KKR’s latest insurance survey showed a sharp recovery in allocations to investment-grade fixed income as rates rebounded over the past three years but considerable resilience for nontraditional investments such as private equity and structured credit as well.
Despite higher rates, insurance company CIOs remain focused now on creating portfolios that are more “all-weather” in nature, leveraging both liquid and illiquid investments, according to a report on the survey results released by KKR on April 30.
Henry H. McVey, chief investment officer of KKR’s balance sheet as well as the firm's head of global macro and asset allocation, predicted in an interview that the portfolio share of nontraditional investments — in market segments such as private credit and equity, real estate credit and equity, structured credit and infrastructure — could rise another 500 to 600 basis points over time to around 35%.
The survey of 50 insurers overseeing more than $8 trillion in assets showed allocations to investment-grade fixed income recovering to 56.6% from 48.5% in KKR’s previous survey in 2021, a moment when extraordinary central bank stimulus aimed at bolstering a pandemic-stricken economy had left sovereign bonds yielding next to nothing.
Still, that 56.6% level remained well below the 60.7% allocation logged in KKR’s 2017 insurance survey, and the latest report concluded there would be “no going back” to more traditional asset allocation approaches singularly focused on liquid credit.
McVey, a lead author of KKR’s 2024 Insurance Survey, said the sharp rebound in bond yields since the 2021 survey is unlikely to derail the push by insurance company CIOs into investments such as private equity and private credit.
The latest survey showed allocations to nontraditional investments slipping to 28.9% from 31.8% in 2021, as the aggressive rate-hiking cycle the U.S. Federal Reserve launched in March 2022 left more traditional investments, including sovereign debt, offering non-negligible returns for the first time in years.
Still, the latest allocation remained well above the 20.3% result for KKR’s 2017 insurance survey.
McVey said interviews with a select group of CIOs showed a considerable consensus that private markets and alternatives exposures had helped their firms cope with extraordinarily volatile policy and market conditions over the past three or four years, leaving insurers focused on the benefits of further diversifying their portfolios.
“Having gone through this very tumultuous period from 2020 to 2024, the alternatives part of insurance portfolios" held up far better than insurers' public market exposures, with returns that exceeded capital charges, creating confidence that’s likely to drive further allocations, McVey said.
At some point, insurers’ need for liquidity will limit further increases in private markets allocations, he said.
