FOR INSTITUTIONAL, PROFESSIONAL,

WHOLESALE, QUALIFIED INVESTORS AND

QUALIFIED, PERMITTED CLIENTS ONLY

GLOBAL
INSURANCE
REPORT
2018

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Searching for better returns
Insurers ready to act on multiple fronts

MK TG0918E-593279-1873012
 Now in its seventh edition, our global insurance report finds insurers in
relatively upbeat mood. Granted, conditions remain tough with profitability
and business models under continued pressure. However, insurers appear
to have taken stock of the significant macro and market risks, and are
ready to move forward across several fronts. Specifically, having identified
their investment portfolios as a key tool for boosting profitability, they now
appear willing to increase risk exposures across a wide range of assets –
both public and private – and to diversify into new asset classes and growth
markets, which now also includes a more pronounced interest in China.

The key challenge they face in achieving the return outcomes they seek is
the need to ensure optimum portfolio efficiency, both from an economic
and risk point of view as well as in relation to capital consideration aspects
that are very regulation driven.

Increasingly, their objectives also include meeting specific ESG criteria. The
real surprise of this year’s study is how important ESG is to insurers around
the world, how many of them have already embarked on the ESG journey
and how far they want to go in the future. At the same time, our results also
highlight the significant obstacles that insurers and the wider industry still
have to overcome to enable effective ESG integration across portfolios.

Zach Buchwald Kimberly Kim Patrick Liedtke

Head of Financial Institutions Head of Financial Institutions Head of Financial Institutions
Group for North America Group for APAC Group for EMEA

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About this report

The seventh edition of the BlackRock Global Insurance report summarises the
results from the online and telephone survey the Economist Intelligence Unit
conducted on our behalf during July-August 2018. It reflects the responses
from 372 senior executives across 27 countries in the insurance and reinsurance
sectors, representing estimated assets under management of US$7.8 trillion,
with strong representation from Asia Pacific, EMEA and Latin and North America.
These responses are complemented by insights gained through detailed
telephone interviews with 12 senior executives from the sector.

The report looks at investor sentiment and the outlook for investment strategy
at insurance companies, particularly in relation to macro and market risks, fixed
income and private markets portfolios, and asset allocation more broadly. We
also explored how insurers increasingly take into account ESG considerations.

Any opinions, forecasts represent an assessment of the

market environment at a specific time and is not intended
to be a forecast of future events or a guarantee of future
results. There is no guarantee that any forecasts made will
come to pass.

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The breakdown of respondents was as follows:

By organisation’s assets under management AUM:

•• 9% US$75billion+,
•• 15% between US$25 billion and US$75 billion,
•• 29% between US$5 billion and US$25 billion,
•• 38% between US$1 billion and US$5 billion, and
•• 9% between US$500 million and US$1 billion.

By business line:
•• 37% in multi-line (including re-insurers),
•• 22% in life insurance,
•• 22% in health, and
•• 19% in property and casualty.

By geographic headquarter:
•• 42% from Europe,
•• 30% from Asia Pacific,
•• 20% from North America, and
•• 8% from Latin America.

By role in investment decision making:

•• 65% Lead role,
•• 35% Adviser or closely involved,

About th is report 5

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 In-depth interviews

BlackRock would like to thank the following individuals and their

organisations (listed alphabetically) for sharing their views and experience.

AIA PRUDENTIAL FINANCIAL

Mark Konyn Scott Sleyster
Chief Investment Officer Chief Investment Officer

ARCH CAPITAL SUN LIFE

Preston Hutchings Randy Brown
Chief Investment Officer Chief Investment Officer

AXA SWISS RE
Laurent Clamagirand Martin Zingg and
Chief Investment Officer Pascal Zbinden
Co-heads of Strategic Asset
BRIGHTHOUSE Allocation and Markets
John Rosenthal
Chief Investment Officer W&W
(Wüstenrot & Württembergische)
JAPAN POST INSURANCE Alexander Mayer
Atushi Tachibana Chief Investment Officer
Chief Investment Officer
ZURICH INSURANCE
PRUDENTIAL CORPORATION ASIA Johanna Köb
Stephan van Vliet Head of Responsible Investment
Chief Investment Officer

The survey was conducted by the Economist Intelligence Unit during

July-August 2018. Results reported as of September 2018.

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Contents
Executive summary 8

Key findings 10

Asset allocation trends 28

Spotlight: ESG is moving centre stage 29

Fixed income: embracing the full spectrum 50

Alternatives: towards a more holistic approach 58

Seeking further diversification: China 65

Regulation 70

Investment efficiency 74

Looking ahead 82

BlackRock commentators 84

About BlackRock’s Financial Institutions Group 85

Important legal information 86

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Executive summary

Insurers worldwide see increased in its intensity, is their increased focus

investment returns as a key tool to boost on ESG and the challenge of integrating
overall business profitability, results from sustainability across the entire portfolio.
the seventh annual BlackRock Global
Insurance Report show. This is a trend we Less concern about
first identified last year, at a time when macro and market risks
a number of other means to maintain
profitability seemed to have largely Geopolitical developments and
run their course. What is different for changing regulations stood out as
insurers this year, however, is the marked critical macro risks and drivers of change
change in their willingness to take risk. for insurers in 2017, but this year these
After years of limited risk appetite on the concerns have abated with insurers
investment side, insurers are now back in considering a wider range of factors.
the market with higher risk targets. Given
1 And while regulatory change is still seen
the size of insurers’ investment portfolios as the most critical industry driver, other
globally, this is an important shift that factors have become more pressing in
will affect markets everywhere. It reflects 2018. Environmental concerns stand out
a significant easing of concern about the most if we look at the macro risk and
most macro and market risks, despite a critical driver responses in combination,
background of continued geopolitical particularly given last year’s low score.
tension and a less positive economic and Insurers’ perceptions of market risks have
market outlook. Insurers recognise the also improved with the notable exception
need to cast the net wider – by investing of credit risk.
1 This is a consistent across the entire fixed income spectrum,
result also after increasingly treating private markets as Growing appetite
adjusting for greater mainstream asset classes and looking for risk exposure
participation by APAC to take advantage of the opening up of
insurers in the survey growth markets, notably China. They Not surprisingly this is translating into
this year, as well as a also aim to drive further investment increased appetite for investment risk
more mixed sample efficiency through smart use of exposure. Almost half (47%) of insurers
both in terms of size outsourcing. Perhaps the most important surveyed plan to increase portfolio risk
and business line. development, and certainly surprising exposure over the next 1-2 years,

8 GLOB A L IN SU R A N C E R E P ORT 2 0 1 8 E DIT IO N

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compared to a low of 9% in 2017. CIOs even experienced ESG practitioners
appear relatively open minded in their struggle to integrate ESG at the overall
asset allocations intentions, which portfolio level. We also found significant
span virtually all asset classes. Within divergence in approaches and views on
fixed income, insurers broaden the whether or not ESG investing entailed
investments spectrum on both the short giving up some return or diversification
duration and alternatives side. We also potential. Perhaps the most striking
observe continued strong interest in finding was that a vast majority – almost
private markets, which are increasingly 90% – agreed that regulators needed to
considered mainstream, as well as a offer more clarity and global consistency
desire to selectively take advantage in their guidance.
of emerging market opportunities as
exemplified by their interest in the The quest for investment
China A market. efficiency continues

ESG is Similarly to last year, we see a continuing

increasingly important drive towards greater investment
efficiency, particularly in relation to
Our 2018 survey findings point to the private market assets, where insurers
growing relevance of ESG investing often lack in-house expertise, both in
across the insurance sector. Globally, terms of knowledge and staff (67%) and
a strong majority (83%) of insurers do not have the necessary scale (58%).
indicate that an ESG investment policy Outsourcing is the most obvious route
is important to their firm, with a majority to greater investment efficiency with
(80%) already having one in place 98% outsourcing some, or all, of their
or planning to adopt one within the private market assets. However, our
next year. Many insurers have already in-depth interviews suggest insurers
started to implement ESG strategies, are also concerned about optimising
but significant obstacles remain. 70% their overall portfolios given greater
of insurers feel that their firm lacks in- alternative weightings and ESG
house expertise to model ESG variables considerations – an area, which we
and our in-depth interviews reveal that believe, warrants further exploration.

E x ecutive summ ary 9

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 Key
1 findings

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Risk concerns abate
Insurers appear
generally more
sanguine about
the macro risk
environment.

Overall, insurers appear less concerned key concern among both North and
about the key macro risks they South American insurers, 41% and
highlighted last year, while concerns 43% respectively, as shown in the
about the environment and to a lesser table section of figure 1 overleaf.
extent the direction of inflation are on While this was roughly double the
the rise. Specifically, in sharp contrast to proportion from last year, the majority
the 2017 survey results, concerns about of respondents appear nevertheless to
geopolitical and other macro risks have be relatively upbeat about economic
subsided in almost every case, suggesting growth prospects over the next 12-24
insurers are generally more sanguine months. At 33%, geopolitical risk is
about the macro-environment (see the highest macro risk to monitor for
figure 1 overleaf). The ‘weak economic European insurers, but only just ahead of
growth’ category scores highest among environmental risk (30%). This is a drop
the macro risks in this year’s survey, but of more than 50% compared to 2017,
at 33% this is the lowest top score for despite the fact that European insurers
macro risks we’ve seen for many years, were surveyed at a time of significant
and broadly similar to risk categories negative news flow relating to renewed
such as geopolitical (30%) and regulatory political uncertainty in the eurozone,
(30%). In spite of issues such as fraught Brexit and continued trade tensions.
international trade relations, the The decline is even more pronounced
destabilising effect of increased populism in other regions. Concerns about
and continued geopolitical tensions, regulatory risk have fallen significantly
levels of concern about geopolitical risk across North America, Europe and APAC
have fallen sharply compared with 2017, in particular, but remain at elevated
when 71% cited it as a key concern. Twelve levels in Latin America (53%). Worries
months on, the proportion has dropped about the low interest rate environment
to 30%. While this does not mean have risen slightly in Latin America
insurers discount those risks, it suggests to a modest 27%, but have declined
nevertheless that they are more inclined everywhere else, though less so in the
to see this as the new normal. US. Finally, both inflation (41%) and
deflation (32%) are of notable concern
From a regional perspective, weak for US insurers, a major increase relative
economic growth stood out as the to 2017 levels of 2% and 7% respectively.

K E Y F I ND I NG S 11

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Figure 1

No major macro concerns

North
Global Europe APAC LatAm*
America

2017 2018 2017 2018 2017 2018 2017 2018 2017 2018

Weak global
39% 33% 20% 41% 43% 29% 63% 31% 20% 43%
economic growth

Geopolitical risk 71% 30% 67% 28% 68% 33% 77% 26% 80% 30%

Regulatory risk 64% 30% 49% 37% 69% 27% 75% 22% 53% 53%

Currency risk 27% 24% 50% 24% 16% 18% 13% 27% 50% 43%

Environmental risk 6% 23% 9% 21% 7% 30% 5% 19% 0% 7%

Inflation risk 16% 27% 24% 41% 11% 23% 5% 20% 37% 33%

Deflation risk 15% 28% 7% 32% 19% 24% 20% 31% 3% 30%

Persistent low interest

40% 27% 31% 35% 49% 29% 39% 20% 23% 27%
rate environment

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n = 30) and North America (n =
75). Q. Which of the following do you consider to be the most serious macro risks to your firm’s investment strategy
over the next 12-24 months? Source: BlackRock Global Insurance Survey, July-August 2018. Note: Throughout the
report, percentages may not add to 100 due to rounding. * Small base, indicative only.

12 GLOB A L IN SU R A N C E R E P ORT 2 0 1 8 E DIT IO N

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 48
Weak global 52
economic growth 39
33

50
51
Geo-political risk
71
30

40
46
Regulatory risk
64
30

27
38
Currency risk
27
24

15
37
Environmental risk
6

23

25
25
Inflation risk
16
27

28
22
Deflation risk
15
28

n/a
Persistent low n/a
interest rate 40
environment
27

% 2015 % 2016 % 2017 % 2018

K E Y F I ND I NG S 13

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Figure 2: Less prevalent market risk Levels of concern about most market
risks (liquidity, asset price volatility
27
and interest rate risk) have all declined
57 sharply from very elevated levels last year
Asset price volatility
(see figure 2). The exception to this trend
74 is credit risk: which scores 45% this year
vs 31% in 2017 suggesting concern that
47
the credit cycle is becoming extended.
Randy Brown, CIO of Canadian insurer
Sun Life, believes that one of the big
36
topics insurance CIOs have to contend
with at the moment is how they handle
53
Interest rate risk the credit cycle. “On one side, you
72 have business that’s under continued
pressure: liability pricing is getting
51
more competitive and new entrants are
disrupting the industry. On the other
side, total returns from investments
27 are dropping relative and absolute, so
what do you do? How you handle that
49
Liquidity risk pressure is a really important topic.”
74
In every case, North American
44
insurers are more concerned about
credit, liquidity and asset price
volatility than those in other regions,
23
while with the end of the European
Central Bank’s quantitative easing
39
Credit risk in sight, European insurers are more
31 focused on interest rate risk.

45
In this year’s survey, we also examine
interest rate risk through the lens of

% 2015 % 2016 % 2017 % 2018 divergence in monetary policy. As the

US tightening cycle has been clearly
Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA
signalled, any resulting divergence does
(n = 154), Latin America (n = 30) and North America (n = 75).
Q. Which of the following do you consider to be the most serious not appear to be a concern among
market risks to your firm’s investment strategy over the next 12-24 insurers, although they report that it
months? Source: BlackRock Global Insurance Survey, July-August has prompted some shifting of regional
2018. Note: Throughout the report, percentages may not add to
allocations. Over the past 12 months,
100 due to rounding.

