About 57 percent of insurers plan to increase risk exposure in their portfolios in the next 12-24 months, BlackRock found in a survey of insurers that manage more than $6 trillion of assets combined. That compares with 33 percent a year ago, the New York-based company said in a statement Monday.
American International Group Inc. joined Oak Hill Capital Management last year to start a lender serving medium-size companies. TIAA-CREF, led by former Federal Reserve Vice Chairman Roger Ferguson, announced in April that it opened a lender staffed by veterans of Carlyle Group LP as the company seeks borrowers who can’t typically tap public markets.
“Insurers are turning to a broader range of assets, particularly income-generating alternative credit investments such as direct lending, in order to diversify returns and boost income,” David Lomas, global head of BlackRock’s insurance asset management business, said in the statement. “But it isn’t easy, as these markets often aren’t their natural habitat, and there are barriers to being successful here.”
RadioShack Loss
Fidelity & Guaranty Life, the insurer owned by HRG Group Inc., has been hurt by losses on holdings tied to electronics retailer RadioShack Corp., which filed for Chapter 11 bankruptcy in February. HRG has said its Salus Capital Partners unit stopped initiating loans after those losses.
BlackRock is among firms seeking to win more business overseeing investments for insurers. It competes with companies including Goldman Sachs Group Inc. and JPMorgan Chase & Co.
“The mix of divergent central bank policy, bond market liquidity risk and a heightened regulatory regime presents the industry with a dilemma,” Lomas said. “Opportunities exist to protect balance sheet health and maintain challenged business lines, but investors need to quickly get familiar with diversifying portfolios into higher-risk, higher-yield assets, and also closely manage the risks inherent in these new areas.”
Insurance companies have also sought to bolster third-party asset management units, which tend to be less capital intensive and help generate fee income. MetLife Inc., the largest U.S. life insurer, started a third-party investment operation in 2012 and invests along with partners in commercial real estate deals.
Principal Financial Group Inc., which purchased a majority stake in Liongate Capital Management in 2013, said Oct. 16 that it would close the hedge fund and return assets to investors after losing clients.
“Our timing wasn’t good,” Principal Chief Executive Officer Daniel Houston said Friday in an earnings conference call. “The performance was underwhelming and caused us to lose a lot of the assets. We recognized that, we did our due diligence, we did our look-back, and certainly understand perhaps how we could go about acquiring an asset like that in the future.”