- Global survey of insurance CIOs and investment team members reveals three-quarters are struggling to balance alpha generation with the cost of capital in a low-yield environment
- With returns from bonds insufficient to match liabilities, 75% say it’s essential to invest in alternatives in order to diversify portfolio risk
- Regulations create barriers: 89% of respondents say financial rules keep them from investing in higher-risk assets
- Complexity and regulatory constraints associated with alternatives prompt 72% of insurance investors to delegate some portfolio management to external managers
BOSTON–(BUSINESS WIRE)–A decade after the financial crisis, low interest rates still create significant difficulties for global insurance investors as they look to make up ground in a perpetual low-yield environment, finds a new survey released today by Natixis Investment Managers. As a result, insurers are willing to take on liquidity risk in pursuit of higher yields, but 64% say it is increasingly challenging to generate alpha while meeting regulatory requirements, including those designed to protect them from insolvency in the wake of the crisis.
Natixis surveyed 200 Chief Investment Officers (CIOs) and investment team members at life, property and casualty and reinsurance firms around the world on the challenges they are facing in today’s market environment. According to the findings:
- 74% of global insurers say it is becoming increasingly difficult to balance the need to generate alpha with the cost of capital while protecting assets against drawdown
- 73% say interest rates are their top portfolio risk concern in the coming year
- 84% of insurers say the low-rate environment is the main challenge to their organization, followed by meeting long-term return assumptions (81%) and complying with new regulations (76%)
- 68% say the low-rate environment has forced their organization to take on more risk in the search for yield
- Three-quarters (75%) say it is essential to invest in alternatives to diversify risk
“Insurers have been squeezed by the low-yield environment over the last decade. The likes of private debt, private equity and other alternative investments provide a potential fix to underwhelming returns in the bond market, where insurers have traditionally turned to in the hope of finding stable returns to match their liabilities,” said Dave Goodsell, Executive Director of Natixis Investment Managers’ Center for Investor Insight. “We find that increasingly the industry is willing to take on liquidity risk in pursuit of higher yields to balance alpha generation with the cost of capital, while protecting assets against drawdown.”
Low interest rates crank up drive for alpha
Low rates have a number of tangible impacts on insurers’ portfolios. Most visible are lower returns as bond yields, in tandem with rates, remain persistently subdued. The upshot is that low rates and low yields create asset-liability mismatches. For many, this leads them to look to alternative investments for a wide range of portfolio functions where traditional assets are coming up short.
To fill the void left by insufficient bond returns, more than half (53%) of insurers say their organization increasingly is using alternatives as a replacement for low-yielding fixed income investments. Almost the same number (51%) also look to alternatives to help provide alpha. In an effort to counter the low-rate environment, insurers are looking to other types of investments: 57% are increasing investment in private assets, such as real estate and private equity, and 55% are increasing investments in other alternative strategies, which have the potential to enhance alpha and generate non-correlated returns.
Yet, at a time when insurers need alpha to meet return assumptions and long-term liabilities, they are finding that regulatory requirements limit their ability to act. A majority (60%) say increased capital and valuation requirements are negatively affecting the level of diversification in their portfolios.
Regulatory barriers remain
The Natixis survey found that, despite the growth in appetite for alternatives among insurers, nearly all (89%) of insurance investment teams say regulations keep them from investing in these higher-risk asset classes. Furthermore, 83% say regulatory capital requirements are pushing investments toward lower-yielding fixed income.
This represents a significant increase compared to the same survey in 20151, when Solvency II, a European Union regulation that requires how much capital insurers must hold, had not come into force. In the 2015 survey, approximately three in five (58%) insurers said regulatory and capital requirements were frustrating attempts to invest in alternative asset classes.
In complying with regulations, insurance investors say the following are the top challenges facing their organization:
- Implementation cost (43%)
- Technical implementation (41%)
- Capital requirements (37%)
- Data management (36%)
- Implementing changes in risk management, such as ORSA (“Own Risk and Solvency Assessment,” a Solvency II directive) (35%)
Despite this, nearly all (93%) of insurance investment teams say they are well-prepared for the changing regulatory environment – an improvement from the 2015 survey, when 85% of global insurers said they were prepared. At the same time, 56% say new regulation has increased the need for specialized external investment managers.
“Investors are facing new challenges as the regulatory environment takes a firm hold of the industry, and it is unsurprising to see a majority turning to external specialists to help them navigate the many complexities of today’s market,” Dave Goodsell continued. “CIOs may struggle to add more resources in already stretched investment teams and there is greater need for good quality specialist advice and execution.”