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30% non-US insurers have increased far behind every other macro risk. This Credit risk is the
their allocations to US assets (while 10% suggests insurers are focusing much
only market risk to
have decreased them) although 60% more intensely on identifying previously
score higher than
say the monetary policy divergence has un-priced or under-priced environmental
risks in their portfolios. Scott Sleyster,
last year, reflecting
little or no impact on them. Among US
insurers, rising rates have prompted CIO of Prudential Financial, typifies this concerns about the
37% to cut their active exposure to trend. For the past year, he says, he has credit cycle.

45
been gathering data on environmental

%
non-US dollar assets, with a further 55%
reporting no change, since the rate change and adding expertise in his team
adjustment has already been priced in. on data-driven approaches to analysing
climate risk. More broadly, this increased
Regulation worries focus on environmental and, by extension,
recede, but environmental ESG concerns appears to reflect a
risk comes to the fore growing recognition that ESG provides a
powerful additional lens through which
Likewise, insurers’ concerns over to identify and manage risk in portfolios,
regulatory risk have eased significantly and therefore gain better insight into risk-
over the past year, possibly due in adjusted returns. We explore this in our
part to the bedding in of the Solvency ESG section on page 29.
II regime in Europe. In 2017’s survey,
54% of respondents said regulation IFRS 9 and IFRS 17
would be the key driver of change in Insurers appear relatively confident

the insurance industry over the coming about their ability to absorb forthcoming

12-24 months. This year just 26% international financial reporting

agreed, although concern was notably standards 9 and 17. IFRS 9 covers

higher among North American insurers classification and measurement of

(32%), perhaps as a result of changes financial instruments, impairments

to risk-based capital ratios in the US and hedge accounting, while IFRS 17

and Canada. By contrast to the US, covers insurance contracts. In total, only

only 22% of APAC insurers identified 20% point to accounting changes as

regulation as a major concern. important drivers of change over the

next 12-24 months. However, we detect
some concern around how to prepare
Environmental risk
for those implications. We discuss
comes to the fore
these findings further on page 71.
However, this survey makes clear that
environmental risks have moved quickly
Investment risk appetite
up the agenda for insurers globally, with
rebounds strongly
21% pointing to this issue as a key driver
of change in the industry, against its Not surprisingly given their more positive
low point of 6% in 2017, when it ranked risk outlook, almost half of the insurers

K E Y F I ND I NG S 15

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 Environmental, in this year’s survey (47%) expect to Insurers keep an open mind
and ESG risk more increase risk exposure over the next on where to allocate
12-24 months. This marks a decisive
broadly, is of
rebound from the results of the 2017 Overall, we see insurers being open
increasing concern.
survey, when only 9% expected to

21
minded on where to allocate, as

% increase their risk exposure and a

further 79% expected no change. The
illustrated in figure 3, suggesting a
greater willingness to pull several
proportion expecting to reduce their levers. For example, 40% say they
risk exposure has dwindled to almost expect to increase their weighting in
nothing: just 4% of respondents are in cash and shorter duration assets, up 23
this camp in 2018. The results are more percentage points on last year, while
striking given how far we have already 34% expect to increase investment grade
progressed in the current credit cycle. fixed income, up 17 percentage points.

As was the case last year, the major North American insurers are more likely
reason to increase risk exposure is than those in Europe or APAC to say
to maintain or enhance investment they plan to increase their exposure to
income (38%) and to respond to every asset class. Heightened allocations
worsening or improving business to cash-like assets reflect the growing
conditions (36% and 35% respectively). attractiveness of safe short duration
assets in the US as the USD yield curve
Significant proportions of this year’s has flattened (we explore the practical
respondents in North America (40%) investment implications on page 50).
and Europe (35%) say that an important
reason to increase their risk appetite is This divergence between North
to respond to concerns about regulatory American insurers’ portfolios and those
capital, emphasising the industry’s in Europe and Asia also plays out in
growing focus on portfolio efficiency their differing exposures to risk assets
and returns on regulatory capital as (meaning anything other than cash
vital considerations in their efforts to lift or investment grade fixed income).
overall profitability. Globally, 56% allocate 11%-20% of
their portfolio to risk assets. A further
Among the very small proportion 15% hold more than 20% in risk assets.
looking to reduce risk exposure, the However, 41% of North American
major reasons given are concerns insurers have more than 20% in risk
about valuations (67% vs 49% assets, against 9% in Europe and 3% in
in 2017), suggesting continued APAC. This is particularly striking, given
concern about significant asset price that North American insurers are also the
corrections and residual worries most likely to want to increase their risk
about the macro-environment. exposure over the next 12-24 months.

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Figure 3: Insurers allocating to a wide range of asset classes Insurers ready
Cash Investment grade fixed income to increase risk
50 exposure.
45

47
40

%
36 34
21
17 17

-2 -5
-6 -7 -10
-18
-29
-36

2015 2016 2017 2018 2015 2016 2017 2018

Non-Investment grade fixed income Equity

41
36
30 30 31
26 21
13

-10 -9
-15 -15 -12 -15
-25

-42
2015 2016 2017 2018 2015 2016 2017 2018

Liquid alternatives Illiquid alternatives

39 39 40
24 27
18 16 16

-8 -7
-13 -13
-19 -19
-26 -26

2015 2016 2017 2018 2015 2016 2017 2018

% Decreasing allocation % Increasing allocation

Latin America (n = 30) and North America (n = 75). Q. For each of the following asset
classes, please indicate how, if at all, you will be changing the weighting of your
investments over the next 12-24 months? Source: BlackRock Global Insurance Survey,
July-August 2018. Note: Throughout the report, percentages may not add to 100 due
to rounding.

K E Y F I ND I NG S 17

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Figure 4

Robust appetite
across the spectrum

Government bonds IG Corporate bonds Municipal bonds

47
44 42
38 37 36 35
30
25
21

9 9

-3
-6 -6
-10 -9 -11
-13 -15

-25
-28
-31 -33

2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

% Decreasing allocation % Increasing allocation

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 Securitised assets HY corporate bonds Bank loans and CLOs

44

33 33
33
29 27
26 22
19
16
12
6

-7 -8
-12 -10 -13

-22
-26
-30 -27
-33 -33
-39
2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

Inflation-linked bonds ESG/Green bonds Emerging market debt

41
35 37
29 31
23
20
11 13 13 11

n/a

-6 -6
-9
-14 -16 -16
-21

-30 -29 -30

-37
2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n = 30) and North America (n = 75). Q.
For each type of fixed income, please indicate how, if at all, you will be changing the weighting of your investments over the
next 12-24 months? Source: BlackRock Global Insurance Survey, July-August 2018. Note: Throughout the report, percentages
may not add to 100 due to rounding.

K E Y F I ND I NG S 19

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 Repricing is driving
appetite across the
fixed income spectrum
Within the FI universe, expectations
of increased weightings across most
sub-sectors are far stronger than last
year (see figure 4, pages 18-19). This is
particularly pronounced in government
bonds, where 37% expect a higher
It’s hard to be terribly weighting in the next 12-24 months, up

optimistic about the real from 9% in 2017. However, insurers also

plan to up significantly their allocations
return that you’re going to other sectors, for instance, high yield

to get from traditional bonds, with 33% saying that they are
likely to increase their weighting, against

assets. You have to be 16% last year. There has been a similar
increase in appetite for municipal bonds,
prepared to look a little bank loans and CLOs, reflecting perhaps

further afield. the higher yields that are currently on

offer in those segments, but that is not
the only reason for investors’ interest.

Alexander Mayer, CIO of German

insurer W+W, has recently begun
Preston Hutchings, CIO, Arch Capital
adding US municipal bonds to match
the liabilities in W+W’s life insurance
portfolio. He says: “I’m looking for
diversification in long-duration assets,
having become concerned over the
risks in several eurozone markets.”

Investment grade credit and emerging

market debt saw smaller, but still
meaningful increases; only securitised
assets showed fewer insurers expecting
to increase exposure than in 2017.

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Particularly noteworthy is the strength of Globally, the proportion of insurers Respondents
appetite for ESG and green bonds (41% expecting to increase their allocations expecting to increase
expect a higher weighting, up from 13% to illiquid alternatives (40%) is stable
their allocations to
last year). This reflects the increasing compared to last year. North American
illiquid alternatives.
focus on ESG investment strategies respondents show by far the strongest

40 %
revealed in this year’s survey, and appetite for illiquid assets, with 55%
sharply higher levels of concern over the expecting to increase exposure against
environment and climate-related risks. 34% in Europe and 37% in APAC,
although even here that represents a
Viewed from a geographical decline on last year, when 66% in North
perspective, our responses suggest America expected higher weightings.
that North American insurers are more
likely to increase allocations than The top private market assets globally
respondents in Europe or APAC. this year are co-investments and
special situations (42% expect a higher
Alternatives increasingly weighting, up 21 points on 2017),
seen as mainstream direct lending to SMEs (38%, up 14
points on 2017) and commercial real
Over the last few years, the major estate debt (37% expect a higher
strategy insurers have pursued to lift weighting, up 21 percentage points
returns, from both their dominant on 2017), as illustrated in figure 5
fixed income allocations and their overleaf. In spite of concerns about
equity holdings, has been to increase asset values and the extended credit
exposure to illiquid private market cycle, commercial real estate equity
assets. “We definitely want to increase (33% vs 34% in 2017) and private equity
the proportion of our portfolio in (32% against 33% last year) remain
alternatives,” says Preston Hutchings, core choices for many. We discuss
CIO of Bermuda-based Arch Capital. the role of alternatives in insurance
“That’s not based solely on alternatives portfolios in greater detail on page 58.
themselves but what the options in
marketable securities are. With the
S&P where it is, with other developed
markets also at somewhat high levels,
it’s hard to be terribly optimistic about
the real return that you’re going to get
from traditional assets. You have to be
prepared to look a little further afield.”

K E Y F I ND I NG S 21

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Figure 5

Private markets:
stable allocations,
but increasingly mainstream

Infrastructure debt Infrastructure equity Direct lending to SMEs

37 39

33 33 38
26 28 29
18 24
14 16

-7 -19 -7
-13 -14 -12
-25 -19
-26
-36 -33
-38

2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

% Decreasing allocation % Increasing allocation

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 Direct commercial Commercial RE debt Commercial RE equity
mortgage lending

53 48
42
38 37 34 33
29 30
17 16
12

-4 -2 -4 -8
-8 -7 -11 -9
-14
-25
-31
-42

2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

Private equity Co-investment/ Commodities

special situations

49
33 42
32 36
27
24 21 21
19
14
6

-11 -10 -11 -8

-17 -15 -7
-19 -22 -21
-28
-45

2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n = 30) and North America (n = 75).
Q. For each type of private market asset please indicate how, if at all, you will be changing the weighting of your investments
over the next 12-24 months? Source: BlackRock Global Insurance Survey, July-August 2018. Note: Throughout the report,
percentages may not add to 100 due to rounding.

K E Y F I ND I NG S 23

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 Insurers diversify into
new growth markets

Many of the larger insurers participating

in our survey are taking strategic steps to
ensure they are well positioned to take
advantage of the growth potential of
Asian markets, and China in particular.
We explored whether this strategic
shift was also occurring in terms of their
investment portfolios, using the initial

Being responsible for the inclusion of China A-Shares in the MSCI

indices a proxy for future asset allocation
asset allocation, we need intent. Our research shows that following

access to all relevant inclusion of China A-Shares in MSCI

indices from June 2018, more than two-

asset classes. thirds of insurers who took part in the

BlackRock survey either already have
an overweight allocation to A-Shares
(13%) or are considering it (53%). Some
29% expect to follow the weighting
established by the index allocation.

North American insurers have moved

Alexander Mayer, CIO, W&W more quickly to establish overweight
positions in A-Shares than those in other
regions. Some 27% of respondents in
North America are overweight, against
11% in Europe. Perhaps surprisingly,
just 7% of APAC insurers are overweight
China A-Shares. However, the readings
on those considering a move to an
overweight allocation suggest that
more than 67% of APAC respondents
are considering an overweight
allocation, along with 53% in Europe.
By comparison, just 44% in North
America are in this category. Appetite
among insurers globally to increase
their equity exposure to mainland China

24 GLOB A L IN SU R A N C E R E P ORT 2 0 1 8 E DIT IO N

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appears robust. See page 65 for a more Before making an investment into a new Increasing portfolio
detailed discussion of these findings. asset class, we always ask ourselves: efficiency through
‘Do we have the know-how? If not, who
outsourcing private
Investment efficiency has the know-how? Who has the market
markets holdings
remains a key focus access?’ If we need an external manager,
we are looking for an expert with remains a key driver.

87 %
In continuing to increase their exposure experience in this asset class and with the
to private markets, insurers are coming understanding of our business model.”
up against a series of crucial questions He stresses that outsourced managers
concerning their in-house expertise in must also especially understand the
managing these assets, their governance regulatory and accounting constraints
frameworks and the risks of over-paying of (German) insurance groups,
due to limited supply. Many are choosing including the transparency of the
partial or complete outsourcing of asset investment process and reporting.
management as the best way to balance
their desire for more exposure with the Outsourcing management of private
need for cost control and operational market assets is now a well-established
efficiency. The pragmatic decision to strategy among insurers everywhere
borrow expertise in this area, rather and does not appear to depend on
than buy or build it, is a common one. their size – there is little difference in the
percentages that manage these assets
Overall, roughly 35% of respondents entirely in-house between insurers with
outsource management of their private less than US$10bn AUM and those above
market holdings fully, and another 52% that level. Indeed, in some cases, such as
partly. The reasons given suggest most infrastructure debt, a larger percentage of
insurers are reluctant to add to their small insurers manage the assets fully in
costs and dilute profitability by building house. For larger, internationally diverse
in-house expertise in these assets: lack of insurers, the challenge of managing real
expertise and staffing are the main reason assets across multiple markets is likely to
to outsource in all regions (67%), and be too costly and complex to take on.
especially so in Europe and Asia. North
American insurers are far more likely than This makes particular sense in light of
those in Europe or APAC to outsource our finding in 2017 that respondents’
in search of cost savings (67% vs 34% top priorities to improve investment
and 34% respectively) and to, a lesser returns were to increase allocations
extent, because of their lack of scale. to non-traditional asset classes and
to cut investment-related fees and
Alexander Mayer of W+W says: “Being expenses. Outsourcing is playing an
responsible for the asset allocation, we increasingly important role in achieving
need access to all relevant asset classes. these dual goals (see figure 6).

