Institutional asset owners outside the retirement plan landscape continue to seek new sources of alpha in alternative investments, industry experts say.
As of Dec. 31, managers of non-affiliated insurance company assets reported $3.772 trillion in assets under management, a 1% drop from $3.811 trillion a year earlier, according to Pensions & Investments data.
Insurance companies, particularly the large life insurance companies, have traditionally managed their core fixed-income assets internally, which has long been the primary asset class for general accounts and other pools because of capital efficiency requirements.
However, because yields on core fixed income have dropped over the years due to a low-interest-rate environment, more insurance companies must seek expertise outside their organizations to find yield in private markets, said David O'Meara, New York-based senior investment consultant at Willis Towers Watson PLC.
When core fixed income would return 4% or 5%, it was adequate for insurance companies, but those days are long behind, he said.
"Now with the core fixed-income portfolio maybe returning 3%, there's a desire for getting into non-core fixed income or alternative investments whether it be mezzanine debt, real estate or infrastructure-type assets," Mr. O'Meara said. "Those look a lot more attractive when you're comparing them to a 2.5% or 3% return."
Mr. O'Meara said insurance companies have an appreciation for these asset classes, but don't have the internal skill set or apparatus to access them.
"We're working with our clients with that as a premise and foundation for our advice and recommendations to possibly move into these non-core assets," Mr. O'Meara said. "It's taken time for insurers that historically did not invest in these areas. It takes time before everyone sort of coalesces around the idea, that this is what we really need to do to grow our business."