June 25, 2018
Interviewed by: Privcap
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KKR’s McVey: For Insurance Companies, a New World Order

Since the downturn of the banking system in 2008, insurance companies have changed their approach to asset allocation, becoming among the most important and sophisticated institutional investors in the world, according to a KKR economist.

Since the downturn of the banking system in 2008, insurance companies have changed their approach to asset allocation, becoming among the most important and sophisticated institutional investors in the world, according to a KKR economist.

For Insurance Companies, a New World Order

Privcap: In a nutshell, what was the main finding from your recent survey of insurance company CIOs?

Henry McVey, KKR:
The title of the report was called “New World Order,” and what we were really showing is that CIOs in the insurance industry today are on par with some of the most sophisticated investors that we deal with as a firm. They’ve really gotten much more capital efficient in terms of how they’re using their investments. They have more buying power in the market. They’re certainly doing more in alternatives, and they’re really thinking about the duration of their capital. They’ve really embraced dislocations. So, when we’ve seen structural pullbacks and capital being provided to the market, let’s say the banking sector pulled back after the great financial crisis, insurance companies stepped in, very smartly, and were able to earn outsized returns.

How much investment capital did the companies you surveyed represent?

McVey: In our survey, we interviewed about 50 to 60 companies. That was about three trillion dollars in assets. Let me say that again. Three trillion. It’s a massive number. That was only 40% of the U.S. industry.

How are insurance CIOs changing the way they invest?

McVey: Traditionally in the old days, you would have about 75% of the portfolio in very high-quality investment-grade bonds, and then you’d have some equities and maybe some treasuries in cash.

Insurance companies today are really doing interesting things—and let me segment the market—On the life side, I would say there are really three areas of focus for CIOs. Today, that’s about 30% of their assets, which is a large number. On the property and casualty side, they’ve moved from about two and a half percent to about eight and a half percent in non-investment grade debt. What are the CIOs trying to produce? They’re trying to produce solid income, so that they can pay their stake holders in a world where central banks around the world have essentially eliminated the ability to save through traditional fixed income.

McVey: When people think about alternatives, sometimes they think about private equity, or they think about hedge funds. In fact, what the survey showed is hedge fund allocations have gone down over the last three to five years. Private equities increased, but it’s gone from a very small number, maybe one and a half percent to two and a half. The real action has been in creating fixed income substitutes, and really, if you think about everything from CLOs to structured products…

When the banks fell apart after the great financial crisis, there was a void for corporates, particularly in the small and midsize market, to get access to capital. Somewhat ironically, the insurance companies have supplanted the banking sector in terms of providing some of that capital.

What are the expectations around performance?

McVey: Generally, the investment income, on average, of the portfolios that we surveyed, was somewhere between three and four percent, but it’s come down depending on the company somewhere between 50 basis points and a 100 basis points over the last three years. That’s a huge number on three trillion dollars that we surveyed. Most of the CIOs that we’ve surveyed and discussed outlook with, they pivoted, and I think in a healthy and kind of creative way, to generate more return and in many instances, they’re taking bite sizes of the apple across multiple products to get the benefit of diversification, which I think is, obviously, hugely important when you’re running large portfolios that are largely illiquid.

 

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