K E Y F I ND I NG S 25

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 Figure 6: Seeking portfolio efficiency through outsourcing
Reasons for outsourcing
67%
58%

44%

22%

Lack of in house Lack of scale Cost savings Strategy readily

expertise or available
staffing externally

% Outsourcing investments

Direct commercial
mortgage lending
32 56 88%
Commercial
RE debt
33 54 87%
Commercial
RE equity
30 58 88%
Infrastructure debt 30 59 89%
Infrastructure equity 34 55 89%
Direct lending
to SMEs 34 54 88%
Private equity 32 58 90%
Co-investment /
special sit 38 52 90%
Commodities 30 57 87%

%Fully % Partly

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America
(n = 30) and North America (n = 75). Q.1 Which, if any, of the following types of
investments do you currently fully or partly outsource the management of? Select
one for each row. Q2. For which of the following reasons do you outsource the
management of any portion of your assets? Select all that apply.
Source: BlackRock Global Insurance Survey, July-August 2018.
Note: Throughout the report, percentages may not add to 100 due to rounding.

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Some insurers go one step further and Regardless of whether a portfolio
also outsource part or most of their is managed internally or externally,
core portfolios. Again the decision is optimum construction is essential if
driven by performance and efficiency. insurers are to achieve the desired
levels of portfolio efficiency. In the
John Rosenthal, CIO of Brighthouse following sections we will dig deeper
Financial observes: “We can outsource into what this entails both in terms
the day-to-day management of most of blending alpha-seeking and index
of our portfolio considerably cheaper strategies, and in relation to integrating
than what it would take to build the private market strategies into portfolios.
capabilities internally to do it ourselves.
That was driver number one. Driver
number two is performance…We’re
big enough to be able to access the
best asset managers in the world. To
me, to us, there’s not a compelling
reason to think we could achieve better
results or even comparable results than
those managers by trying to build the
capabilities ourselves internally.”
It does suggest, however, that asset
managers from their side have to
evolve and ensure they can deliver
on the strategic partnerships insurers
increasingly seek. John Rosenthal says:
“For a provider to be a strategic
partner we expect from them to be
able to have a timely, transparent
and open dialogue with us, with We can outsource the day-
mutual sharing of ideas and honest
feedback, back and forward.” to-day management of most
of our portfolio considerably
cheaper than what it would
take to build the capabilities
internally to do it ourselves.
John Rosenthal, CIO, Brighthouse

K E Y F I ND I NG S 27

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 Asset
allocation
2 trends

28 GLOB A L IN SU R A N C E R E P ORT 2 0 1 8 E DIT IO N

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Spotlight:
ESG is moving centre stage

The results of this year’s industry survey multiple levels, whether in terms of risk
firmly dispel any lingering doubts about to their business or the ESG risks they
the importance of environmental, social carry in their investment portfolios. It also
and governance issues to insurers matters to their corporate reputations
globally. Some 83% of respondents as responsible asset owners, service
say having an ESG investment policy is providers and members of society. Even
either extremely important (36%) or very so, we see marked regional variations
important (47%) to their organisation in the importance insurers attach to
(see figure 7). Relative to the marked having an ESG investment policy. More
dip last year, we also see a big increase than 90% of respondents in APAC
(from 6% to 23%) in respondents citing and Europe agree that having an ESG
environmental (climate change) risk as a investment policy is either extremely or
key macro risk to their portfolio, while 21% very important, compared with 67% in
consider it to be a major driver of change North America. This reflects the regional
in their industry, compared again to only variation we found in insurers citing
6% last year. environmental change as a key driver for
the industry: 16% in North America, 21%
An increasingly critical issue in Europe and 25% in APAC.

Laurent Clamagirand, CIO of AXA, sees Our interviews with insurers in North
growing pressure from regulators, along America and Asia underscored the
with political momentum following the fact that Europe is widely regarded as
2015 COP21 summit in Paris, as key leading the way in implementing ESG
drivers. “In the last year, climate has investment policies – a view strongly
been the dominating factor,” he says. endorsed by Laurent Clamagirand of
“At an industry level, the things on which AXA: “For me there is absolutely no
investors are co-ordinating are mostly to doubt that Europe is ahead, not only
do with the environment.” because of legislation but also the
mindset of the investment community.”
Insurers’ increasing engagement with ESG Questions over whether insurers in
issues is not surprising when we consider the US were legally entitled to focus
that ESG risks already affect them on on anything other than maximising

A sset allocation trends – S potlig h t: E S G is m oving centre stage 29

MK TG0918E-593279-1873012
Figure 7

ESG investment
policies become the norm

83% 67% 91% 90% 50% 76%

55
53 52
47

39 38
36 35
30
28
24
20

Global North Europe APAC LatAm* Under $10bn

America

% Extremely important % Very important

30 GLOB A L IN SU R A N C E R E P ORT 2 0 1 8 E DIT IO N

MK TG0918E-593279-1873012
 93% 84% 75% 86% 82% 87%

56 57 57

47
43
40 39 40
37
35

29
27

Over $10bn Life Health P&C Re-Insurer Multiline

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n = 30) and North America
(n = 75). Q. How important is an ESG investment policy for your firm? Select one. * Small base, indicative only. Source:
BlackRock Global Insurance Survey, July-August 2018. Note: Throughout the report, percentages may not add to 100
due to rounding.

A sset allocation trends – S potlig h t: E S G is m oving centre stage 31

MK TG0918E-593279-1873012
 investment returns have held back ESG
developments there, he argues. From
the US perspective, Scott Sleyster, CIO
of Prudential Financial, acknowledges
Europe’s lead: “I’d say in the US it’s much
more in the developmental phase but
it’s on everybody’s agenda... [Europe]
has more consistency, structure, systems
and language around this. They’re a little

As a company, we look bit ahead and certainly by having those

things they have driven more investment

at sustainability as a key dollars towards forward-looking projects

in infrastructure – they’ve done more on
corporate value, part of wind and on cleaning up carbon faster.”

our culture, and so it truly However, he observes being somewhat

earlier, means running the risk of “over-
permeates every aspect investing or investing too early in

of what we do, not just some places”.

the investments. Despite the readiness among

interviewees to acknowledge European
insurers’ lead in integrating ESG into
their investment practices, this year’s
survey suggests that insurers everywhere
Randy Brown, CIO, Sun Life are moving ahead quickly; at least in
taking the initial step of adopting an ESG
investment policy. Sun Life became the
first large insurer in Canada to sign the
United Nations Principles for Responsible
Investment (UN PRI), and since then it has
refined its approach to ESG investments.
“There was a question of what does
that mean and what do we do about it,”
Sun Life’s CIO Randy Brown explains.
“The team had already been factoring
ESG in, but we got more disciplined in
how we approached ESG and how we
documented it in our credit reviews. As
a company, we look at sustainability as a
key corporate value – part of our culture –

32 GLOB A L IN SU R A N C E R E P ORT 2 0 1 8 E DIT IO N

MK TG0918E-593279-1873012
and so it truly permeates every aspect of Figure 8: ESG policy gathers pace
what we do, not just the investments.” 53 27 19
Global
This is echoed by AIA’s CIO, Mark Konyn,
59 25 12
who sees the Asian insurer having a
North America
social mandate “that is aligned with
our stakeholders: shareholders, staff; 58 29 13
regulators and governments, and our Europe
policy holders across the jurisdictions
where we operate”. 49 28 23
APAC

This year’s survey found that the vast

27 23 50
majority of both North American (59%)
LatAm*
and European (58%) insurers have already
adopted an ESG investment policy (see 35 36 29
figure 8), compared with just under half Under $10bn
of their Asian counterparts (49%). Most
84 12 2
of those who do not already have an ESG
Over $10bn
investment policy expect to adopt one
over the next 12 months, although more 68 22 9
Asian respondents (23%) than those in Life
other regions say the process will take
40 35 26
more than two years.
Health

Which topics 43 36 21
matter most in ESG? P&C

Within the sub-categories across ESG, 61 18 18

insurers at the global level are more likely Re-insurer

to prioritise labour policies and relations, 55 25 20

shareholder rights and diversity as well
Multiline
as business ethics and transparency.
They are considered very or extremely
% Have already adopted % Within the next year % Within 2+ years
important, ahead of other ESG sub-
topics such as raw materials and water Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154),
scarcity or innovation and clean tech (see Latin America (n = 30) and North America (n = 75). Q.1 Which, if any,
of the following types of investments do you currently fully or partly
figure 9, overleaf).
outsource the management of? Select one for each row. Q2. For which of
the following reasons do you outsource the management of any portion
The survey pinpoints some important of your assets? Select all that apply. Source: BlackRock Global Insurance
regional biases. More than 75% of Survey, July-August 2018. Note: Throughout the report, percentages may
not add to 100 due to rounding. * Small base, indicative only.

A sset allocation trends – S potlig h t: E S G is m oving centre stage 33

MK TG0918E-593279-1873012
Figure 9

Importance of ESG categories

76% 69% 73% 75% 76%

59

53

49 47
43

29
27 26

20
16

Pollution Raw materials Innovation, Climate Product liability

and waste and water scarcity clean tech, change risks including
renewable energy cyber security

% Extremely important % Very important

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MK TG0918E-593279-1873012
 80% 76% 75% 83% 81%

55 55
52 53
50

33
28
26
23
20

Labour policies Controversial Social impact Business ethics, Shareholder rights,

and relations sourcing reporting transparency diversity

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n = 30) and North America (n
= 75). Q. Thinking across the whole range of ESG categories, how important are each of the following to your firm?
Select one for each row. Source: BlackRock Global Insurance Survey, July-August 2018. Note: Throughout the report,
percentages may not add to 100 due to rounding.

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MK TG0918E-593279-1873012
 ESG considerations European insurers regard every ESG issue, on the back of the momentum
are an important subject but one (innovation and clean created by the Paris Agreement.
tech) as being either very or extremely
part of the asset
important. By contrast, North American The difficult question
allocation process.
respondents are the least likely to rate any of ESG integration
Asset liability of the ESG issues we presented as either
management is very or extremely important. In only one However, while ESG’s importance is
at the cornerstone category, labour policies and relations, now widely accepted, there are differing
did more than 75% of North American views among insurers over how best to
of what we do, so
respondents choose the higher rating. integrate ESG considerations into their
ESG needs to be
Overall, they are much more inclined to investment process. Even Zurich, which
embedded in that view ESG issues as moderately important. has a well-developed ESG programme,
aspect as well. says it starts to apply ESG principles only
Within the areas of ESG we highlighted, when it reaches the point of selecting
Pascal Zbinden, European and Asian respondents are asset managers, as opposed to making
Co-head of Strategic far more concerned about governance it a factor in the company’s fundamental
Asset Allocation issues than those in North America and decisions on strategic asset allocation.
and Markets, Latin America. Even in the one area North “We have not yet found a way to integrate
Swiss Re American respondents deemed most ESG that early in our value chain,” says
important, labour policies and relations, Johanna Köb, Head of Responsible
respondents in Europe and APAC were Investment at Zurich. By contrast, Swiss
significantly more likely to give it a high Re argues that by moving to ESG-focused
priority. In social impact reporting the benchmarks for all its major asset classes,
gap between North America and the rest it is able to capture ESG factors in its
of the world was striking: 60% in North asset allocation process. Pascal Zbinden,
America said it was very or extremely Co-head of Strategic Asset Allocation and
important, compared with 80% in Europe, Markets, says: “ESG considerations are
78% in APAC and 77% in Latin America. an important part of the asset allocation
process. Asset liability management is
The overall ranking of climate change, at the cornerstone of what we do, so
which might be assumed to be the most ESG needs to be embedded in that
pressing issue everywhere, also stood aspect as well.”
out, with our results countering that
assumption. While around three-quarters Uncertainty over how to integrate ESG
of respondents globally, bar North is by no means unique to insurance
America (68%), viewed it as extremely companies. However, with many insurers
or very important, several other issues at the forefront of ESG, its integration
attract higher scores in every region. That within a holistic portfolio construction
said, several of our interviewees singled approach may well become an important
out climate change as their most pressing challenge for the industry.

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The essential elements of Case study
ESG integration
Most of the interviewees we spoke to struggle to take ESG factors into consideration
at the level of strategic asset allocation – by common consent, portfolio managers are
at the sharp end of ESG integration. The challenge that all insurers face, therefore, is in
ensuring their internal and external asset managers have the skills, experience and tools
to make properly informed judgments, and that the culture of the organisation from
the top down is pushing it towards deeper and more active engagement in ESG issues.
Johanna Köb of Zurich lists four key capabilities:

•• Training that equips portfolio •• A framework for integrating ESG

managers to understand ESG factors factors into the manager’s broader
and judge which are material in decision-making process
each case
•• A policy of active ownership that
•• Data, ratings and the information promotes continuing engagement to
managers need to understand the improve ESG performance
context for their decisions

This need for internal education both in terms of integrating ESG considerations into
investment thinking but also the overall culture is shared by other interviewees, as is the
importance of governance, which naturally aligns with insurers’ long-term focus.

