Will insurers become the new banks?
Many banks are looking to offload non-core investments to comply with Basel III rules on capital ratios, presenting opportunities for yield-hungry insurers, say BlackRock and Société Générale.
“The sale of these capital-hungry investments helps banks improve their capital ratios and insurers get access to the illiquidity premium they crave with correspondingly attractive yields,” notes David Lomas, head of BlackRock's global financial institutions group in New York.
Insurers worldwide are not alone in being starved of yield and earnings are being dampened as a result. “We are now witnessing insurers starting to consider investing in specialty credit, such as high yield, bank loans, emerging market debt, collateralised loan obligations, aviation finance and mezzanine debt,” says Lomas. “Even dividend equity is proving an area of interest.”
The current low-interest-rate, low-yield environment is pushing institutional investors such as insurance firms to seek to boost their returns through less traditional methods.
However, it is tougher to find the same kind of credit opportunities in Asia, as banks in the region are generally not under the same pressure to cut their loan books, says Pierre Trecourt, Asia-Pacific head of fixed-income solutions in the global markets division at Société Générale.
SG is among several banks increasingly active in structuring such deals. In June it struck a partnership with Axa to provide joint financing to French mid-cap firms and completed its first deal in August.
Still, Asian insurance companies able to invest offshore may find such opportunities attractive.
“You have to look at it on a currency-hedged basis: is the yield still attractive after hedging for a local domestic insurer?” says BlackRock’s Lomas. “If you can generate 8% gross and 7% net, post hedging costs, then that’s interesting.”
These strategies can also bring substantial diversification benefits, he adds, as they are generally not correlated to domestic fixed-income investments held by the typical Asian insurer.
“But you have to understand what you own and you have to understand that if you stress the portfolio against certain economic conditions, can you take that volatility through the balance sheet or the income statement?”
Through its alternatives platform, BlackRock offers what it calls ‘strategic credit opportunities’ (SCOs), which sit between hedge funds (the most liquid) and private equity (the least) on a sliding scale of liquidity.
“Many investors are looking at that middle ground now,” says Lomas. “We think a significant number of these assets will come to market in this space. It’s a two-to-four year investment horizon. Examples would be mezzanine debt, senior secured loans, unsecured loans, securitised assets.”
Insurers in Asia that might consider such assets are those in the large mature markets with the ability to go offshore, he says. “In terms of SCOs, you’re looking at $150 million as a minimum entry point. That restricts a number of organisations. And those smaller firms would typically prefer to use a pooled fund strategy anyway because that better meets their particular requirements.
“The questions we ask all our clients around these asset classes are: do you have the governance framework to make a decision? Do you have the available capital to stomach holding these securities? Do you have the investment horizon in reference to the term liquidity profile to be able to hold these? Do you have access to the risk and data to allow you to provide the level of reporting that the regulators are now starting to demand, and that the investment committee should require.
“If you can answer those questions,” says Lomas, “then this is a great asset universe to consider.”
He hopes to see such business boost BlackRock’s Asian insurance AUM, which doubled to $10 billion by end-2011 from $5 billion the year before. They now account for nearly 4% of the firm’s global $202 billion in insurance general-account AUM.