Insurance companies plan to break out of the core in 2014. So says BlackRock in its 2014 global insurance industry outlook. With interest rates set to stay low for some time, insurers are going to be breaking out of the traditional spectrum of core investments and into non-core, less-liquid investments such as emerging market debt, high-yield bonds and bank loans. More and more insurers are hunting for yield, protection from rising rates and duration deduction.
Exchange-traded funds (ETFs) will also be on the menu for more insurance companies next year, including term-maturity ETFs—an ETF based on a portfolio of bonds that mature within a specific year. For investors looking to sidestep the risk of rising rates, term-maturity ETFs are exposed less and less to interest rate risk as the fund approaches maturity.
With rising rates on the horizon, it’s all about timing.
“Managing investment risk in this environment will prove complicated, and insurers will need to both refine and complement their core fixed income exposures,” said the report.
BlackRock also sees insurers taking a close look at liquidity in their portfolios as they rejig their portfolios to include new and broadening areas such as infrastructure, mezzanine debt, collateralized loan obligations and multi-asset alternative portfolios.
Insurers will also look to loans originated outside the traditional banking model, minimum-volatility strategies as a core holding, and an increased interest in factor-based allocations and dividend-paying strategies.