A sset allocation trends – S potlig h t: E S G is m oving centre stage 37

MK TG0918E-593279-1873012
 A large proportion Practical ESG obstacles
of insurers lack ESG
internal modelling. Beyond the difficult question of portfolio integration, this year’s survey provides

70
evidence that insurers face a range of practical challenges as they try to implement ESG

% investment principles, including a shortage of internal expertise. When asked whether

they lack the in-house expertise to model ESG variables, 80% of respondents in Europe
and 88% in APAC strongly or somewhat agree – this proportion drops to 37% in North
America. It is striking that in Europe, widely considered to be the leading region for ESG
implementation, such a large proportion of insurers should say they lack this expertise
in-house (see figure 10 below).

Figure 10: The ESG implementation challenge

28 53 25 45 34 55 30 57
Global 81 %
70
%
89 %
87%

24 55 12 25 43 47 33 48
North
America 79 %
37 %
90 %
81%

29 52 25 55 26 64 29 58
Europe 81 %
80 %
90 %
87%

32 51 33 55 37 50 25 63
APAC 83 %
88 %
87 %
88%

20 63 20 13 47 50 40 50
LatAm* 83 %
33 %
97 %
90%

We frequently model for We are lacking in-house Regulators should We are confident we
different climate expertise to model provide greater clarity can access high
scenarios ESG variables by defining ESG quality external
investments on a ESG ratings data
consistent basis globally
% Strongly agree % Somewhat agree

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n = 30) and North America
(n = 75). Q. To what extent do you agree or disagree with each of the following statements about ESG. Select
one for each row. Source: BlackRock Global Insurance Survey, July-August 2018. Note: Throughout the report,
percentages may not add to 100 due to rounding.

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A role for regulators? emissions, which means 50% out there We found
are currently not doing so and that I widespread
There is widespread agreement that would suspect is a reflection on the
agreement
regulators should provide greater clarity markets where we operate and invest.”
that regulators
in this area by defining ESG investments AIA is pushing for greater disclosure
from the companies it invests in, he adds. should provide
on a consistent basis globally: nearly
90% of respondents agree this is greater clarity
desirable. Laurent Clamagirand, CIO Scott Sleyster at Prudential Financial and consistency
of AXA, quotes climate change as one identifies the quality of ESG ratings
globally.

90
of the cases “where I believe regulation as a significant challenge – numerous

helps, because it puts the issue front

of mind for people”. He sees the COP
organisations publish ratings that can
produce widely differing scores for
%
21 climate change conference in Paris the same company. He argues that the

and subsequent One Planet summit as industry needs “to look at what’s being

landmark events that act “as pressure measured, how it’s being measured – are

points for everyone to work together, factors being measured consistently and

regulation can then use that momentum what are the measures we think are most

to push us forward”. relevant? – and try to be a little more

supportive to those that we think make
Interviewees mention in particular long-term sense”. Informal discussions
transparency and disclosure of data as among US insurers on these issues are
well as guidance to show that prudent already under way, he says.
use of ESG factors does not contravene
managers’ fiduciary duties. Laurent Clamagirand of AXA shares
that frustration: “I am totally unhappy
Ongoing data challenges about the data. Take for instance carbon
The mention of data as an issue is footprint. I cannot do anything with
not surprising given that the ability to it because of lack of data. That’s why
integrate ESG effectively depends on I welcome initiatives such as the Task
having access to enough high-quality Force on Climate-related Financial
data on individual companies’ ESG Disclosures (TFCD).”
performance. While 87% of respondents
indicated that they were very or fairly Does applying
confident that they can access high- ESG reduce returns?
quality external ESG ratings data, our
in-depth interviews highlighted that A key question for all insurers that apply

data availability and reporting remains ESG principles as part of their investment

a critical challenge. Mark Konyn from strategy is whether doing so means

AIA says: “About 50% of the universe compromising in other vital areas such

of companies that we’re engaged with as diversification or returns. The main

report on their use of energy and carbon price to be paid in implementing an

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MK TG0918E-593279-1873012
 ESG investment strategy is some loss piece, we need to put back a piece with
of diversification, according to 55% of exactly the same shape. ESG integration
respondents, as certain sectors or types helps identify whether that piece really has
of asset are excluded from their investible the shape we think it has...” and concludes
universe. More than a third of insurers “So ESG integration is about making sure
globally (37%) believe they should expect we get the right shapes and put them
to give up some excess return as a result in the right places because we want the
of ESG constraints, while just 9% are most efficient risk-adjusted return and risk
concerned about reduced investment consumption in our puzzle.”
income (see figure 11).
Pascal Zbinden says that Swiss Re’s
Although many insurers believe that analysis concluded that switching to
they will pay for their ESG principles in ESG benchmarks for its corporate bond
reduced diversification, alpha or yield, allocations produced a comparable
22% globally do not believe they need return to non-ESG equivalents over a
to accept any compromises in applying five-year horizon, but with significantly
ESG principles. Johanna Köb at Zurich lower volatility: “If you look at it on a
is clear on this point: “Zurich makes no risk-adjusted basis, actually the ESG
such compromises and instead looks for benchmark outperforms the non-
situations in which it can fulfil both its ESG ESG benchmark over that period.”
and its investment objectives.” While the obvious warning about past
performance not being a guide for
She points out that Zurich’s ESG future returns applies, it aligns with the
strategy must operate entirely within research undertaken by the BlackRock
the company’s asset-liability matching Investment Institute, which suggests
framework and its strategic asset that ESG can be implemented across
allocation: “We need to work within the most asset classes without giving up
framework we have, and to me portfolio risk-adjusted returns. ESG and existing
management always seems like a quality metrics such as strong balance
sophisticated version of Tetris. You have a sheets have a lot in common. This
board to fill out – there are certain pieces implies ESG-friendly portfolios could
you are allowed to play with and others underperform in ‘risk-on’ periods — but
you are not allowed, able or willing to use. be more resilient in downturns.
We have US$200bn under management
but the great majority of our assets tends Regionally, however, the question of
to be invested at any point in time, often whether compromises are necessary to
for the very long term, so we’re starting incorporate ESG considerations shows
with a puzzle that gives the portfolio an interesting divergence: a far larger
managers only a few pieces each year to proportion of insurers in North America
place somewhere. If we want to change (41%) believe no compromises are
something existing and we take out a necessary to achieve ESG goals than in

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Figure 11: Does ESG entail compromises?

55%

37%

22%

9%

Diversification Alpha Income No compromises

will be needed

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n
= 30) and North America (n = 75). Q. In which of the following areas, if any, do you think
your firm will have to compromise to achieve its ESG goals? Select all that apply. Source:
BlackRock Global Insurance Survey, July-August 2018. Note: Throughout the report,
percentages may not add to 100 due to rounding. * Small base, indicative only.

Europe (18%) or APAC (20%). European indicate that smaller insurers, many with
insurers voice a strong conviction (63%) a more domestic focus, find it harder to
that reduced diversification is the main meet ESG objectives from their readily
area in which they should expect to pay a investable universe of asset classes
price for their commitment to ESG, along without sacrificing other considerations.
with 80% of Latin American respondents.
This compares to 40% in North America Significant divergence
and 47% in APAC. in implementation

These disparities on such crucial Respondents were also asked to

questions for insurers’ investment specify which of five broad approaches
portfolios are large, and a similar to implementing ESG they favoured in
disparity emerges between insurers their investment activities. Among these,
with more than US$10bn of assets impact investing emerged as the most
under management and those with cited strategy (48%), followed by use of a
less. Some 42% of larger insurers think thematic focus on particular ESG issues
no compromises are needed; just 11% (43%), (see figure 12).
of smaller insurers agree, which may

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MK TG0918E-593279-1873012
 40 % Thematic investing and exclusion were Increasingly popular
the second and third respectively. Our
in-depth interviews reveal significant Globally, more than 40% of insurers
differences in relation to the latter. See expect to allocate more to green bonds,
of insurers globally
our client case study: ‘To exclude or not against 13% a year ago. In Europe,
expect to allocate more
to exclude?’ on page 44. appetite has risen more than threefold
to green bonds, against
13% a year ago. from 11% to 36%; in North America it
Although impact investing is the most has jumped from 20% to almost 55%;
popular approach globally, in practice in Asia, from 13% to 34%, while in
it is largely confined to alternative Latin America it has risen more than
asset allocations as well as the debt sevenfold, from 7% to 53%.
space, according to Johanna Köb at
Zurich. “In private equity, which is the This strong appetite makes sense as
most traditional impact investing asset green bonds offer an effective pairing
class, our asset allocation is around 1%. of investment and environmental
We’re not increasing the strategic asset objectives. We expect the market to
allocation due to impact, but have a continue its rapid development over
target to invest 10% of that allocation into the next five years with insurers playing
impact private equity funds to reach our a major role in that expansion.
target of USD 5bn in impact investments.
That means that debt markets are of high The investment case is familiar, but
importance for our impact strategy.” worth repeating. Green bonds are
attractive buy-and-hold investments
Overall, impact investing appears that benefit from regulatory support
unlikely ever to become a central and a robust market structure. From a
investment strategy for insurers. yield perspective, evidence indicates
However, within it we see a rapidly that green bonds have neither a material
growing role for green bonds. advantage nor a disadvantage relative
to conventional bonds, while pricing
levels between green and conventional
bonds are generally very close and
highly correlated.

We present a more detailed analysis in

our paper Insurers and green bonds.

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Figure 12: How ESG is being implemented

48%
44%

38% 37%
35%

Impact Using a thematic Avoidance Incorporating Using optimised

investing focus on particular screening ESG principles ESG benchmarks
ESG issues into the
investment process

North
Europe APAC LatAm*
America

Impact investing 61% 52% 34% 53%

Using a thematic focus on

45% 37% 50% 47%
particular E, S or G issues

Avoidance screening 28% 39% 39% 57%

Incorporating ESG principles

43% 37% 33% 43%
into the investment process
Using optimised ESG
41% 37% 29% 27%
benchmarks

Base: Global (n = 372), of which Asia Pacific (n = 113), EMEA (n = 154), Latin America (n =
30) and North America (n = 75). Q. Thinking about the most important categories, how
is your firm taking these into consideration or planning to do so? Select all that apply.

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 To exclude or
Case study
not to exclude
Among the most fundamental questions use it heavily for power generation,
over how to integrate ESG into the exclusion screens do not form a central
investment process is whether to part of Zurich’s ESG investment strategy,
exclude certain sectors – tobacco, coal, she explains. “One of the reasons is that
or armament producers, for example. implementing them would be extremely
Here, our interviews reveal wide complex across diverse markets with
differences among insurers with highly differing cultural norms, for example
developed approaches to ESG. regarding alcohol.”

“One of the biggest myths of ESG Instead, Zurich asks all its managers
integration is that people assume it to invest on the basis of relative ESG
necessarily involves a significant use of performance, based on ESG scores
exclusion screens,” says Johanna Köb and data, while giving them discretion
of Zurich. While she sees screening as to underweight companies on ESG
an important tool generally, it does not grounds. “We work with the portfolio
feature significantly in Zurich’s approach. managers to understand the rationale
In fact these are two different strategies behind their ESG integration process
under the responsible investment and investment decisions, and then
umbrella. Although company policy of course we make sure that if we are
bans investment in a few areas, including invested, we vote our proxies and we
controversial weapons specified by look at what shareholder proposals
the UN and a forthcoming ban on come up, and whether we need to
companies that mine thermal coal or send a signal.”

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 Our interviews reveal wide
differences among insurers
with highly developed
approaches to ESG.

AXA takes a different approach. The but adds that, in any case, “it’s not that
company excludes industries that do we don’t care [about sacrificing alpha,
not meet its ESG criteria, including diversification or income], it’s that for
tobacco and coal producers, and us it’s a second-order [issue], versus
applies ESG scoring to the remaining having something that’s aligned with
investable universe. However, it also our corporate policy.”
operates a strict ‘double-exclusion’
policy by not only refusing to invest in AXA operates probably one of the
these companies but also declining to toughest exclusion policies, but others
provide them with insurance coverage. implied that they are contemplating
Laurent Clamagirand, AXA CIO, argues measures that go further than may be
this is necessary for the “coherence of currently the case. Overall though, the
the corporate brand and the positioning question of how far – and how explicitly
in society…To be honest, one of the – to embed exclusion policies into all
biggest challenges in the beginning aspects of insurers’ business appears
was that it was always easier to take far from resolved.
the decision on the investment side,
but it was more difficult to get it on the
business side.”

He does not believe AXA’s tough

exclusion policy adversely affects the
returns his portfolio managers generate

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 BlackRock Gathering
Perspective
ESG momentum
Brian Deese

In essence, our survey findings make clear the rapidly growing importance of ESG to
insurers’ investment strategies – as well as the many challenges they continue to face in
fully implementing these considerations into the way they construct insurance company
portfolios. Overall, there is a strong sense that the role of ESG as an additional lens
through which to view risk management can only continue to grow. To quote Johanna
Köb, Head of Responsible Investment at Zurich: “ It’s naturally very connected to what we
do as insurers. Seeing, understanding and pricing risks is at the core of what we do.

”This fits into a wider pattern of sustainable investing going mainstream with the key
question investors ask shifting from “why ESG” to “how to implement ESG”. We explore
this trend in more detail in our paper Sustainable investing – a “why not” moment, but
key conclusions include:

ESG covers a broad spectrum

The definition of what constitutes ESG investing and how to apply it remains fluid.
However, rather than being seen as an all-or-nothing decision, we believe sustainable
investing should be considered as a continuum between two broad categories:

Avoid: eliminate exposures to companies or sectors that pose certain risks or violate
an investor’s values.

