The insurance industry, once synonymous with conservative investing, is undergoing a significant transformation. Gone are the days when life insurers relied on the steady, predictable returns of long-term bonds. The global financial landscape, particularly following the 2008 crisis, has rendered those traditional investment strategies inadequate in meeting the rising cost of liabilities.
With interest rates hitting historic lows, insurers are increasingly seeking out alternative investments to plug the gaps. From private debt to infrastructure and real estate, these high-risk, high-reward options are shaking up the industry. To navigate this new terrain, insurers are forming partnerships with private equity firms and asset managers, reshaping their portfolios and transforming the nature of their investments.
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As Ramnath Balasubramanian, McKinsey’s global co-leader for life insurance and retirement, explains, “Insurers needed to de-risk their balance sheets and find ways to deploy capital more efficiently after the financial crisis.” The result? A strategic shift towards alternatives such as private debt, which offers better yields but with higher risks than traditional investment-grade bonds.
Private Equity: The Game Changer
Private equity firms, particularly in the U.S., have been pivotal in this shift. Industry giants like Apollo Global Management, Brookfield Reinsurance, and KKR have not only bought up insurance companies but also invested heavily in insurance-related assets. Their model is straightforward: acquire legacy books of insurance liabilities, then reinvest the underlying assets into higher-yielding, more diverse investments. Since the financial crisis, these firms have executed over $900 billion in transactions globally, boosting their share of the U.S. insurance market from just 1% in 2012 to 13% today.
For Meghan Neenan of Fitch Ratings, the key driver behind this surge is clear: “The search for yield,” she says. “The returns have been significant, and the migration in insurance portfolio profiles continues to unfold.” However, as insurers diversify their portfolios, they also face increased risks. As Neenan points out, these portfolios are now less liquid, and the demand for private loans—particularly those with floating interest rates—has surged in line with rising rates.
But what does this shift mean for insurers? The short answer: it depends. For underfunded insurers seeking higher returns, alternative investments are becoming an essential tool to meet return targets that public markets simply cannot deliver.
The Shift is Global
Insurers are adopting alternative investment strategies across the globe, but the models they choose vary. Some are building in-house investment teams, others are forging partnerships with asset managers, and some are outsourcing their asset management altogether. AXA, for instance, decided to exit the asset management business by selling AXA Investment Managers to BNP Paribas for €5.1 billion, opting instead to focus on strategic partnerships. In contrast, Italian insurer Generali is expanding its asset management operations, acquiring Conning and MGG Investment Group, and even merging its operations with Natixis Investment Managers to create a €1.9 trillion powerhouse.
Generali’s bold move exemplifies the industry’s push into alternative markets. The insurer’s new joint venture will focus heavily on private markets, particularly in private debt, with plans to inject €15 billion in seed capital over the next five years.
Asia’s Emerging Role
While Europe and the U.S. are leading the charge, Asia—specifically Japan—is beginning to follow suit. Japanese insurers, traditionally more conservative, are now exploring new frontiers in reinsurance, especially after a raft of regulatory changes. The Society of Actuaries estimates that as much as $900 billion of Japanese insurance obligations could be reinsured in the coming years, offering a significant growth opportunity for the global reinsurance market.
Notably, deals like KKR’s reinsurance of $4 billion in Manulife Japan policies are pushing insurers in the region to adopt more flexible approaches to risk and return management. As Japan’s market evolves, the broader Asian market will likely see a shift toward more complex, high-yield investments.
A Regulatory Tightrope
The surge in alternative investments has raised alarms among regulators. With insurers now holding a broader mix of opaque, hard-to-value assets, determining the true risk associated with these portfolios has become increasingly difficult. In the U.S., the National Association of Insurance Commissioners (NAIC) has launched a task force to revise risk-based capital solvency formulas in light of these changes. Meanwhile, the Bank of England has warned of potential systemic risks stemming from private equity-owned insurers’ shift toward private-debt investments, suggesting the model could increase industry fragility if left unchecked.
However, despite regulatory concerns, insurers are betting that the opportunities in alternative investments far outweigh the risks. The partnerships between insurers and asset managers continue to thrive, creating a mutually beneficial relationship where insurers receive higher yields and asset managers collect lucrative fees.
The Road Ahead
As McKinsey’s Balasubramanian puts it, the insurance industry is in the “middle innings” of this evolution. Insurers are still determining whether to build, buy, or partner for new investment capabilities. The deals are unfolding rapidly in both directions, with large and small players alike rethinking their strategies.
For now, the industry’s focus remains firmly on the potential of alternative investments. As insurers seek to better navigate an increasingly complex financial world, their embrace of private debt, infrastructure, and real estate investments will continue to reshape the global landscape. With regulators scrambling to keep pace, the question remains: will this gamble pay off in the long run?