New thinking, external expertise
According to the survey, insurance executives say the main reasons they don’t use more alternatives in their portfolio are because of complexity (51%), their organization’s investment restrictions (42%), fees (also 42%) and regulatory constraints (41%).
As insurers grapple with the regulatory and executional complexity that comes with the search for higher yields and moving into alternatives, 65% say gaining access to specialist capabilities and expertise is the primary reason they use an outsourced CIO or third-party manager. When hiring an investment manager, the performance and track record of an individual is the most important attribute. That is matched by expertise and knowledge.
Seven in ten (72%) survey respondents outsource some of their portfolios, with 10% of insurers delegating their entire portfolio to an outside firm. On average, insurance investors outsource nearly half (48%) of their portfolio. High-yield corporate debt, investment-grade corporate debt, private equity and emerging market equities are the primary asset classes where insurance investors are looking for outside help.
To download a copy of the full report, titled “Rock and a Hard Place,” visit im.natixis.com/us/research/insurance-survey-2019-regulatory-challenges.
About the Natixis Survey of Global Insurers
Natixis Investment Managers surveyed 200 investment professionals in insurance companies through Asia Pacific, France, Germany, Nordics, US and UK/Ireland. Data was gathered in July and August 2019 by the research firm CoreData.
About the Natixis Investment Institute
The Natixis Investment Institute applies Active Thinking® to critical issues shaping the investment landscape. A global effort, the Institute combines expertise in the areas of investor sentiment, macroeconomics, and portfolio construction within Natixis Investment Managers, along with the unique perspectives of our affiliated investment managers and experts outside the greater Natixis organization. Our goal is to fuel a more substantive discussion of issues with a 360° view of markets and insightful analysis of investment trends.
About Natixis Investment Managers
Natixis Investment Managers serves financial professionals with more insightful ways to construct portfolios. Powered by the expertise of more than 20 specialized investment managers globally, we apply Active Thinking® to deliver proactive solutions that help clients pursue better outcomes in all markets. Natixis Investment Managers ranks among the world’s largest asset management firms2 with more than $1 trillion assets under management3 (€921.5 billion).
Headquartered in Paris and Boston, Natixis Investment Managers is a subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Investment Managers’ affiliated investment management firms include AEW; Alliance Entreprendre; AlphaSimplex Group; Darius Capital Partners; DNCA Investments;4 Dorval Asset Management; Flexstone Partners; Gateway Investment Advisers; H2O Asset Management; Harris Associates; Investors Mutual Limited; Loomis, Sayles & Company; Mirova; MV Credit; Naxicap Partners; Ossiam; Ostrum Asset Management; Seeyond; Seventure Partners; Thematics Asset Management; Vauban Infrastructure Partners;5 Vaughan Nelson Investment Management; Vega Investment Managers;6 and WCM Investment Management. Investment solutions are also offered through Natixis Advisors and Natixis Investment Managers Solutions7. Not all offerings available in all jurisdictions. For additional information, please visit Natixis Investment Managers’ website at im.natixis.com | LinkedIn: linkedin.com/company/natixis-investment-managers. Twitter: @NatixisIM
Natixis Investment Managers’ distribution and service groups include Natixis Distribution, L.P., a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliated firms of Natixis Investment Managers, Natixis Investment Managers S.A. (Luxembourg), Natixis Investment Managers International and its global affiliated distribution and investment management entities.
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1 Natixis Investment Managers 2015 Insurance Industry Survey, conducted by CoreData Research in July 2015. Survey included 200 financial executives in United States, France, Germany, the United Kingdom, Ireland and Nordic countries of Denmark, Sweden, Finland and Norway.
2 Cerulli Quantitative Update: Global Markets 2019 ranked Natixis Investment Managers as the 17th largest asset manager in the world based on assets under management as of December 31, 2018.
3 Net asset value as of September 30, 2019 is $1.004 billion. Assets under management (“AUM”), as reported, may include notional assets, assets serviced, gross assets, assets of minority-owned affiliated entities and other types of non-regulatory AUM managed or serviced by firms affiliated with Natixis Investment Managers.
4 A brand of DNCA Finance.
5 Not yet licensed – currently pending authorization process as a portfolio management company with the French Autorité des marchés financiers (the “AMF”).
6 A wholly-owned subsidiary of Natixis Wealth Management.
7 Natixis Investment Managers Solutions teams, based in several locations (Paris, London, Geneva, Boston), gather the asset allocation, portfolio construction, multi-asset portfolio management and structuring expertise of Natixis Investment Managers. Only the entity based in Paris has the portfolio management company certification.
Contacts
Natixis Investment Managers
Maggie McCuen
Tel: (617) 449-2543
[email protected]
