QE Uncertainty Hurting Insurers’ Income Streams and Driving Them into Riskier Assets, Says New BlackRock Study
Quantitative easing (‘QE’) and uncertainty around tapering of asset
purchases by the Federal Reserve and other central banks is limiting the
ability of insurance companies to generate returns, and driving them to
diversify towards riskier assets, according to new research into the
investment strategies of over 200 insurers globally.
Unveiled in a report called Global
Insurance: Investment strategy at an Inflection Point?, produced
by BlackRock, Inc. (NYSE:BLK) in partnership with The Economist
Intelligence Unit (‘EIU’), the results highlight insurers’ changing
investment attitudes in response to central bank policy. With last
Wednesday’s decision to continue QE at its current pace, the report
suggests insurers need to consider how this uncertainty affects their
overall strategic asset allocation and the potential impact on their
Low yields on investments were identified as the most critical driver of
change affecting the industry with 73 per cent of respondents citing
this. 80 per cent agreed their business will have to change to produce
adequate shareholder returns over the next three years.
When QE ends or tapers, however, insurers are expecting rising interest
rates, but there are widely divergent views on when QE will end. The
majority of insurers internationally (52 per cent) believe QE will end
within one and two years, while 35 per cent think it will continue for
more than two years. 13 per cent, however, see QE ending within a year.
In a ‘QE-infinity’ world before potential tapering was discussed by the
Fed, insurers said they were highly likely to increase allocations to
riskier, higher-yielding fixed income instruments such as bank loans and
lower rated debt (73 per cent), and illiquid strategies (68 per cent).
In an environment where QE tapering was expected, however, insurers
changed their investment approaches and risk appetite. After the Fed’s
introduction of an unofficial tapering timeline in late June, just 52
per cent said they were looking to invest in new, diversifying fixed
income asset classes; only 33 per cent were willing to take on more
investment risk; and just 17 per cent were seeking illiquidity premia.
The report shows that despite the uncertainty in markets and concerns
over restrictive regulations, many insurers see opportunities and are
confident of growth prospects. Of note, insurers are using
exchange-traded funds (ETFs) to diversify out of cash and access certain
asset classes, while remaining liquid. ETFs also help insurers deal with
supply issues, allowing them to invest in assets classes through ETFs
that may be difficult to access directly. 83 per cent of survey
respondents agree or strongly agree that more insurers will use ETFs
over the next three years, while 70 per cent agree that these vehicles
are suitable as a long-term strategic holding for both core and
Most respondents identified home markets as offering the best potential
for growth, with organic growth (75 per cent) and product innovation (63
per cent) identified as the chief catalysts for growth.
David Lomas, global head of BlackRock’s insurance business, comments:
“‘QE or not QE?’ - That is the question insurers need the Fed to
answer definitively as the implications for portfolios, investment
returns and ultimately their businesses are so dramatic. As the Fed
continues with asset purchases, our research shows insurers are much
more likely to buy higher yielding fixed income assets, invest in less
liquid assets and increase duration risk. However, tapering or even the
suggestion of tapering is ‘risk-off’ with firms seeking to reduce
duration in fixed income instruments.
“The market will continue to be dominated by several major themes -
reduced liquidity, constrained supply, idiosyncratic credit risk and the
unwind of unprecedented monetary stimulus. This study demonstrates the
incredible challenges insurers face in the coming months and the
nimbleness required when determining asset allocations.
“No matter the direction of central bank policy, insurers are opting
to increase allocations to illiquid assets like infrastructure debt and
real estate debt to meet long-term liabilities. We also see the appeal
of ETFs growing as they provide cost-efficient access to markets and are
suitable both as long-term strategic investments and interim beta for
core and satellite holdings. Lastly, risk management is clearly an area
where insurers are strengthening to handle market volatility and a more
diverse set of products. This increased focus on risk is giving them the
confidence to grow their businesses organically and innovate with new
products – even whilst some product lines are being challenged.”
The full report can be accessed at www.blackrock.com/intlfig.
About Global Insurance: Investment strategy at an Inflection Point
The Economist Intelligence Unit surveyed 206 insurers worldwide in April
and May 2013 on behalf of BlackRock. 102 had more than $25bn in assets,
20 had AUM of $11bn to $25bn, 22 with $6bn to $10bn, 24 had AUM of $2bn
to $5bn, 11 reported assets of $500 to $1bn and 27 insurers had
$100m-$500m AUM. Life companies accounted for 53 responses, non-life for
61 and composite amounted to 75 respondents. Seventeen were reinsurers.
