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.
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.