BlackRock: Insurers Face Fixed Income Dilemma

Insurers are likely to re-examine their allocations to fixed income assets in 2013 as continued low interest rates challenge business models and profitability, according to BlackRock’s global insurance industry outlook, “2013: The Year Ahead.”

David Lomas, Head of the Financial Institutions Group within BlackRock’s Institutional business, said, “This is a crucial time for insurers as persistently low interest rates will challenge their income prospects and stress their business models. We expect them to embrace new ways of achieving profitability to meet the increasingly complex challenges of the global investment environment and the post-crisis regulatory regime.”

The Year Ahead analyzes the key drivers that BlackRock believes will shape the insurance industry, including the sector’s income prospects, profitability targets and capital allocation techniques and provides insight into the evolving regulatory landscape.

Mr. Lomas added: “Not only is profitability being squeezed, but the investment returns insurers generate from traditional fixed-income assets – to match their underwriting liabilities – are now harder to access at attractive risk-to-reward levels. Central bank purchases of quality fixed income assets, coupled with a global thirst for yield and safety, has created an environment where newer bonds are being issued with lower interest rates, but longer maturities. As a result, interest rate risk is increasing significantly. Faced with the dilemma of needing predictable cash-flows to pay client claims and policy guarantees, insurers will need to be more selective and opportunistic with their fixed income allocations than ever before.”

The current market volatility, regulatory changes, and increases in capital are forcing banks to deleverage by exiting businesses, selling assets and transferring risks. Mr. Lomas predicts larger insurers will help to fill the void as they seek higher yields, some inflation protection and superior risk-adjusted returns.

“We expect that some insurance companies will take advantage of the situation and increase their exposure to illiquid assets, particularly those assets with predictable cash flow, such as infrastructure project finance,” said Mr. Lomas.

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