Insurers Seek Investment Alternatives as Interest Rates, Pricing Lag

By | June 29, 2011

Insurers do not expect interest rates to rise materially in the next year or so, leading them to look for alternatives to improve returns and manage risk, the head of the world’s largest asset manager for insurance companies said Tuesday.

Randy Brown, the global head of Deutsche Insurance Asset Management, said insurers are being forced to look outside their traditional comfort zone of investment-grade bonds by persistently low interest rates. Historically insurers invested 80 percent of their assets or more in that class.

But Brown said Deutsche Bank AG’s insurance clients do not expect rates to rise over the next year, and expect them to rise only moderately over the next three years. With rates so low, insurers are looking at dividend-yielding stocks, infrastructure lending, commercial real estate and “green” investing as places to put their $23 trillion in assets.

“We’ve never been here before,” said Brown, whose unit manages $200 billion for insurers, at a presentation in New York. “In the future, they are convinced rates are higher; it’s just that the date is nebulous.”

Persistently low interest rates affect insurers in different ways. For property and casualty insurers, whose portfolios have shorter durations, low rates mean low returns on capital they will need in the short term.

Combine that with the heavy losses property insurers have taken this year on natural disasters around the world, and the result is an ongoing problem in the income statement.

“They have an earnings problems in the liabilities side; they have an earnings problem on the asset side,” Brown said.

For life insurers, liabilities are much longer, so the risk is one of duration — buying long-dated bonds now and seeing their value fall as yields eventually rise, leading to markdowns that affect the insurers’ surplus.

Should low rates persist, he said, life insurers could have trouble meeting the minimum guarantees they have given on annuities and other policies.

Brown and Michael Earley, the unit’s senior strategist, said Deutsche has been pitching its services as a specialist to insurers who want to look at alternative asset classes but do not have the experience. Brown estimated less than 7 percent of insurance assets worldwide are outsourced to managers.

“They have money; it has to go somewhere,” Earley said. The problem is particularly noteworthy with reinsurers, he added, after all of the expensive earthquakes and tornadoes of late.

“They’re holding onto cash a little more but also realizing that’s expensive,” he said.

(Reporting by Ben Berkowitz, editing by Gerald E. McCormick)

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