Regardless of the percentage increase, consultants who help insurers find external managers contacted for this story are unanimous in their view that the search for extra yield is pushing more insurance companies to outsource part of their assets.
“The low-yield environment is one of the key drivers for increased outsourcing,” said Sunny Patpatia, president and CEO of Patpatia & Associates.
Mr. Patpatia said insurers are hiring external managers to add investment strategies beyond traditional core fixed income — a staple investment that can account for more than 90% of an insurer's general account — as they attempt to make up for the low interest rates.
Mr. Patpatia said the search for yield has been a boon to firms offering alternatives as well as those with specialty offerings, like emerging markets equity or high-yield fixed income. Large firms with multiasset capabilities also have been in a good position to benefit as insurers look to diversify their portfolios, he said.
Traditional external insurance money managers that mainly specialize in core fixed income strategies have been hurt by the trend, Mr. Patpatia said.
He said insurers are choosing to outsource assets because building in-house specialized investing capabilities from scratch doesn't often make sense economically, never mind the difficulty of finding the right talent.
“Why bother at that point? It's more logical to hire an experienced manager with specialty expertise,” Mr. Patpatia said.
James Gillard, vice president-credit rating criteria, research and analytics at rating firm A.M. Best Co., Oldwick, N.J., said the overall net investment gain for the insurance portfolio for life insurers dropped to 4.92% at the end of 2014 from 5.37% at the end of 2010 because of low-yielding core fixed-income assets.
“As the bonds mature, they are rolling off the books and insurers have to replace them with lower-yielding assets,” Mr. Gillard said. “It's a slow decline. It's going down and down and not likely to reverse itself anytime in the near future.”
Mr. Gillard said a 10-year Treasury note that would have yielded 4.8% in 2006 now yields 2.5%.
He said property and casualty insurers also have seen declines in net yield returns to 3.6% at the end of 2014 from 3.8% at the end of 2010.
Alternative assets produced a yield for life insurers of 7.1% in 2013 and 7.3% for property and casualty insurers, according to a Patpatia & Associates analysis. In comparison, life insurers in the same year saw a 5.2% yield from their fixed-income portfolios, while property and casualty insurers saw a 2.8% yield.
Mr. Patpatia said because life insurers can estimate their payouts from mortality calculations, they are able to invest in longer-duration assets with better yields than property and casualty insurers.
Life insurance firms are able to invest to a greater extent in private placements and below-investment-grade securities, which generate a yield premium over investment-grade public bonds, he said.
Property and casualty insurers have greater needs for liquidity to pay out claims in a disaster, so they can't take big bets on riskier fixed-income securities because they might have to sell in a down market, Mr. Patpatia said.
Still, much of the outsourcing occurs at the margins because insurers often manage core fixed-income assets — mandated by insurance regulators to be their dominant asset class — internally.