Advance: align capital with certain desired ESG outcomes while pursuing
financial returns.

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ESG does not mean Take advantage
compromising returns of expanding universe
The survey results reflect a longstanding Alongside the development of discrete,
debate on whether ESG involves investable ESG asset classes such as
compromises. While track records remain green bonds and renewables, we are
relatively short, we believe that there is a witnessing a rapid growth in ESG-friendly
growing body of evidence – including our indices that allow more scalable ESG
own research – that suggests investors can solutions. Even where investors look
build ESG into many traditional portfolios at customisation or active approaches
without compromising return goals. these indices offer useful starting points.
Indeed, our research suggests applying Moreover, we see gaps in coverage being
an ESG lens may even enhance returns filled rapidly, with emerging debt markets
over the long run. being the most recent example.

Delve deeper into data Within private markets, ESG is rapidly

While respondents were cautiously becoming a key consideration. This is
positive about their access to high-quality perhaps most notable for long-duration
ESG data, with 57% somewhat agreeing, and physical assets that have direct
several of our interviewees were more exposure to the risks and opportunities
outspoken in identifying the lack of posed by global challenges such as
reliable data as a significant obstacle to climate risks, resource constraints and
more efficient ESG implementation. population growth. Certified “green”
buildings now increasingly attract a
This chimes with our own research that premium. Conversely, less resource-
while ESG-related data are improving, efficient buildings may end up with a
it is important to go beyond the headline ‘brown discount’. Moreover, innovation
scores and identify which subcomponents continues apace as highlighted by
are the most useful. the following case study.

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 Implementing ESG
Case study in private markets
Green property financing

It is now possible to secure green loans New types of renewable energy

for projects that meet Investments in solar and wind energy
higher environmental standards. facilities are becoming mainstream, but
BlackRock recently secured such a the mix of renewable energy continues
green loan from a leading UK bank to evolve and we see increased
for the development of a sustainably opportunities in areas such as sustainable
designed student accommodation waste management. A recent example is
project in London. In return, BlackRock the Dublin Waste to Energy (WtE) facility,
has committed to a number of specified a partnership between BlackRock and
‘Green covenants’, including: leading waste management specialist
Covanta. By processing approximately
•• Achievement of a BREEAM ‘Excellent’ 600,000 metric tons of non-recyclable,
Rating for the final development; solid waste per year, the plant will supply
clean, renewable power into Ireland’s
•• Installation of numerous energy national grid which is enough to power
efficiency technologies more than 80,000 homes annually, as
well as providing district heating for
•• Student engagement programmes approximately 50,000 additional homes.
and the development of student
incentives to encourage energy
reduction and improved energy
usage behaviours.

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 Within private markets,
ESG is rapidly becoming
a key consideration.

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 Asset allocation trends

Fixed income:
embracing the full spectrum
Our research highlights how insurers of a decade-long project to build its
continue to evolve the ways in which private-market allocation. In terms of
they allocate to this core asset class, the sources of the capital that could
increasingly diversifying across sub-asset be allocated to this market, it has a
classes and expanding the spectrum significant amount of money currently
on both the short duration and the invested in the bond market. A lot of
alternative side. these bonds are maturing and are going
to be reinvested into various asset
Interestingly, after several years of classes. It is considering that a part of the
increasing allocations to private market reinvestment may be allocated to private
assets, many insurers no longer place all credit over the course of the next years.
private market assets in the alternatives
bucket. Private credit in particular is However, given the illiquid nature of
increasingly seen as part of mainstream these private market assets, interviewees
fixed income. Randy Brown of Sun Life emphasised the need to consider
says: “We’re a big user of non-public their characteristics within a holistic
markets. Part of this comes down to approach to portfolio construction
definition: when I think of investment that identifies the risk factors and
grade private debt, do I think of that as diversification opportunities that they
an alternative investment? Personally, no bring. Randy Brown, CIO of Sun Life
I don’t.” This is echoed by Scott Sleyster, Canada, advocates this outcome-based
CIO of Prudential Financial, which has a approach to assessing the contribution
major in-house origination capability in that investment-grade private credit can
both mortgages and private placements, bring to his fixed income allocation: “We
says: “Given the size of the positions we treat it differently and we have a different
have [US$50bn-US$60bn], I would not group that does it, but when I think
consider mortgages or private corporate about risk exposures I think of that as a
bonds as alternatives. They’re core liquidity risk diversifying my corporate
assets for us.” credit exposure. In return, I’ve bought
better covenant protection. So frankly in
Japan Post Insurance takes a similar this part of the cycle….I’d rather have the
view, even though it is in the early stages covenant protection of private debt and

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give up the liquidity as a lifebelt, versus increase. This emerged as a key Insurers no
senior unsecured.” concern for many interviewees, as not longer place all
only insurers but many other types of private market
In practice, this is likely to involve a institutional investors seek to diversify assets in the
barbell approach to managing liquidity their fixed income exposure in this alternatives
risk that leads to reduced allocations to direction. bucket. Private
more liquid forms of higher-yielding fixed credit in
income. “To the extent that you’re getting “Many insurers like these asset classes particular is
cash flow, solid cash flow, for many of and many pension funds are chasing increasingly
the investments, the liquidity need sort similar opportunities,” says Martin Zingg, seen as part of
of goes away”, says Preston Hutchings Co-Head of Strategic Asset Allocation mainstream fixed
of Arch Capital. “But clearly what you and Markets at Swiss Re. “While income.
need to do is to structure the rest of investment volumes have increased
your portfolio, to provide the liquidity meaningfully in recent years, we observe
that you’re not getting on the alternative a crowding out issue in the market.
side of things. So, for instance, we might Different institutions have varying risk
have less in the way of high-yield and appetite and tolerance, and some are
leveraged loans than ideal, simply in prepared to push the limits. The market
recognition of the fact that we’ve got environment can be characterised as
private credit in the alternatives portfolio. very competitive, based on [the] capital
We may have a higher allocation to available for such investments.”
treasuries than is ideal, solely because we
perceive that the return per increment On the other end of the spectrum, we
of credit risk that we get in alternatives is also see increased interest in cash-type
better than it is in just buying an average short duration assets, particularly in the
corporate bond.” US. This may reflect a shift in relative
attractiveness of short duration assets
Inevitably, though, as allocations following the series of interest rates
to private market assets become a rises implemented by the US Federal
more central part of insurers’ core Reserve. In turn, this is opening up new
fixed income holdings, the level of possibilities for extracting additional
competition among buyers will only yield with lower risk.

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 BlackRock Is the ‘USD front end’
Perspective
the new alternative?
Jeffrey Jacobs

Low interest rates and more broadly low yields, remain a significant concern for
insurers given their large fixed income portfolios. Interest rate risk is the major market
risk insurers worry about (nearly 51%), ahead of even asset price volatility (47%). This
fits with a picture where asset markets remain driven by investors seeking new and
incremental sources of yield. Rising US Treasury rates, supported by a robust economy
and the Federal Reserve’s determination to remove crisis-era accommodative
policies, have softened the impact of widespread central bank quantitative easing.
Nevertheless, for global investors, yield suppression remains a reality, with the
European Central Bank and the Bank of Japan still pursuing largely accommodative
policies (in response to less robust growth and anaemic inflation rates). This global
dynamic, coupled with structural factors such as heightened pension fund demand for
long duration assets, puts downward pressure on US yields, effectively checking the
ability of US rates to rise across the curve.

These opposing pressures have resulted in a relatively flat US yield curve, creating
opportunities to achieve yields that in the recent past required some combination
of higher interest rate, credit, and liquidity risks. For most of the post-crisis period,
bond markets were sceptical of the rate path outlined by the Fed and the commitment
to policy normalisation. This in turn translated into relatively benign increases in
rates on the front end of the curve. However, the Federal Reserve’s slow-but-steady
reversal of crisis-era policy has ultimately convinced market participants to revise their
expectations about the path of short-term rates. This increased confidence has spilled
over to the front end of the curve and introduced upward pressure on front-end yields.

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Historically, the pressure from Fed rate Figure 13: When shorter becomes better
increases tails off as maturities increase,
3.50
given that for longer-term yields inflation
expectations matter more than the
path of Fed policy rates. With inflation 3.00

expectations tied to the low inflation

experience since the crisis, we expect 2.50

only modest pressures on longer-term

Yield (%)
yields from strong US economic growth 2.00
during the rate rising 2018-19 period.
While a prolonged run of above trend 1.50
growth in the US may push inflation
expectations higher, we do not see 1.00
signs of this reversal in the current data.
By contrast, we believe low interest 0.50
rates and inflation in the eurozone and
in Japan mean those investors will still 0
have to seek yield outside their home 2013 2014 2015 2016 2017 2018
currency, hedging costs permitting, with UST 2-year UST 10-year IG Corp 1-3 year
the US rate markets the best of the ‘bad’
choices. As a result, we see US long-term
1.80
rates that are not in line with historic
trends at this stage in the Fed rate cycle. 1.60
Over time, this downward bias may
1.40
become less pronounced as quantitative
easing globally tails off. 1.20
Yield / Duration (%)

For now, however, the relatively high 1.00

yields on the 2-3 year part of the curve
0.80
appear to offer compelling value. The
sacrifice in yield on the treasury curve 0.60
in moving from 10-year maturities to
0.40
2-years is roughly 30 basis points – just
over 18 months ago it was in excess of 0.20
120 bps. (see figure 13). By contrast,
most assets that are riskier from either 0
a credit or rate perspective have seen 2013 2014 2015 2016 2017 2018

substantially lower increases in yields UST 2-year UST 10-year IG Corp 1-3 year
due to a combination of smaller rate
Source: chart by BlackRock based on data from Bloomberg.
increases and credit spread tightening.
Data as of 31 July 2018.

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In fact, this exercise of seeking to achieve Figure 14A: Greater opportunity for re-allocation
similar yields with lower interest rate Fixed income yields as of 31 December 2016
risk assets can be carried out across a
range of fixed income sectors. With a US corp HY 6.12
combination of shorter maturities and
EM USD 5.04
floating rate assets, it is possible to create
a spectrum of potential portfolios that
Bank loans 5.24
offer yields that previously could only be
achieved through longer-dated (i.e. 10+ EM local currency 5.17
years), fixed rate securities. Overall, we
view the current USD rate environment as US municipals HY 6.42
now providing ‘interesting’ yields across
a wider spectrum of risk profiles, allowing US Corporate IG 3.37
for more opportunities to optimise
CMBS 2.78
portfolio construction for investors’
specific needs.
US MBS 2.85

Achieving a similar yield with US securitised 2.83

substantially less interest rate risk, offers
the opportunity to re-allocate risk to US aggregate 2.61
alternative long duration asset classes
with attractive yields and diversification 1-3 credit 2.01
potential (see figure 14). Alternatively,
US TIPS 2.30
investors can use combinations of
high quality assets, such as AAA rated,
Treasury 10-year 2.43
securitised and agency MBS to avoid the
incremental credit risk associated with Treasury 2-year 1.20
corporate bonds.
US municipals 2.62
Figure 15 overleaf, shows yields and
spreads for a range of fixed-rate, Global aggregate 1.60

investment grade sectors across the

Pan-European corporate 1.19
maturity spectrum, based on Bloomberg
Barclays Aggregate Index data. In
Pan-European goverment 0.63
each bucket, sectors are coloured in a
lighter shade for yields < 3% and in a Asian Pacific aggregate 0.50
darker shade for > 3%. It highlights a
significant degree of flexibility in terms of Yield > 3% Yield < 3%
constructing a portfolio with a 3% yield
Source: chart by BlackRock based on data from Bloomberg and S&P
target. This is true even at higher quality
/ LSTA. Data as of 31 July 2018.
ratings such as agency MBS, AAA-rated

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Figure 14B: Greater opportunity for re-allocation.
Fixed income yields as of 31 July 2018

US corp HY 6.31

EM USD 5.59

Bank loans 5.52

EM local currency 5.27

US municipals HY 4.79

US Corporate IG 3.99

CMBS 3.49

US MBS 3.47

US securitised 3.36

US aggregate 3.23

1-3 credit 6.31

US TIPS 3.06

Treasury 10-year 2.96

Treasury 2-year 2.67

US municipals 2.66

Global aggregate 2.05

Pan-European corporate 1.29

Pan-European goverment 0.96

Yield > 3% Yield < 3%

Source: chart by BlackRock based on data from Bloomberg and S&P

/ LSTA. Data as of 31 July 2018.

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Figure 15: A wide range of options

Yield (%) by years to maturity

Sector Rating <3 3 to 5 5 to 7 7 to 10 10 to 15 15 to 25

US Treasuries 2.64 2.79 2.89 2.95 3.04 3.09

Agency MBS – 30 year 3.56 3.54 3.48 3.33

Agency MBS – 15 year 2.94 3.14

ABS AAA 2.99 3.25 3.53 3.88 4.24

CMBS (non-Agency) AAA 3.19 3.49 3.72 3.84

Corporates A 3.12 3.47 3.78 3.96 4.40 4.26

Corporates BBB 3.40 3.86 4.26 4.48 5.03 4.72

Taxable Muni AA 3.27 3.32 3.73 3.88 4.05

Tax-exempt Muni * AA 2.04 2.38 2.88 3.48

* Tax adjusted at a 21% rate

Source: table by BlackRock based on data from the Bloomberg Barclays Aggregate Index. Data as of 3 August 2018.