Regionally respondents were split as follows: 103 from Europe, Africa
and Middle East; 63 from North America; and 40 from Asia-Pacific. An
additional survey was conducted in July 2013, of 100 respondents with a
similar demographic to the main survey. Additionally, in-depth
interviews were conducted with 17 experts from insurance companies,
regulators and trade bodies.
About BlackRock Financial Institutions Group
BlackRock has unrivalled insights into the management of insurance
company assets. Its Financial Institutions Group manages $306 billion
for 151 insurers in 20 countries as at the end of June 2013. In addition
to these asset management relationships, BlackRock also provides risk
management services to 56 insurers through BlackRock Solutions,
BlackRock’s risk management and advisory business.
BlackRock is a leader in investment management and risk management
services for institutional and retail clients worldwide. At June 30,
2013, BlackRock’s AUM was $3.857 trillion. BlackRock helps clients meet
their goals and overcome challenges with a range of products that
include separate accounts, mutual funds, iShares® (exchange-traded
funds), and other pooled investment vehicles. BlackRock also offers risk
management, advisory and enterprise investment system services to a
broad base of institutional investors through BlackRock Solutions®.
Headquartered in New York City, as of June 30, 2013, the firm had
approximately 10,700 employees in 30 countries and a major presence in
key global markets, including North and South America, Europe, Asia,
Australia and the Middle East and Africa. For additional information,
please visit the Company's website at www.blackrock.com.
BlackRock Forward-Looking Statements
This press release, and other statements that BlackRock may make, may
contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act, with respect to BlackRock’s future
financial or business performance, strategies or expectations.
Forward-looking statements are typically identified by words or phrases
such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,”
“comfortable,” “expect,” “anticipate,” “current,” “intention,”
“estimate,” “position,” “assume,” “outlook,” “continue,” “remain,”
“maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or
future or conditional verbs such as “will,” “would,” “should,” “could,”
“may” and similar expressions.
BlackRock cautions that forward-looking statements are subject to
numerous assumptions, risks and uncertainties, which change over time.
Forward-looking statements speak only as of the date they are made, and
BlackRock assumes no duty to and does not undertake to update
forward-looking statements. Actual results could differ materially from
those anticipated in forward-looking statements and future results could
differ materially from historical performance.
In addition to risk factors previously disclosed in BlackRock’s
Securities and Exchange Commission (“SEC”) reports and those identified
elsewhere in this press release the following factors, among others,
could cause actual results to differ materially from forward-looking
statements or historical performance: (1) the introduction, withdrawal,
success and timing of business initiatives and strategies; (2) changes
and volatility in political, economic or industry conditions, the
interest rate environment, foreign exchange rates or financial and
capital markets, which could result in changes in demand for products or
services or in the value of assets under management; (3) the relative
and absolute investment performance of BlackRock’s investment products;
(4) the impact of increased competition; (5) the impact of future
acquisitions or divestitures; (6) the unfavorable resolution of legal
proceedings; (7) the extent and timing of any share repurchases; (8) the
impact, extent and timing of technological changes and the adequacy of
intellectual property, information and cyber security protection; (9)
the impact of legislative and regulatory actions and reforms, including
the Dodd-Frank Wall Street Reform and Consumer Protection Act, and
regulatory, supervisory or enforcement actions of government agencies
relating to BlackRock or The PNC Financial Services Group, Inc. (“PNC”);
(10) terrorist activities, international hostilities and natural
disasters, which may adversely affect the general economy, domestic and
local financial and capital markets, specific industries or BlackRock;
(11) the ability to attract and retain highly talented professionals;
(12) fluctuations in the carrying value of BlackRock’s economic
investments; (13) the impact of changes to tax legislation, including
income, payroll and transaction taxes, and taxation on products or
transactions, which could affect the value proposition to clients and,
generally, the tax position of the Company; (14) BlackRock’s success in
maintaining the distribution of its products; (15) the impact of
BlackRock electing to provide support to its products from time to time
and any potential liabilities related to securities lending or other
indemnification obligations; and (16) the impact of problems at other
financial institutions or the failure or negative performance of
products at other financial institutions.
BlackRock's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and BlackRock's subsequent filings with the SEC, accessible on the SEC's
website at www.sec.gov
and on BlackRock’s website at www.blackrock.com,
discuss these factors in more detail and identify additional factors
that can affect forward-looking statements. The information contained on
the Company’s website is not a part of this press release.
Copyright Business Wire 2013