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Low interest rates and recession risk will probably continue to give insurance company investment managers headaches over the next few years.

In recent years, “both the absolute low level of interest rates and the extremely tight level of credit spreads have wreaked havoc on  the insurance industry,” the KKR analysts write.

The Federal Reserve board has started to try to push rates back up. But, even if rates continue to rise, insurers will probably have to continue to invest in assets other than high-traded bonds and common stock, the KKR analysts write.

“Interest rates are now just too low in absolute terms to use a more traditional asset allocation playbook, according to our survey respondents,” the analysts warn.

(Related: ‘Black Swan’ Investor Who Profited From ’08 Crisis Says Market’s More Fragile)

Henry McVey and other analysts at Kohlberg Kravis Roberts & Co. L.P. have based the report on a summary of results from a KKR survey of about 50 large insurers.

Only about 38% of the participants were life insurers. But, because life insurers depend so much more than property-casualty insurers on investments and investment returns, the life insurers accounted for about 75% of the participants’ investable assets.

Assets other than bonds and common stock accounted for 14.5% of the surveyed insurers’ assets in 2017, up from 11.3% in 2014, the analysts write.

Insurers are making more use of instruments such as collateralized loan obligations, asset-based securities, commercial mortgage-backed securities, private equity, and private credit, the analysts write.

Like other asset managers, KKR wants insurers to hire it to help them manage “alternative investments.”

But McVey and his colleagues acknowledge that they have included a recession in their “base case” scenario for 2020, and that insurance company chief investment officers are keenly aware that a recession could hurt some borrrowers’ ability to pay their bills.

One challenge is that corporate borrowers with a BBB credit rating are paying an average of just 1.45 percentage points more than the U.S. Treasury.

The insurance company chief investment officers already say they are working harder to understand what they are investing in.

The KKR analysts say insurers should also avoid taking credit ratings on alternative assets for granted. Insurers should make sure borrowers and securities issuers really have the ability to keep making payments in both good times and bad times, the analysts write.

— For more life and annuity issuer investment coverage, see our Insurance Company Investments archive, on ThinkAdvisor.

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