Insurers to Embrace Non-Core Assets Challenges Posed by Low Rates, Profitability and Regulation to Drive Re-allocation NEW YORK --(BUSINESS WIRE)-- Insurers are likely re-examine their allocations to fixed income assets and invest in new financial instruments in 2014 in response to prolonged low interest rates, regulatory changes, and profitability worries, BlackRock’s annual insurance industry outlook suggests. Insurers need predictable cash flows to meet underwriting liabilities, but are struggling to generate enough income through traditional fixed income investments to meet their liabilities and provide competitive products. Because of this squeeze on income streams, BlackRock believes insurers will relax investment guidelines and embrace more alternative investment products. David Lomas , Head of BlackRock’s Financial Institutions Group , “This is a critical time for insurers. Profitability is being hurt by intense competition on the liability side while poor returns from traditional fixed incomes assets and costs to comply with impending regulation are adding to the pressure.” Alternative income sources BlackRock predicts risks in traditional markets will prompt firms to increase exposure to more alternative sources of income like collateralized bank loans and infrastructure debt, as well as real estate debt and mezzanine debt instruments. Insurers will have to embrace less liquid and alternative investment strategies that offer attractive risk-adjusted returns. Conservative insurers have generally avoided these types of investments, but in the last three years the assets BlackRock manages for insurers in alternative fixed income products has increased fivefold to $11.4billion from $2.1billion . Additionally, a recent client study of 20 large insurers with $2 trillion of assets found 60 per cent intended to increase allocations to real estate; 50 per cent intended to increase allocations to real assets like infrastructure, and a third intended to increase allocations to private equity. “Insurers are looking for uncorrelated returns in diversifying assets and are interested in harvesting proceeds from investing in less liquid asset classes. Being generally flush with liquidity, they are willing to take more illiquidity risk to get the returns they need,” Mr. Lomas commented. Regulation challenges Preparations for regulations like Solvency II in Europe or the Own Risk and Solvency Assessment in the US will see insurers further upgrade risk management systems and add compliance staff to cope with increased regulatory and reporting requirements, BlackRock predicts. Mr. Lomas said, “Efficient use of capital and optimizing asset management strategies in a compliant fashion with impending regulation will undoubtedly be a theme driving activity globally; but this will have its costs.” Profitability and business impact BlackRock’s Outlook also warns stronger demand for and limited availability of alternative capital like insurance-linked securities will pressure reinsurance pricing, mounting further strain on insurers’ profitability. Consequently, BlackRock expects further growth in insurers’ use of exchange-traded funds for lower-cost, liquid exposures to many credit markets. Mr. Lomas added, “Ultimately, if insurers’ profit margins dwindle and the costs of doing business keep going up, then those players that do not fully exploit the return potential of their assets will have to stop offering some lines of less profitable business. This could mean less choice for end consumers of those products.” For more information or to speak with a BlackRock spokesperson, please contact: Tara McDonnell 646.226.0849 Tara.Mcdonnell@BlackRock.com About BlackRock Financial Institutions Group BlackRock has unrivalled insights into the management of insurance company assets. Its Financial Institutions Group manages $327 billion for 159 insurers in 23 countries as at the end of December 2013 . In addition to these asset management relationships, BlackRock also provides risk management services to 56 insurers through BlackRock Solutions, BlackRock’s risk management and advisory business. About BlackRock BlackRock is a leader in investment management, risk management and advisory services for institutional and retail clients worldwide. At December 31, 2013 , BlackRock’s AUM was $4.324 trillion . BlackRock helps clients meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. Headquartered in New York City , as of December 31, 2013 , the firm had approximately 11,400 employees in more than 30 countries and a major presence in key global markets, including North and South America , Europe , Asia , Australia and the Middle East and Africa . For additional information, please visit the Company’s website at www.blackrock.com . This material is for distribution to Professional Clients only (as defined by the FCA Rules) and should not be relied upon by any other persons. Issued by BlackRock Investment Management ( UK ) Limited, authorised and regulated by the Financial Conduct Authority . Registered office: 12 Throgmorton Avenue , London , EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management ( UK ) Limited. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2013 BlackRock, Inc. All Rights reserved. BLACKROCK , BLACKROCK SOLUTIONS, iSHARES, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. BlackRock, Inc. Tara McDonnell , 646-226-0849 tara.mcdonnell@BlackRock.com Source: BlackRock, Inc.
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