ABS and CMBS. Where appropriate, AA- there are growing market concerns
rated taxable municipal bonds may also that a recession may be imminent and
have a role to play. that this may be a poor time to add
additional risk. We believe that an
An additional undercurrent to the inverted curve is possible given how
flattening of the yield curve is the little space remains between short and
possibility of yield inversion. Given the long yields. However, we do not believe
historical association between inverted the predictive power of that event is the
yield curves and recessions in the US, same today.

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 Spread (OAS, bps) by years to maturity

<3 3 to 5 5 to 7 7 to 10 10 to 15 15 to 25

0 0 0 0 0 0

49 33 23 13

17 21

37 45 63 89 120

52 68 82 89

46 66 87 100 134 114

73 103 133 149 194 159

61 49 76 81 91

-60 -41 53

The degree of on-going central bank is different’, then the relatively small
activity that is distorting historic sacrifice in moving into shorter-maturity,
patterns remains a distinguishing factor high-quality assets may provide a lower
between today and past occurrences risk alternative to risk assets –
of inverted yield curves. Moreover, in essence, paying investors to wait
there are signs that the economic out the cycle. (This is also true in the
momentum in the US may be stronger opposite cyclical case, i.e. the belief
than generally assumed. However, if an in higher inflation over the next two to
investor does not believe that ‘this time three years.)

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 Asset allocation trends

Alternatives: towards a
more holistic approach
Alternatives are becoming less and to 3% of the overall portfolio, that could
less alternative. This is particularly the total up to US$15bn to US$20bn, could be
case for private market assets, which invested into this asset class.”
increasingly are becoming an integral
part of insurers’ asset allocation as The size of Japan Post’s potential
reflected in the high asset allocation allocation makes them perhaps
intentions (40%). somewhat atypical, but all insurers
continue to grapple with regulatory,
These higher allocations reflect the accounting and other constraints in
higher premium spreads that selective relation to private markets.
private market assets continue to offer
as John Rosenthal, CIO of Brighthouse So even where insurers target higher
Financial, highlights: “In general, we tend allocations as a proportion of their
to favor, and we favor right now, privately portfolios, these factors along with
sourced assets such as corporate “the volatility that comes with these
private placements and commercial and returns” remain important constraints
agricultural mortgages that we believe that require careful managing, according
can earn attractive premium spreads or to John Rosenthal at Brighthouse.
returns over public assets Liquidity management is another area
with comparable risk.” of focus, with many insurers looking
to take advantage of the illiquidity risk
For insurers such as Japan Post, which are premium that private assets generally
looking to allocate even a relatively small offer as John Rosenthal explains: “As
portion of a sizeable portfolio to illiquid an insurance company with relatively
private markets, there is no choice but to long illiquid liabilities, taking liquidity
take a very long-term approach. Atsushi risk is something that is pretty natural
Tachibana, the company’s CIO, says: and makes sense for us and many of our
“Since there are a lot of players out there peers. This is why a lot of our peers are
in the market and also other constraints big investors in private assets.
[in Asia] for these asset classes, we’re
thinking about this in a ten year horizon. “Insurers are also thinking carefully about
We just started from last year and within the beta exposures embedded in their
the next ten years, we believe that 2% private markets portfolios.

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“What we’re trying to construct is an
alternative portfolio that doesn’t have
a whole lot of beta to it,” says Preston
Hutchings, CIO of Arch Capital. “There’s
Since there are a lot of
going to be some of course. But to the players out there in the
extent that the portfolio does have beta,
if you’re generating significant ongoing
market and also other
cash flow, you don’t need to sell your constraints [in Asia] for
equities that may be under water, your
high-yield bonds that have got beaten these asset classes, we’re
up or anything else that is cheap, in
order to finance the capital calls that you
thinking about this in a
get on your alternatives portfolio.” ten year horizon.
Overall, we would support these
approaches as part of the wider
evolution towards a more holistic, Atushi Tachibana, CIO, Japan Post Insurance
outcome-focused view of portfolio
construction. Specifically, in relation to
alternatives, we believe that such a total
portfolio view allows investors to assess
the complementary qualities
and characteristics of the full investment
spectrum, building a portfolio, which
blends different attributes to achieve
true diversification. Overleaf we set out
our thoughts on how best to achieve
that goal.

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 Asian insurers
Case study
and private
market assets
Asian insurers that aim to increase Another obstacle is hedging.
allocations to private market assets face a Infrastructure investments are often long
range of obstacles. term and require hedges for off-shore
investors. The cost and complexity of
One is the dominance of banks in Asia hedging long-term local-currency cash
– Stephan van Vliet, CIO of Prudential flows from these assets is a major issue,
Corporation Asia says. “It’s not been easy according to Stephan van Vliet.
to source either private placements or
infrastructure debt in Asia. Banks have Regional complexity is the other key
been quite flush with liquidity and have obstacle. Prudential Corporation Asia
dominated this space but also there have invests in a global alternative portfolio
not been enough asset managers in Asia of regional and global private equity,
who have expanded their teams and real estate equity and private credit funds.
capabilities so that they have become “People are realising that setting up
credible counterparts for treasurers country-specific alternative strategies in
of corporations and infrastructure Asia is expensive, difficult in terms of finding
projects…there’s a gap here for asset the right diversification and deal flow, and
managers to step into.” For instance, the markets are not as large as the US or
in Asia a much higher percentage of in one currency zone like in Europe,” he
commercial mortgages is financed says. “It’s not that we have a strong Asia
by banks than in US where insurance bias in our illiquid assets. We want global
companies are more active in this space. exposure and good diversification.”

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 Asian insurers that aim
to increase allocations to
private market assets face
a range of obstacles.
Mark Konyn, CIO of AIA, which operates
across 18 markets, says private market
assets do not form a significant portion
of the group’s portfolios although the
allocation is growing. Among the major
obstacles he identifies is the region’s
“patchwork of regulatory requirements”,
which make it difficult to pool assets and
create “internal syndicates” across AIA’s
local businesses to invest in international
private market offerings.

In a region as diverse as Asia, the

challenge of building enough in-house
expertise in these assets to make a
strong business case to allocate to them
is also “significant”, he says. As a result,
AIA has chosen to work with external
asset managers to build its exposure,
focusing on private equity, private debt,
structured credit and, more recently,
infrastructure debt and equity.

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 BlackRock Simple assets not
Perspective
so simple to access
Brian Chase

Although private assets are not necessarily complex, they are not so simple to access
or combine efficiently in a total portfolio. Some of the key challenges include:

Portfolio governance: Many institutions seem to not have the ‘governance budget’ to
invest efficiently across private markets or to select single asset managers to invest in
specific private market asset classes. A May 2016 BlackRock study comparing number
of investment professionals / assets under management ratios from four leading
alternative managers (AUM of US$95bn / US$350 bn) with those of four traditional
counterparts (AUM of US$850 bn / US$1.5 trn) suggests that private markets are 5x
more resource-intensive than public markets. Dispersion of performance tends to
be higher in private markets reflecting the many levers of return, but also the risks to
consider when carrying out private investments. Successfully executing all the key
stages from sourcing to structuring and negotiation, and asset allocation requires
considerable resources and expertise.

Non-homogeneity: Private assets are non-homogenous: adequately analysing an

investment opportunity within a single asset class silo may lead to sub-optimal results.
Having a cross-functional / multi-disciplinary approach allows more accurate pricing of
assets and the identification of overlooked opportunities. For example, an investment
opportunity in infrastructure social housing will have real estate and credit related
aspects in addition to an infrastructure angle.

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Risk management: imperfect information Tackling the challenges
and low frequency of valuations restrict
the ability to price and manage risk Peel away the label
effectively. A traditional measure of risk Adopting an ‘outcome-orientated’
derived from accounting valuations investment approach means that
will often lead to underestimating the investors are not narrowly focused on
true economic risk of the investment the label of the asset class, but rather
under consideration and exaggerate pay attention to the characteristics of the
the diversification benefit. For example, cashflows, their economic risk and their
a real estate debt transaction may alignment with the investment objective.
be attractive from a fundamental The key question, argues Preston
standpoint, but have an unwanted Hutchings, CIO of Bermuda-based Arch
exposure to the oil and gas sector Capital, is: “What is the economic rent
through a high concentration of tenants derived from this activity and why does
operating in that space. That ‘second it exist?”
degree’ exposure may be highly
correlated to another exposure in the Speak a common risk language
portfolio, creating an undesirable It is possible to overcome undesirable,
correlation risk. and often hidden, correlation risks by
adopting a risk factor approach, which
Scott Sleyster at Prudential Financial allows investors to analyse the economic
started building an alternatives risk risk rather than the accounting risk of an
management team four years ago, investment. More broadly, it provides a
initially to analyse the company’s common language to analyse private and
hedge fund holdings. Over the past public market assets across the portfolio.
two years, he says, this three-person Technology can provide further support,
risk management group has started to albeit that no technology platform can
apply their framework to their entire entirely eliminate the risk.
alternatives portfolio including private
equity, real estate and other funds, Arch Capital uses BlackRock’s Aladdin
“tracking across the entire portfolio, platform as the basis of a factor-
looking for correlations that might led approach to analysing risk in its
be sneaking up on us…Prior to that alternatives portfolio. “As Aladdin
it was back-of-the-envelope proper has developed, those more specific
diversification by vintage, by manager risk factors are being identified and
etc., but not very quantitative.” captured in the programme,” says
Preston Hutchings. “It’s still a work in
progress, but it’s one that’s gone from

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 not capturing anything in the alternatives Credit replacement: Appealing to
space, to using market proxies, to one that investors who are looking to achieve
is beginning to capture the specific risks a yield pick-up versus BBB / BB credit
of the individual funds. Okay, given the risk by investing in a range of less
nature of alternatives and the wide risks correlated assets.
that may be involved, you can appreciate
that not everything is going to have a Growth / total return approach:
risk that can be perfectly captured. But Where investors are looking for capital
Aladdin is making steady progress.” appreciation, with income
less of an objective.
Align with desired outcome
Typically, we see investors gravitating Deal with abundance of capital
towards three types of outcomes: At a time when capital is abundant, we
believe price discipline and flexibility are
Liability sympathetic: Appealing for key. Despite the increased competition,
insurers that have local government debt deal flow and fundamentals remain
markets that are too small to match their strong across a number of asset classes.
liability requirements or that feel that However, we believe it is important to
investment grade credit is offering too avoid crowded areas and to be wary of
modest a return for their cost of capital. syndicated markets and trophy assets.
Investments in this category include Ensuring access to a wide range of assets
infrastructure debt, long-dated real estate will allow greater flexibility to deal with
debt, senior secured private credit and capital shifts. We also suggest focusing
any other investment, which benefits on bilateral situations where value can
from long-dated contractual cashflows be generated from structuring and
underpinned by tangible assets. underwriting and making your assets
work hard.

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 Asset allocation trends

Seeking further
diversification:
China
As outlined in the key findings section, we’ve explored insurers’ appetite for
diversification into China equities as a consequence of the recent inclusion of China
A-shares in MSCI’s emerging market and global (ACWI) indices. Our findings show that,
over time, a significant proportion of insurers are looking to increase their allocations to
A-shares beyond the benchmark weightings. In particular, APAC insurers are looking to
overweight China, suggesting that they view their regional neighbour as an important
future component of their equity portfolios.

Figure 16: Going beyond the benchmark

Already invested in A-shares 13%

in excess of initial index weights

Considering a dedicated allocation to

53%
A-shares in excess of initial index weights

Expecting to follow index provider

29%
guidance on A-share allocations

Looking for guidance on how

4%
and how much to invest

Not sure 1%

Q13. MSCI began including China onshore equities (A-shares) in its equity indices in
June, forcing many investors to consider allocating onshore in China for the first time
in the context of initial index weights. How would you describe your firm’s approach
to A-shares over the next 12-24 months? Select one. Source: BlackRock Global
Insurance Survey, July-August 2018. Note: Throughout the report, percentages may
not add to 100 due to rounding.

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 BlackRock
Perspective A potentially
structural opportunity
The case for making a strategic sub-4% weight in global equity indices
allocation to A-shares is rooted (as represented by ACWI), meaning
in China’s economic significance. China’s economic importance and
Institutions and asset allocators need contribution to global financial
to consider the implications of China markets is significantly greater than
becoming a greater proportion of global is represented by current benchmark
benchmarks sooner rather than later. construction.

Institutions are The structural underweight to China is

structurally underweight exacerbated for A-shares, as historical
barriers to foreign investment in
China represents the second-largest domestic Chinese equities have led to
economy in the world, contributing many institutions considering A-shares
~15% of global GDP. China has for the first time as a result of MSCI’s
contributed more than 20% of the inclusion process. Over time, this is
world’s GDP growth over the last 15 expected to change. Illustrating the
years and is now home to the second- potential path forward, MSCI expects
largest equity market in the world, that, all things equal, China’s weight in
representing approximately 15% of its emerging markets index when fully
global market capitalisation and 38% represented could exceed 40% (up from
of emerging markets market ~31% today), including almost 17% in
capitalisation, on a pro-forma basis. A-shares, which are currently less than
That said, China currently only has a 1% of the benchmark index.

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Figure 17: Complementary allocation

China H-shares Emerging S&P

World
/ ADR Markets 500

China
0.53 0.37 0.24 0.27
A-Shares

It is not possible to invest directly in an index. Source: table by BlackRock, based

on Bloomberg data as at July 2018. Average rolling 12-month correlation from
2001 to 30 June. 2018.

Complementary exposure While the ‘beta case’ for exposure to

and diversification potential A-shares is compelling, we also see scope

for active management to add value.

