Life insurers boost allocations of private income, private debt

The heightened focus on private fixed income and private debt reported by Cerulli dovetails with the conclusions of a recent Fitch Ratings white paper. In tandem with shifts in corporate bond credit quality, Fitch noted, U.S. life insurers modestly increased their holdings of private placement securities relative to publicly traded bonds (rising to 34 percent in 2014 from 33 percent in 2007); and increased their exposure to statutory capital (to 147 percent from 135 percent over the seven-year period.)

Significant percentages of those polled by Cerulli Associates also say they intend to boost allocations of:

• High-yield securities (38 percent)

• Tax-exempt municipal debt (31 percent); and

• Investment-grade fixed income (25 percent)

Underpinning the changing fixed income allocations, the report adds, are growing concerns among asset managers about how best to counteract persistently low interest rates since the 2007-2009 recession. Alexi Maravel, an associate director at Cerulli, describes the low interest rate environment as damaging to life insurers' balance sheets over the long-term.

"While falling interest rates benefit fixed-income investments from a total return standpoint, as bonds mature or are called by the issuer, insurers have to reinvest in even lower-yielding securities," Maravel says. "Depending on the type and duration of the insurer's liabilities, this reinvestment risk can be detrimental to the financial performance of the company."