Hong Kong, China -- (SBWIRE) -- 09/30/2015 -- Insurers to Embrace Non-Core Assets; Challenges Posed by Low Rates, Profitability and Regulation to Drive Re-allocation
Insurers are likely re-examine their allocations to fixed income assets and invest in new financial instruments in response to prolonged low interest rates, regulatory changes, and profitability worries, Apex Equities' annual insurance industry outlook suggests.
Insurers need predictable cash flows to meet underwriting liabilities, but are struggling to generate enough income through traditional fixed income investments to meet their liabilities and provide competitive products. Because of this squeeze on income streams, Apex Equities believes insurers will relax investment guidelines and embrace more alternative investment products.
David Chang, Head of Apex Equities' Financial Institutions Group, "This is a critical time for insurers. Profitability is being hurt by intense competition on the liability side while poor returns from traditional fixed incomes assets and costs to comply with impending regulation are adding to the pressure."
Apex Equities predicts risks in traditional markets will prompt firms to increase exposure to more alternative sources of income like collateralized bank loans and infrastructure debt, as well as real estate debt and mezzanine debt instruments. Insurers will have to embrace less liquid and alternative investment strategies that offer attractive risk-adjusted returns.
Conservative insurers have generally avoided these types of investments, but in the last three years the assets Apex Equities manages for insurers in alternative fixed income products has increased fivefold.
"Insurers are looking for uncorrelated returns in diversifying assets and are interested in harvesting proceeds from investing in less liquid asset classes. Being generally flush with liquidity, they are willing to take more illiquidity risk to get the returns they need," Mr. Chang commented.
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