Insurers warm to private equity as yields edge lower

Private equity is expected to deliver the highest returns in the next 12 months by 43% of respondents, the highest of any asset class, according to GSAM research.

Insurance companies are planning to ramp up their private equity allocations as low interest rates in Europe and Asia-Pacific drive yields down.

More than one-third (36 percent) of insurers expect to increase their allocation to private equity over the next 12 months, more than any other asset class, according to Goldman Sachs Asset Management’s Insurance Survey 2019. 

Asian insurers are most bullish on private equity, with 56 percent planning to increase their allocations, up from 48 percent last year. Thirty percent of US insurers plan to increase their allocations, compared with 21 percent of those in EMEA.

Private equity is expected to deliver the highest returns in the next 12 months by 43 percent of respondents, the highest of any asset class, followed by US equities at 42 percent and emerging market equities at 38 percent.

Insurance companies are losing their appetite for US equities, cash and short-term instruments and municipal bonds. Respondents identified credit quality deterioration and low yields as the biggest investment risks, while last year’s top concern – rising interest rates – was among the least prevalent this year.

Insurers are more likely to outsource their private equity activity than for any other asset class (34 percent). Two-thirds of respondents in Asia-Pacific anticipate outsourcing their private equity management, up 22 percent year-on-year.

ESG and impact investing are more than three times as likely to be a consideration among European and Asia-Pacific insurers than their US counterparts, the report noted.

Respondents included more than 300 companies with more than $13 trillion in combined balance sheet assets.

Japan Post Insurance is among those piling into the asset class: the insurer started its alternatives programme in 2017 and has made a ¥30 billion ($269 billion; $240 billion) anchor commitment to Japan Post Investment Corporation. JPI wants to deploy as much as 1.5 percent of its total assets under management – about $10 billion – in private equity, real estate, infrastructure and hedge funds by 2020 and has invested about a third of its target in alternatives to date.

Insurers in China, Taiwan, Korea, Singapore, Indonesia and Malaysia had a fourfold increase in their alternatives allocation in the last five years, hitting $973.8 billion last year, according to The Cerulli Report–Asian Insurance Industry 2018: Focusing on Long-Termism, from research and consulting firm Cerulli.

The European Commission has also reduced the amount of capital insurers must set aside to manage the perceived risks for some long-term equities.