Institutions that own Chinese equities Scepticism exists around government

today generally own H-shares and other data, but there is greater transparency

offshore-listed equities. While it is true at the company level, which can be

that adding A-shares to an H-share supplemented by robust fundamental

portfolio increases China exposure in analysis and alternative data sources like

aggregate, the two markets are very satellite imagery and GPS signals to inform

complementary. Relative to H-shares, sentiment and complete a picture of

which are much more heavily weighted economic activity. Further, the high retail

in information technology (> 40% of the participation rate and lack of institutional

index), A-shares provide higher weights in ownership of A-shares can create

critical elements of the domestic Chinese inefficiencies that skilled active managers

economy such as consumer staples, may potentially exploit. Illustrating the

consumer discretionary and healthcare. point, over the trailing ten years ended
March 31, 2018, the median active China

From a portfolio construction standpoint, A-share manager’s excess return as

China A-shares appear highly diversifying. reported in the eVestment database was

As shown in figure 17, they exhibit low +5.4% per annum, roughly 5x that of the

historical correlations against other median EM manager (+1.0%) and 3.9x that

major equity market indices, and low to of the median ACWI manager (+1.4%).

moderate correlations to China H-shares:

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 While past performance is never a guide While volatility can give rise to tactical
for future performance, it nevertheless investment opportunities and attractive
suggests the potential for skilled active entry points, we believe it is important
managers to mitigate volatility and other to differentiate between short-term risk
market related risks. It seems reasonable to and return and the investment case for
conclude that the portfolio diversification a strategic allocation to A-shares, which
and risk / return benefits of an active investors with a long-term view, such as
approach could be at least as good, insurers, may want to explore.
if not better, than investing in indices
alone. However, this may not hold true We believe it is hard to overstate
in all markets, and the outsized alpha the long-term impact on global and
historically generated in China A-shares emerging markets that will arise from
relative to other emerging and global MSCI’s decision. While investors have
markets is likely to erode as the market historically cited lack of market access
institutionalises. as an impediment to investing in
domestic Chinese equities, these
A long-term investment case barriers are now being removed through
At any given time, the optimal allocation deliberate structural reforms, increased
to A-shares will depend on a number of adoption of standard market practices,
investor-specific factors, including risk and the advent of new programmes,
tolerance. Despite its significant economic such as the Renminbi Qualified Foreign
position, China is still emerging and its Institutional Investor (RQFII) process and
equity market and economic growth are ‘Stock Connect’. As China A-shares enter,
vulnerable to potential disruption from and ultimately grow to be significant parts
domestic factors (including China’s reform of benchmark indices, what was once a
agenda and deleveraging) and external “Can we?” question is now becoming a
factors such as geopolitical, trade and question of “How?” and “How much?”
other tensions.

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 Insurers, in line with
most other investors,
have a structural
underweight to China.

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 3 Regulation

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Preparing for
IFRS 9 and IFRS 17
While our survey suggests that overall Background
insurers feel relatively sanguine about
IFRS 9, we detect some concern in IFRS 9 addresses how an entity should
relation to specific elements of the classify and measure financial assets, and
new accounting regulation. 61% worry replaces the International Accounting
about their ability to ensure that certain Standard 39 (IAS 39) on 1 January 2018.
portfolios’ contractual cash flows will It is likely to introduce more day-to-day
meet the ‘Solely Payment of Principal volatility in insurers’ P&L statements,
and Interest’ (SPPI) test (61%), while as a result of new mark-to-market
46.5% are concerned about a possible requirements of unrealised gains /
increase in income-statement volatility losses and forward-looking, estimated
as assets are marked to market, a view impairment charges of existing
echoed by Stephan van Vliet, CIO of investments. For now, many qualifying
Prudential Corporation Asia. “The insurers have taken advantage of IFRS 9’s
degree to which firms will be impacted deferral option to 1 January 2021.
depends on the liability characteristics
and their ALM position. As our books IFRS 17 addresses the treatment of
are predominantly participating and insurance contracts with a view to
unit-linked and we manage on an provide high-quality financial information
economic market value basis already, we that is globally comparable, consistent
expect the impact on our strategic asset and transparent. The new standard is
allocation to be limited.” due to come into force on 1 January
2021, but the implementation aspects
Concern about the need to source are still being finalised with the industry
forward-looking information on through, for instance, the International
expected credit losses was raised by 45% Accounting Standards Board’s Resource
of respondents, and 45% mentioned the Transition Group.
challenge of evaluating the net impact
of IFRS 9 in light of the forthcoming BlackRock contributed to this effort with
introduction of IFRS 17, covering a regulatory policy Paper published in
insurance contracts. October 2017 Viewpoint: IFRS 17:
An investor-perspective.

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 BlackRock
Perspective The devil is
in the detail
As insurers prepare for IFRS 9, we believe they should pay particular attention to the
following aspects:

A significant portion of the typical insurer assets are in the form of fixed income
instruments, that, under IAS 39, used to escape the mark-to-market valuation lens via
a number of prescriptive, ad hoc, accounting rules and exceptions. Under the new
principle-based classification requirements insurers will need to assess each individual
security based on the underlying characteristics (“contractual cash flow characteristics
test”) and broader use in the insurance business (“business test”), meaning new
insurance-aware portfolio management skills will have to be sourced;

All financial assets not marked-to-market (i.e. not classified as “Fair Value through Profit
& Loss”) will require a forward-looking Estimated Credit Loss (ECL) assessment, to
gauge impairment risk, and the setting aside of the necessary reserves. Unlike under
the previous IAS 39, this has to happen on an ex-ante basis. Insurers will therefore need
access to new risk measurement technologies and competencies; and

Marked-to-market assets generate profits and losses that, if not properly managed, may
‘contaminate’ an insurer’s operating results in the income statement. In this regard, the
concerns expressed by respondents may relate to the need to develop new portfolio
solutions and asset allocation strategies that minimise P&L volatility and the mismatch
with the way in which liabilities are measured (under the forthcoming IFRS 17 principle).

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 Timings may be tighter than
is generally assumed given
the broad range of areas that
require focus.

Beyond those general considerations,

individual insurers may also face
further complexities relating to, for
instance, parent company balance sheet
consolidation or local generally accepted
accounting principles (GAAP).

We believe, therefore, that the level of

IFRS 9 engagement between insurers
and their asset managers will have to
increase significantly in the coming years
as additional portfolio management
capabilities, risk assessment technologies,
and allocation solutions will need to be
developed. With that in mind, timings may
be tighter than is generally assumed
given the broad range of areas that
require focus, whether it is building
IFRS 9-aware fixed income portfolios or
finding an optimum trade-off between
minimising P&L volatility and maximising
potential returns.

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 Investment
4 efficiency

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 Alongside the smart use
of outsourcing, we
believe efficiencies
can also come from
optimising overall
portfolio construction.

A continued theme from last year is the

quest for greater portfolio efficiency.
Concerns about ensuring that portfolios
were constructed in an optimum
manner came through during the
in-depth interviews as insurers seek
exposures to a an increasingly wide
range of opportunities within an evolving
regulatory and accounting framework.

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 The importance
BlackRock
of a holistic
Perspective portfolio approach
Mark Azzopardi

A continued theme from last year is the quest for greater portfolio efficiency.
Particularly in private markets, our findings show widespread use of outsourcing.
However, efficiencies can also come from optimising overall portfolio construction
With that in mind, we believe it is worth taking on board BlackRock’s recent research
into the optimum framework for blending alpha-seeking and index strategies,
The BlackRock Way, Building better portfolios.

A key conclusion of our research is that alpha exists in all asset classes and can provide
diversification, with the latter offering some potential to mitigate market risk. Alpha can
also be generated across asset classes through tactical asset allocation. However, the
decision on how to allocate to alpha seeking and indexing strategies is not an asset
class by asset class decision, nor is it a case of simply using index funds in one place
and seeking alpha in others.

Instead, we find that it is best addressed at a holistic portfolio level, taking into account
the interplay between the strategic asset allocation, factor exposures and costs.

The framework also highlights that investment returns generated by managers beyond
a benchmark fall into two categories: 1) returns that can be attributed to persistent
tilts to factors and can be replicated cost-efficiently by exposure to broad market and
factor indices, and 2) returns that are driven by true investment skill and cannot be
systematically captured through an index.

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The former includes both tilts to macro Figure 18 overleaf illustrates that up to
factors, such as economic growth, real half of the variance of alpha-seeking
rates and inflation, as well as style factors managers’ active returns relative to the
such as value or momentum, typically benchmark comes from macro factor
used to explain returns within asset tilts. Factor tilts such as being short
classes such as equities. duration can introduce asset-liability
mismatches that an insurer does not
The latter is what we refer to as alpha, want. Similarly, additional exposure
and includes returns generated to economic growth by overweight
through security selection, tactical positions to corporate bonds may result
asset allocation across asset classes and in credit exposures in excess of an
market timing strategies. insurer’s credit risk appetite.
We further separate this alpha into
‘common alpha’ – alpha that is common Insurers will want to take risk and deploy
across managers and could reflect capital only in the areas where they feel
systematic strategies not yet captured it is most rewarded, and within their
by existing indices – with the remainder overall risk appetite. Market risk often
referred to as ‘pure alpha’. competes with insurance risk as a source
of shareholder returns, particularly for
What are some of the multiline insurers. Even where market risk
key takeaways of our is a key driver of profitability, such as for
research for insurers? many investment products written by life
insurers, an insurer will want to determine
The first is that when adding active carefully the optimal mix of market risk
managers, insurers need to look at exposures through a strategic asset
the whole picture to ensure they do allocation process.
not incur unintended risk exposures in
pursuit of alpha generation. As mentioned before, one approach
to ensure that actual exposures do not
Take, for instance, fixed income, which materially deviate from the strategic
typically forms a significant part of asset allocation is to adjust explicitly
insurers’ portfolios: bonds are often a for any persistent factor tilts that the
good match for an insurer’s liabilities, manager is likely to have. For example,
are generally deemed relatively low a short duration position could be
risk – hence they attract low capital adjusted through a derivative overlay
charges – and generate the stable and implemented elsewhere. Another
predictable income sought by insurers. approach would be to give the active
Yet a manager’s active positions portfolio manager more restrictive
could potentially dilute some of these guidelines, including incorporating
attractive properties. some of the regulatory and asset liability

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 management considerations described they have particularly strong security
above. However, will a fixed income selection skills in that asset class and
manager constrained in this way still be expect this to generate the majority of
able to deliver alpha? their alpha. Another would be market
timing between factor tilts themselves.
Our research, while not giving a
definitive answer, appears encouraging Of course, the information ratio is only
in this regard as illustrated by figure one part of the alpha picture. What
19 overleaf. It compares the active matters is not just the efficiency of
information ratios, where active generating alpha, but also the absolute
returns incorporate factor tilts, with level of alpha that managers can
alpha information ratios, where the generate. This is illustrated in figure 19,
contribution of factor tilts is stripped which compares alpha information ratios
out from the active return. The and alpha return levels for top quartile
methodology and assumptions are managers across different asset classes.
described in more detail in the
full research paper. Whilst the information ratios of active
fixed income managers are generally
It suggests that within the fixed income higher than those of active equity
space, alpha information ratios are managers, the absolute levels of
often higher than active information alpha are mostly lower: fixed income
ratios, except for a few asset classes managers earn higher alpha returns per
such as euro credit and local currency unit of risk but take less risk overall. This
EMD. This is the second key takeaway: is perhaps unsurprising, as their asset
while further research is needed, classes are typically lower risk by nature.
we believe that given these higher However, the chart also shows that the
information ratios there could still contribution of alpha could potentially
be scope for fixed income managers be material, particularly for equities:
to deliver alpha, even if they have to for top quartile managers, the lowest
contend with more restrictive mandates median alpha assumption of equity
awarded by insurers who seek to avoid asset classes we analysed is 1.6% for
active exposures that are undesirable US large cap equities, this contrasts to
from an asset-liability management or long-term beta return assumption of
capital perspective. The main exception only 6.0% for all US large cap managers.
would be situations where a manager
implements factor tilts to be able to use
their full spectrum of alpha generation
ability; for example, a manager running
a government bond mandate tilting
towards credit because they feel

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Figure 18: Explaining active return variance
Annualised average active return variance of all managers across asset classes, 2012-2017

FACTORS COMMON PURE

ALPHA ALPHA
Global credit

US aggregate

Hard-currency EMD

UK credit
US credit
Fixed income

Euro credit

Euro aggregate

US Treasuries

US high yield

US TIPS

Euro government

Local-currency EMD

UK large cap

US large cap

Euro large cap

Global equity
Equity

EM

US mid cap

Japan large cap

US small cap

Asia ex-Japan

0 20 40 60 80 100%

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future
results.Sources: BlackRock Investment Institute, with data from Morningstar, MSCI, Bloomberg Barclays, JPMorgan,
FTSE, S&P, IBoxx and Thomson Reuters, July 2018. Notes: The chart breaks active return variance into factors,
common alpha and alpha as explained above. All returns throughout are in US dollars.

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Figure 19A: Picking your spots
Annualised IRs of top-quartile managers, gross of fees, with confidence bands, 1997-2017

Active IR Alpha IR
US credit
US aggregate
Global credit
US Treasuries
Fixed income

UK credit
US high yield
US TIPS
Euro credit
Hard-currency EMD
Euro aggregate
Euro government
Local-currency EMD
Multi asset
US small cap
Asia ex-Japan
Global large cap
Japan large cap
Equity

Europe large cap

EM
UK large cap
US large cap
US mid cap
0 0.5 1 1.5
The figures shown relate to past performance. Past performance is not a reliable indicator of current or future
results. Sources: BlackRock Investment Institute, with data from Morningstar, MSCI, Bloomberg Barclays, JPMorgan,
FTSE, S&P, IBoxx and Thomson Reuters, July 2018. Notes: The estimate is based on active and alpha information ratios
(IRs) over five-year periods between 1997 and 2017. Each five-year period begins in October of the start year and ends
in September of the end year. The size of the confidence bands can reflect the sample size by asset class – smaller
samples can lead to larger confidence bands. The volatility of the IR over the sample period can also lead to larger
confidence bands. The IRs are gross of management fees. If fees were included, IRs to the investor would be lower.

