Corner Office Views | Q3 2023
The European Insurance Industry Is Turning Back to Fixed Income
Which fixed-income investment managers provide the best value?
- There are several drivers of insurers’ willingness to increase their outsourcing of traditional fixed income: their increasing focus on diversification and increasing demand for green and sustainable fixed-income products and strategies.
- Given that fixed-income yields have picked up after a decade of low rates, some expect the outsourcing of traditional fixed income to reverse. However, this is unlikely.
- Italian insurers will offer the most opportunities for external managers in the next 12 months: more than a third of the Italian insurers Cerulli surveyed expect to increase their allocations to high-yield corporate bonds and green bonds over that period.
- Nearly three-fifths (58%) of the insurers Cerulli surveyed said that client service is the most important factor for them when choosing a manager.
Justina Deveikyte, CAIA
Justina joined Cerulli Associates in February 2014 and heads the European Institutional Asset Management research practice. In her role, she is responsible for all research activities relating to institutional investors, the firm’s analysis of alternative investments, the environmental, social, governance (ESG) section, and all data-science-based activities. She also contributes to multiple strategic consulting engagements and The Cerulli Edge series.
Justina is the lead author of several Cerulli reports, covering insurance, retirement, ESG, and alternative investments. Throughout her career, she has successfully developed partnerships with industry associations and has presented at several conferences and events across the Europe.
Prior to joining Cerulli, Justina was a Financial Manager and Global Analyst at Global Food Consulting; she previously has provided professional advice on banking products, including unit-linked insurance and third-pillar pension products at SEB Bank Group.
Full biography here.
Fixed income is back on insurers’ agendas
Following the rise in interest rates, European insurers are refocusing on fixed-income strategies. Insurers are looking to add high-quality, short-dated, investment-grade bonds and longer-dated sovereign bonds to portfolios over the coming 12 months. Around a quarter of the insurers Cerulli surveyed plan to increase their allocations to government bonds. However, larger insurers are more likely to rely on external asset managers than smaller insurers. 15% of larger insurer respondents plan to increase their allocations to government bonds by appointing external managers, versus 9% of smaller insurers.
Demand for sustainable bonds will predominantly come from small and mid-sized insurers over the next 12 months. Almost half of the small and mid-sized insurers we surveyed that plan to grow their allocation to sustainable bonds will consider partnering with external asset managers to do so. In addition, sustainable bonds will be most in demand from UK insurers; however, most will use internal teams to increase their exposure to green bonds. The opposite is the case in France: more of the insurers that plan to invest more in green bonds will use external managers than internal teams (17% vs 7%).
The market with the most expected interest in fixed income and that will offer the most opportunities for external managers in the next 12 months is the Italian insurance market. More than a third of the Italian insurers Cerulli surveyed expect to increase their allocations to high-yield corporate bonds and green bonds over that period.
In Germany, nearly a third (30%) of insurer respondents intend to expand their investments in green bonds and sovereign bonds and 20% of local respondents will consider hiring external managers for government bond strategies in the next 12 months. French insurers are expected to grow their fixed-income portfolios in line with the European average, with green bonds providing the most opportunities for managers.
Outsourcing of traditional fixed income
European insurers typically have some ability to manage investment-grade fixed-income in-house. However, over the past decade, insurers’ fixed-income portfolios have gradually shifted away from government bonds toward higher-yielding corporate bonds, searching for greater returns. This has made it more challenging to run such portfolios internally. As the complexity of insurers’ fixed-income portfolios has increased, some have decided to outsource part of their traditional fixed-income portfolios to external asset managers. Nearly two-fifths (39%) of the insurers Cerulli surveyed outsource part of their traditional fixed-income portfolios, with the highest proportions in Spain (60%) and Switzerland (55%). In contrast, Dutch insurers are least likely to outsource traditional fixed income: only 15% of those we surveyed use external managers for such investments.
Given that fixed-income yields have picked up after a decade of low rates, some expect the outsourcing of traditional fixed income to reverse. However, this is unlikely. On average, 81% of the insurers that already outsource traditional fixed income intend to increase their outsourcing of such investments over the next three to five years. More German, Spanish, and French respondents plan to increase their outsourcing of traditional fixed income to external asset managers than Dutch or Swiss insurers over the next three to five years.
There are several drivers of insurers’ willingness to increase their outsourcing of traditional fixed income. Their increasing focus on diversification is one of them. Insurers that are looking to invest outside their local markets—in US or global credit, for example—typically do not have the right level of expertise or the capacity to hedge interest rate and currency risks. This makes for a strong argument to seek specialist fixed-income asset managers that do this regularly and that offer real scale.
Increasing demand for green and sustainable fixed-income products and strategies is another major contributing factor to the increasing outsourcing of traditional fixed income. Many insurers are seeking to transition to more sustainable fixed-income portfolios by increasing their exposure to sustainable bonds and to do so they increasingly rely on external asset managers. Finally, declining investment management fees have made outsourcing to external asset managers more attractive. The fees that insurers pay for external managers have fallen significantly over the past five years, encouraging insurers to seek best-in-class fixed-income asset managers that can help them navigate complex markets.
Preferred fixed-income asset managers
Client service is more important than ever when working with European insurers. Nearly three-fifths (58%) of the insurers Cerulli surveyed said that client service is the most important factor for them when choosing a manager. Large insurers place even greater importance on client service than small insurers (63% vs 40%). This is not surprising, given that insurers are resource-intensive clients and are increasingly asking for more non-investment services from their asset managers.
When it comes to dedicated insurance solutions teams, a much higher proportion of mid-sized insurers than small insurers said that a dedicated insurance solutions team is very important to them when selecting external asset managers (46% vs 27%). In addition, Italian (50%), Spanish (40%), and Swiss (40%) insurers place more importance on dedicated insurance solutions teams than their peers in Germany (33%) and the Netherlands (33%).
Although affiliated asset managers have often faced challenges raising assets from external insurance clients, this is no longer the case in most situations. Nonetheless, most insurers still prefer global independent asset managers with established brand names and strong servicing capabilities.
The insurers Cerulli surveyed ranked BlackRock, Allianz GI, and J.P. Morgan AM as the three fixed-income managers that provide the best value. Amundi and AXA Investment Managers took joint fourth place and Schroders took fifth place. However, large insurers ranked DWS and PIMCO higher than small insurers. For instance, large insurers ranked DWS in third position, whereas small insurers placed DWS in seventh position and mid-sized insurers put it in ninth position.
Our research uncovered some local biases, too. BlackRock was ranked first in France, Germany, Switzerland, and the UK; it took second position in Italy and Spain and fifth in the Netherlands. PIMCO was ranked higher in the UK and Italy than in other insurance markets.
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