As interest rates remain low, insurers are increasingly turning to alternative investments like private debt, infrastructure, and real estate to secure higher yields. Historically conservative investors, life insurance companies once relied heavily on long-term bonds, which offered steady and predictable returns to meet their policy obligations. However, the post-2008 financial crisis environment, with plunging interest rates, has rendered traditional investment models less effective in delivering adequate returns.
In response, insurers have shifted toward riskier, harder-to-value assets, often partnering with private equity firms and asset managers to improve their investment portfolios. This transformation is reshaping the insurance industry, offering both profit opportunities and raising regulatory concerns as insurers take on more complex risks.
The Shift Toward Alternative Assets
The pressure to find better investment returns led insurers to re-evaluate their strategies. “With interest rates way down after the Great Financial Crisis, the cost of insurers’ pre-2008 liabilities was still high,” explains Ramnath Balasubramanian, global co-leader of McKinsey & Company’s life insurance and retirement practice. “Insurers needed to find ways to de-risk their balance sheets and deploy capital more efficiently.”
As part of this shift, insurers have sold off high-cost legacy obligations to reinsurers, freeing up capital, and are now investing a larger portion of their premiums into higher-yielding assets, primarily private debt. This strategy is common among global insurers who have been building, acquiring, and partnering to improve investment returns for the past decade.
Private Equity’s Role in the Transformation
Private equity firms, especially in the US, have played a significant role in transforming the insurance sector. Major players like Apollo Global Management, Brookfield Reinsurance, and KKR have launched or acquired insurance companies, while others such as Blackstone and Carlyle have taken minority stakes in insurers. The strategy involves purchasing legacy insurance liabilities and reinvesting the underlying assets into higher-yielding investments.
Since the financial crisis, private equity firms have completed over $900 billion in transactions acquiring insurance liabilities globally. According to McKinsey, these firms now control 13% of the US insurance market, up from just 1% in 2012, and account for 35% of new US fixed and fixed-index annuities sales.
“The search for yield was the motivation,” says Meghan Neenan, managing director at Fitch Ratings. “The success they’ve had in terms of returns has been significant, and the migration in insurance portfolio profiles is still ongoing.” However, this shift toward private markets and alternative assets increases the risks faced by insurers. Their portfolios are becoming less liquid, and demand for private loans, especially those with floating interest rates, continues to grow as interest rates rise.
The Growing Role of Asset Managers
Insurers are exploring a variety of models to manage these investments. Some have built their own investment-sourcing capabilities, while others have partnered with asset managers or outsourced asset management entirely. AXA, for instance, opted to exit the asset management business, selling AXA Investment Managers to BNP Paribas for €5.1 billion in December. Meanwhile, Italian insurer Generali is expanding its asset management operations, acquiring major investment managers such as Conning and MGG Investment Group.
Generali’s partnership with Natixis Investment Managers in a 50/50 joint venture, announced in January, will manage €1.9 trillion in assets, positioning the new entity as the ninth largest global asset manager. Generali has committed to contributing €15 billion in “seed money” over the next five years to support new initiatives in alternative investments, particularly in private markets.
Japan: A Growing Market in Asia
Japan is emerging as a key player in the alternative investment space, with about $3 trillion in life and annuity reserves in force. Japanese insurers are becoming more comfortable with block reinsurance transactions, with recent deals including the reinsurance of $4 billion worth of Manulife Japan’s whole life policies and a $4.7 billion block of Japan Post Insurance annuities by Reinsurance Group of America. The Society of Actuaries estimates that as much as $900 billion in Japanese insurance obligations could be reinsured in the coming years due to new capital reserve regulations set to take effect this year.
Regulatory Challenges and Risk Management
As insurers expand their investments into more opaque and difficult-to-value assets, regulators are facing greater challenges in monitoring risk. In the US, the National Association of Insurance Commissioners (NAIC) has established a task force to revise risk-based capital solvency formulas, aiming to address the growing complexity of insurers’ portfolios. The Bank of England has also warned that the shift towards private-debt investments could increase the fragility of certain parts of the global insurance sector, posing systemic risks.
Despite these concerns, insurers view the opportunities in alternative investments as outweighing the risks. As they compete with asset managers to build better investment platforms, these firms are also finding increasingly profitable partnerships.
“The deals will continue because they’re beneficial for both parties,” Neenan says. “Insurers with long-term investment horizons get higher yields for patient investing, and alternatives managers collect fees on the assets.”
For now, the growing collaboration between insurers and asset managers appears to be a mutually beneficial trend, but the future will depend on how regulators address the increasing complexity and risks in the sector.
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