Insurers boosting cash as credit worries build, BlackRock says

(Bloomberg) — Insurers expect to slow purchases of high-grade corporate debt and hold more cash over the next two years, potentially squeezing already low returns, BlackRock Inc. said.

“Cash balances are ticking upward,” said Zach Buchwald, head of BlackRock’s insurance asset-management business in North America. “In today’s environment, where every basis point is so precious, within your core fixed income, we want to be investing wisely and generating the best risk-adjusted returns we can, and a large cash balance doesn’t help.”

About half of 315 insurers surveyed globally are looking to increase cash holdings in coming months, up from 36 percent last year, according to a BlackRock study released Monday. Companies have been stung recently by alternative investments such as hedge funds, and have been turning to other illiquid assets such as real estate, infrastructure and timber to generate returns as interest rates have remained persistently low.

The appetite for risk declined since last year, BlackRock said. Only 21 percent of companies surveyed plan to boost allocation to investment-grade corporate credit, compared with 45 percent last year, as investors anticipate deteriorating credit conditions, BlackRock said.

‘Very skeptical’

“Insurers are really struggling and they’ve been struggling for a very long time, and I think we’re also now past the period where there’s an expectation that rates are going to start rising meaningfully,” Buchwald said in a phone interview. The decreased desire to boost bets on high-grade credit “is the indication that insurance clients are getting very skeptical about the state of the corporate credit market.”