Increasing Alpha in Life and Health Insurance Investments

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As the market for life and health insurance continues to evolve, insurers are exploring new ways to increase their return on assets. In addition to building investment skills in their own organizations, many insurers are re-evaluating their strategic asset allocations. These strategies aim to generate alpha by accessing higher yielding assets while retaining capital. In addition, many insurers are exploring new partnership models, including with alternative asset managers.

While traditional fixed-income investments have historically been a reliable source of income, the low-yield environment has forced insurers to explore new investment strategies. One such opportunity is the use of alternative asset classes, which represent a fundamental shift in insurance general account investment practices. In addition to enhancing returns, these strategies can help insurers manage risk through diversified portfolios.

In addition to distribution activities, insurers can also consider investments in private loans and other asset-backed securities. The benefits of scale can be realized through the consolidation of multiple insurance companies. These companies can offer their customers a wider range of services than smaller competitors. While such a strategy can lead to lower dividends in the short term, it can produce an attractive return over the long run. As long as the insurance company maintains regulatory standards, it can reap significant returns from investment in these assets.

Insurers are also increasing their allocations to alternative asset classes, such as hedge funds, private equity, and specialty investments. These non-traditional investments, known as Schedule BA assets in the US, have gradually been integrated into insurer portfolios. In 2013, insurers allocated 5.4% of their total invested assets to these types of assets, up from 3.8% in 2008.

Insurers that earn high proportions of their revenue from fee-based businesses are often valued at higher valuations than their capital-intensive counterparts. Similarly, insurers that sell their life back books can generate needed capital to pivot and increase profitability. Investors are willing to support such decisions. One recent example is a US insurer that sold a closed block of variable annuities in order to generate cash to help pay down debt and focus on capital-light businesses.

Private equity investors have long played an important role in the insurance industry. Recent years have seen an increase in the number of insurance companies being acquired by private equity companies. While most of these acquisitions have occurred in the US, they are also emerging in Europe and Asia. If a private equity sponsor is considering an insurance investment, it is important to look at lessons learned in the US and keep in mind the nuances of other jurisdictions.

Insurance investments also pose significant challenges for PE firms. For example, insurance companies face a variety of operational and IT challenges. While investing in automation is attractive in the medium term, it also entails significant costs that should be accounted for.

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