COVID-19 Has Not Deterred Europe’s Insurers From Private Markets

July 7, 2020 — London

The pandemic has caused some hesitancy but has not wholly stifled demand

The coronavirus pandemic may be causing Europe’s general account insurers to hesitate before making new commitments into private assets, but fundraising has not stopped, according to the latest The Cerulli Edge―Global Edition.

Cerulli Associates notes that European insurers are more carefully monitoring their exposure to the most vulnerable sectors. Many insurers are already reviewing their strategic asset allocations, outside of the usual cycle, and will make tactical changes if needed.

“Despite positive 1Q 2020 underwriting results, most of the European insurers that Cerulli spoke to agreed that it is too early to provide precise guidance on the impact of the coronavirus pandemic. Nonetheless, they believe that, overall, COVID-19 will have a material impact on their earnings and balance sheet,” says Connor Bigland, an analyst in Cerulli’s European institutional research team.

“Insurers recognize that some of their investments will underperform, but the magnitude of the loss is unknown. To make better assessments, insurers look to asset managers to provide a more detailed breakdown of their investment portfolios based on different types of risks,” says Bigland, adding that managers also need to provide simulations of the impact of the decreased net asset value on an insurer’s investment portfolio performance.

Insurers are resource-intensive clients and the current situation makes them even more time-consuming customers—they want to assess the impact of COVID-19 on their assets and liabilities before making any new commitments to private assets. However, given the long duration of illiquids, new commitments to illiquid asset funds are still flowing, albeit at a slower rate.

Infrastructure equity is the most popular private asset class among Europe’s insurers. Cerulli research indicates that 15% of insurers anticipate a significant increase in their infrastructure equity allocations over the next 12 to 24 months and 21% expect a slight increase.

In the current environment, well diversified Infrastructure equity funds will likely be in greater demand than sector-specific funds (funds focused on transport sectors, such as airports or motorways, may be overexposed to financial risks related to COVID-19). Larger insurers generally prefer to invest across three or four sectors, which can be done via segregated mandates. However, not all smaller insurers are capable of building well diversified infrastructure portfolios. Smaller insurers must therefore attempt to gain diverse exposure via commingled funds.

“Fund-of-funds structures are still popular for this reason, regardless of the extra costs associated with them,” says Bigland.

Private debt is arguably the private asset class with the greatest momentum in the insurance industry at present and most insurers stick to senior debt strategies. Although more distressed opportunities may arise, given current market conditions, Cerulli believes that only the largest and most experienced insurers will consider this strategy.

Other Findings:

  • In Asia, there are reasons to be optimistic about private equity. Asia funds have more dry powder than ever before, valuations are falling, and there are potential distressed assets. The region also has a diversity of players in private equity.
  • In the U.S., the case for increased exposure to noncorrelated alternative investments is becoming more apparent for many investors in the wake of market volatility during early 2020. There are distinct areas for potential growth within distribution: insurance general accounts and health and hospital channels—two institutional channels where investment outsourcing for alternatives is becoming more prevalent—and interval funds, a budding vehicle garnering increased flows in the retail marketplace

Note to editors

These findings and more are from The Cerulli Edge―Global Edition, July 2020 Issue.

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