KKR Finds Insurance Industry Embracing A 'New World Order’
KKR today announced the release of a new Insights piece by Henry McVey, Head of Global Macro and Asset Allocation (GMAA). In New World Order, McVey and his team outline key investment trends in the insurance sector as industry executives prepare to navigate a challenging investment climate during the next few years.
“From almost any vantage point, the multi-year decline in interest rates since the Global Financial Crisis is having an unprecedented effect on the profitability and sustainability of the entire insurance business,” Henry McVey said. “Importantly, it comes at a time when the investment part of the business is now often taking on more responsibility for driving profitability than the traditional underwriting function. Given this backdrop, getting asset allocation right has never been more important. The good news is that many CIOs in the insurance industry understand that they are operating in what we are terming a ‘New World Order’ for asset allocation.”
To better understand how cognizant CIOs are of the risk in today’s environment, McVey and his team, alongside KKR’s Insurance Asset Management team, conducted a proprietary survey of approximately 50 large, well-capitalized insurance companies that are either existing clients of KKR or prospects of the firm. Collectively, participants surveyed oversee nearly three trillion dollars in investable assets, representing nearly 40% of the total U.S. insurance industry investable assets.
In his latest report, Henry McVey shares his primary conclusions from the survey, including:
- To combat today’s challenging investment environment, insurance companies have begun to branch out into a variety of new products, including Structured Products, Alternatives, and Non-Investment Grade Debt. All told, total Non-Traditional Investments and Non-Investment Grade Debt now represent 26.4% of on-balance sheet investment assets for our survey participants, compared to just 17.4% in 2014.
- Within Structured Products, the survey reports greater demand by insurance companies for better capitalized and more transparent securitized investment vehicles, including CLOs, ABS, and CMBS, relative to the pre-Global Financial Crisis.
- Within the Alternative Investment arena, Private Equity allocations have nearly doubled to 2.4% since 2014, though Private Credit remains the largest absolute Alternative allocation at 5.6% of total allocations versus a 4.7% allocation in 2014. On the other hand, Hedge Fund allocations fell sharply to just 50 basis points, down meaningfully from 110 basis points in 2014.
- Not surprisingly, life and annuity companies are much more aggressive allocators toward Private Credit and Private Real Estate.
- Within KKR’s property and casualty universe, there has been a significant increase in Non-Investment Grade Debt, which recently reached 8.4% versus 2.8% in 2014.
- Even though many survey participants believe long-term interest rates have bottomed, KKR and its survey respondents do not see insurance asset allocation returning to prior allocations any time soon.