Insurance companies, which have historically invested primarily in fixed-income, are getting creative with their portfolios as low interest rates have made it harder to get the returns they desire.

While still a relatively small part of their holdings, insurers have significantly increased their investments in alternatives to squeeze out much-needed yield, with their allocations to private equity doubling since 2014, according to a KKR & Co. research report on Wednesday. Private credit represents the largest portion of their holdings in alternative investments, rising to 5.6 percent last year, from 4.7 percent in 2014.

The report by Henry McVey, KKR's head of global macro and asset allocation, found that insurers are shifting to alternatives for bigger returns in an environment where they own an estimated $9 trillion in negative yielding fixed-income securities. Insurance companies are typically considered conservative investors as they need to buy assets that will help them meet promises to life insurance, property & casualty and other policy holders.

“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,” McVey said in KKR's statement Wednesday on the research report. "Life and annuity companies are much more aggressive allocators toward private credit and private real estate." 

Life insurance companies increased their share of private credit to 10.3 percent last year, up from 7.6 percent in 2014, according to KKR. Their private real-estate equity allocation rose 130 basis points to 2.3 percent over the same period.

As they reach for yield in alternative assets, insurers have been favoring private equity over hedge funds. While their private equity allocations increased to 2.4 percent last year, from 1.3 percent in 2014, insurance companies cut their hedge fund exposure by about half to 0.5 percent, according to KKR's report.

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The alternative asset manager's survey found that 36.4 percent of insurance companies plan to increase their exposure to real estate credit this year; 29.5 percent expect to expand their private credit holdings; and 27.3 percent plan to invest more in private equity. Insurance companies are funding their increased alternatives allocations with cash they'd been holding in their portfolios and by reducing their allocations to U.S. equities.

McVey and his team expect long-term rates to remain low in absolute terms over the next few years, suggesting that chief investment officers will remain interested in alternative strategies.

“CIOs are increasingly of the view that a diversified set of alternative investments likely represents the best way to not only deliver strong results by harnessing the illiquidity premium to their advantage but also to minimize capital charges associated with these strategies,” he said in his report.