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Insurance CIOs See Alternatives Driving Portfolio Returns

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Insurance CIOs are increasingly seeking to increase their allocations to alternative investments, and to many of them, there is no turning back to traditional, liquid asset allocations. These were the key takeaways of KKR’s 2024 insurance survey, which surveyed roughly 50 insurance companies and their CIOs.  

Insurers see a new regime emerging for asset allocation, according to KKR’s survey. With a rise in interest rates, insurers want to increasingly add alternatives and uncorrelated assets into the mix, creating “all weather” portfolios that can absorb different types of shocks.  

Approximately 64% of surveyed insurance CIOs said they envision alternative investments driving portfolio returns in the future, according to KKR.  

“CIOs are increasingly embracing the notion that there will be ‘No Turning Back’ when it comes to creating all-purpose portfolios that can thrive in this new macroeconomic environment that we now all find ourselves navigating on a global basis,” the report concludes.  

Asset Allocation 

Insurers are increasing or plan to increase their allocations to alternatives, at the expense of cash and public equities according to KKR. From 2021, allocations among all insurance AUM to domestic equity fell from 7.2% in 2017, to 4.2% in 2021, to 4.0% in 2024.  

In comparison, allocations to private equity increased from 2.4% of all insurance AUM in 2017, to 3.2% in 2021, to 4.1% in 2024, representing a reallocation of $100 billion to $150 billion to the asset class during these years. 

“More and more CIOs are again turning to private equity, despite its higher capital charges, to boost portfolio returns. The diversification benefits and extra returns were cited by multiple participants, particularly when compared to public markets. The asset class is also viewed as less volatile,” the report states. 

According to the survey, 55% of surveyed CIOs said they plan to increase their allocations to private credit, 46% said they plan to increase private equity allocations. Infrastructure ranked third, with 32% of CIOs planning to increase allocations to this asset class. Bank loans and high yields were fourth, with 27% of respondents saying they plan to increase allocations in these asset classes.  

Public equities were the lowest, with only 5% of respondents intending to increase these allocations, and 27% of respondents said they intend to decrease their allocations to cash, the only asset class where CIOs intend to reduce allocations, according to the survey.  

Fixed income still has the highest allocation among insurers, although it, like liquid public equities, is also declining. Total allocations to fixed income among insurers fell from 66.8% in 2017, to 56.3% in 2021, to 61.5% in 2024.  

While insurers are decreasing their fixed income allocation, KKR writes that they want their managers to own more high-quality fixed income instruments, and/or non-traditional assets that can match, or exceed liabilities with little risk. According to Insight Investment, its clients are favoring core public markets fixed income over private ones, as fixed income yield rebounds and uncertainty around private market deals increases. According to Insight Investment, structured products can play an increasingly important diversifying role in the portfolios of insurers, a trend the firm is seeing.  

Related Stories: 

Insurance Investors Rethink Approaches Near End of 2023 

Insurers Flock into Private Debt, Alternatives, Mercer Says 

Insurers Increasingly Interested in Private Credit, Per GSAM 

Tags: Alternatives, Asset Allocation, CIO, insurance, KKR, Private Credit, Private Equity

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