About a quarter of insurance companies will most likely boost their allocations to alternatives in the next two years, according to Eager, Davis & Holmes' Insurance Asset Outsourcing Trends and Investment Practices report. Furthermore, insurers are increasingly hiring third-party investment firms. Currently, 69% of insurers outsource some of their assets to unaffiliated managers, up from 64% in 2002. The average percentage of assets outsourced increased to 68% from 56%.
Within the next two years, a fifth of insurance companies are likely to outsource one or more specialized fixed-income mandates. Insurers invest 84% of their assets in fixed income. "Insurance companies are seeing pressure on the underwriting," said Partner David Holmes. They need the expertise of third-party investment managers to improve returns and add to their bottom-line earnings per share. Insurers also want assistance with risk control in a market with low equity returns.
Insurance companies are outsourcing a range of asset classes, including core fixed income, core-plus, specialist fixed income, municipal and high-yield bonds. They have also hired mid- and large-cap growth and value managers. "Increases to [alternatives] are for purposes of diversification, with return expectations ranging from 6% to 10% over a cash return," said Holmes.
"It's not just about performance, they look for managers who understand the needs of an insurance company and insurance company issues," Holmes continued. One important concern is regulatory compliance because insurers have many restrictions on their investments.