The chart leads us to the final key takeaway. Insurers typically have limited allocations to
risky asset classes such as equities: they tend to increase balance sheet volatility, do not
provide a good match for liabilities and often attract high regulatory capital charges.
These drawbacks may not be sufficiently compensated for by the returns expected
from beta exposures to the asset class. Would the conclusion be different if the
expected return from alpha, minus selection and monitoring costs, was incorporated
explicitly in the strategic asset allocation process?

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Figure 19B: Risk and return
Annualised gross alpha IRs and returns of top-quartile managers with confidence bands, 1997-2017

Alpha IR Alpha return

US credit
US aggregate
Global credit
US Treasuries
Fixed income

UK credit
US high yield
US TIPS
Euro credit
Hard-currency EMD
Euro aggregate
Euro government
Local-currency EMD
Multi asset
US small cap
Asia ex-Japan
Global large cap
Japan large cap
Equity

Europe large cap

EM
UK large cap
US large cap
US mid cap
0 0.5 1 1.5 0 1 2 3 4%

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future
results. Sources: BlackRock Investment Institute, with data from Morningstar, MSCI, Bloomberg Barclays, JPMorgan,
FTSE, S&P, IBoxx and Thomson Reuters, July 2018. Note: The alpha IRs and returns are derived using the same
methodology as on the previous page and presented in the associated research paper. The alpha IRs and returns are
gross of management fees. If fees were included, alpha IRs and returns to the investor would be lower.

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 Looking
5 ahead

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This year’s survey suggests a cautious range of technical tools to achieve a
optimism among insurers. Profitability superior outcome. From a societal point
and existing business models remain of view, ESG and specifically climate
under pressure and the demands put change, pose increasing challenges
on investments to offset those pressures but also offer companies a chance to
are daunting. Insurers have correctly reposition themselves competitively.
identified access to a wider range of The survey results highlight how quickly
return sources and greater investment ESG is moving up insurers’ list of
efficiency as crucial components in priorities, but also the difficulties they
meeting that challenge. face in integrating sustainability at the
overall portfolio level. To a large extent,
They also know that they need to this reflects the fact that ESG is a young
accept more risk overall to reach their discipline with data, research, and
return target. methods improving continuously. With
this in mind, we see ESG integration as
Our role as an investment and risk an important evolutionary element of the
management partner is to support investment undertaking. As a fiduciary
insurers effectively on both fronts – to our clients we believe it is incumbent
whether it is by helping them build upon us to accelerate that evolution
and manage inherently more complex with our clients, whether it is in terms
portfolios or by offering new ways of of expanding our already significant
dealing with changing business, market investment stewardship effort, engaging
or societal conditions. with regulators and industry initiatives
on their behalf, capturing new, data-led
Perhaps, this need is most pressing in the insights through our technology platform
context of technological advancements, or building new ESG investment solutions.
where the insurance sector is confronted
with new demands from their underlying We look forward to discussing these
risk taking businesses and their end crucial topics with you over the next
clients, while they can deploy a greater 12 months.

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BlackRock commentators

Mark Azzopardi

Managing Director is the Global Head of Insurance within Client Portfolio Solutions.
His primary responsibility is to ensure that BlackRock’s investment, advisory, risk
management and product offerings for insurance companies reflect the environment
in which they operate. Mr Azzopardi also serves as a member of the Client Portfolio
Solutions Global Investment Committee.

Brian Chase

Managing Director, is the Global Head of Product Strategy for the Alternative Solutions
Group. ASG is BlackRock’s multi-alternative investment team that constructs outcome-
oriented, diversified portfolios of private markets assets. An outcome-orientated
approach is asset class agnostic and not narrowly focused on the label of the asset class
but rather on the characteristics of the cash flows and their alignment with the desired
investor outcome. Mr. Chase is responsible for leading platform strategy, marketing,
client service and the development of new outcome-oriented investment products.

Brian Deese

Managing Director, is Global Head of Sustainable Investing at BlackRock. The

Sustainable Investing team is focused on identifying drivers of long-term return
associated with environmental, social and governance issues, integrating them
throughout Blackrock’s investment processes, and creating solutions for our clients
to achieve sustainable investment return. Previously, Brian worked as US President
Obama’s senior advisor for climate and energy policy, helping to negotiate the Paris
Climate Agreement and other national and international initiatives

Jeffrey Jacobs

Managing Director, is the Global CIO of the Financial Institutions Group, and Head of
FIG – Portfolio Management. He is responsible for portfolio performance, strategic
positioning, and customised solution creation across the full FIG platform at BlackRock.

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About BlackRock’s
Financial Institutions Group
We work in close partnership with insurers, offering investment management, strategic
advice, liability assessment, and, alongside our colleagues in BlackRock Solutions,
investment accounting and risk management services. Through our deep commitment
to this partnership, we seek to help our clients succeed in an investment environment
characterised by increasingly complex financial, accounting and regulatory developments.

Our insurance practice has more than 270 dedicated specialists globally, of whom
107 are focused on supporting more than 445 relationships in 38 countries from offices
across the globe.

We manage US$227 billion in unaffiliated general account assets and US$158 billion in
sub-advised assets on behalf of our clients and have 34 insurance-dedicated portfolio
management professionals.

Source: BlackRock. Data as at 30 June 2018.

Contacts

ZACH BUCHWALD KIMBERLY KIM PATRICK LIEDTKE

Managing Director, Managing Director, Managing Director,
Head of Financial Head of Financial Head of Financial
Institutions Group Institutions Group Institutions Group
for North America for APAC for EMEA

zach.buchwald@ kimberly.kim@ patrick.liedtke@

blackrock.com blackrock.com blackrock.com
+1212 8105650 +852 3162 6099 +44207 743 2187

about blackrock' s financial institutions group 85

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 Important
legal
6 information

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Important legal information
This material is provided for educational purposes only and is not intended to be relied
upon as a forecast, research or investment advice, and is not a recommendation, offer or
solicitation to buy or sell any securities or to adopt any investment strategy. The opinions
expressed are subject to change. References to specific securities, asset classes and
financial markets are for illustrative purposes only and are not intended to be and should
not be interpreted as recommendations. Reliance upon information in this material is at
the sole risk and discretion of the reader. The material was prepared without regard to
specific objectives, financial situation or needs of any investor.

Any research in this document has been procured and may have been acted on by
BlackRock for its own purpose. The results of such research are being made available only
incidentally. The views expressed do not constitute investment or any other advice and
are subject to change. They do not necessarily reflect the views of any company in the
BlackRock Group or any part thereof and no assurances are made as to their accuracy. This
document is for information purposes only and does not constitute an offer or invitation
to anyone to invest in any BlackRock funds and has not been prepared in connection with
any such offer.

This material may contain “forward-looking” information that is not purely historical in
nature. Such information may include, among other things, projections, forecasts, estimates
of yields or returns, and proposed or expected portfolio composition. Moreover, where
certain historical performance information of other investment vehicles or composite
accounts managed by BlackRock, Inc. and / or its subsidiaries (together, “BlackRock”)
has been included in this material and such performance information is presented by
way of example only. No representation is made that the performance presented will be
achieved, or that every assumption made in achieving, calculating or presenting either the
forward-looking information or the historical performance information herein has been
considered or stated in preparing this material. Any changes to assumptions that may
have been made in preparing this material could have a material impact on the investment
returns that are presented herein by way of example.

The report summarises the results of a survey of senior representatives of global insurance
companies by the Economic Intelligence Unit on behalf of BlackRock, complemented with
a series of telephone interviews. The gathered data and opinions are indicative in nature
only and do not represent a scientific or exhaustive study of insurers’ asset allocation and
investment intentions. Data sets may be incomplete or inconclusive. BlackRock does not
necessarily agree with the third-party opinions expressed here.

The information and opinions contained in this material are derived from proprietary
and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-
inclusive and are not guaranteed as to accuracy.

This material is not intended to be a recommendation or advice by BlackRock. If this

material were construed to be a recommendation by BlackRock, BlackRock would seek
to rely on Department of Labor Regulation Section 2510.3-21(c)(1). As such, by providing
this material to you, a fiduciary that is independent of BlackRock, BlackRock does not
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Further, BlackRock receives revenue in the form of advisory fees for our mutual funds and
exchange traded funds and management fees for our collective investment trusts.

This material may contain “forward-looking” information that is not purely historical
in nature. Such information may include, among other things, projections, forecasts,

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 and estimates of yields or returns. No representation is made that any performance
presented will be achieved by any BlackRock Funds, or that every assumption made
in achieving, calculating or presenting either the forward-looking information or any
historical performance information herein has been considered or stated in preparing this
material. Any changes to assumptions that may have been made in preparing this material
could have a material impact on the investment returns that are presented herein. Past
performance is not a reliable indicator of current or future results and should not be the
sole factor of consideration when selecting a product or strategy. Unless otherwise stated,
all information as at end of August 2018.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of
the investment and the income from it will vary and the initial investment amount cannot
be guaranteed.

Authorised recipients
In the EEA – This material is for distribution to Professional Clients (as defined by the FCA
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persons. Issued by BlackRock Investment Management (UK) Limited, authorised and
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London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your
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BlackRock Investment Management (UK) Limited: Amstelplein 1, 1096 HA Amsterdam,
Tel: 020 – 549 5200.
In Switzerland – For qualified investors in Switzerland, this material shall be exclusively
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In South Africa, please be advised that BlackRock Investment Management (UK) Limited is
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In Israel – BlackRock Investment Management (UK) Limited is not licensed under Israel’s
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This document and the products mentioned herein are being offered to those categories
of investors listed in the First Addendum (the “Addendum”) to the Securities Law,
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placement or other exemptions of the Joint Investment Trusts Law, the Securities Law

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and any applicable guidelines, pronouncements or rulings issued from time to time by
the Israel Securities Authority. This document may not be reproduced or used for any
other purpose, nor be furnished to any other person other than those to whom copies
have been sent. Nothing in this document should be considered investment advice or
investment marketing as defined in the Regulation of Investment Advice, Investment
Marketing and Portfolio Management Law, 5755-1995. This document does not constitute
an offer to sell or solicitation of an offer to buy any securities, nor does it constitute an offer
to sell to or solicitation of an offer to buy from any person or persons in any state or other
jurisdiction in which such offer or solicitation would be unlawful, or in which the person
making such offer or solicitation is not qualified to do so, or to a person or persons to
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In the U.S. – this material is for institutional use only – not for public distribution.

In Canada – this material is intended for permitted clients only, is for educational purposes
only, does not constitute investment advice and should not be construed as a solicitation
or offering of units of any fund or other security in any jurisdiction

In Latin America and Iberia – for institutional investors and financial intermediaries only
(not for public distribution). This material is for educational purposes only and does not
constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to
buy any shares of any fund or security and it is your responsibility to inform yourself of, and
to observe, all applicable laws and regulations of your relevant jurisdiction. If any funds
are mentioned or inferred in this material, such funds may not been registered with the
securities regulators of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal,
Spain Uruguay or any other securities regulator in any Latin American or Iberian country
and thus, may not be publicly offered in any such countries. The securities regulators of any
country within Latin America or Iberia have not confirmed the accuracy of any information
contained herein. No information discussed herein can be provided to the general public
in Latin America or Iberia. The contents of this material are strictly confidential and must
not be passed to any third party.

The information provided here is neither tax nor legal advice. Investors should speak to
their tax professional for specific information regarding their tax situation. Investment
involves risk including possible loss of principal. International investing involves risks,
including risks related to foreign currency, limited liquidity, less government regulation,
and the possibility of substantial volatility due to adverse political, economic or other
developments. These risks are often heightened for investments in emerging / developing
markets or smaller capital markets.

In Australia and New Zealand – Issued by BlackRock Investment Management (Australia)

Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL) for the exclusive use of the recipient
who warrants by receipt of this material that they are a wholesale client and not a retail
client as those terms are defined under the Australian Corporations Act 2001 (Cth) and
the New Zealand Financial Advisers Act 2008 respectively. BIMAL is the issuer of financial
products and acts as an investment manager in Australia. BIMAL does not offer financial
products to persons in New Zealand who are retail investors (as that term is defined in the
Financial Markets Conduct Act 2013 (FMCA)). This material does not constitute or relate
to such an offer. To the extent that this material does constitute or relate to such an offer
of financial products, the offer is only made to, and capable of acceptance by, persons
in New Zealand who are wholesale investors (as that term is defined in the FMCA). This
material has not been prepared specifically for Australian or New Zealand investors and
may contain references to dollar amounts which are not Australian or New Zealand dollars

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 and financial information which are not prepared in accordance with Australian or New
Zealand law or practices.

In China – this material may not be distributed to individuals resident in the People’s
Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan)
or entities registered in the PRC unless such parties have received all the required PRC
government approvals to participate in any investment or receive any investment advisory
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In Hong Kong – this material is issued by BlackRock Asset Management North Asia Limited
and has not been reviewed by the Securities and Futures Commission of Hong Kong.
This material is for distribution to “Professional Investors” (as defined in the Securities and
Futures Ordinance (Cap.571 of the laws of Hong Kong) and any rules made under that
ordinance.) and should not be relied upon by any other persons or redistributed to retail
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In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no.

200010143N) for use only with institutional investors as defined in Section 4A of the
Securities and Futures Act, Chapter 289 of Singapore.

In South Korea – this material is issued for the exclusive use of the recipient who warrants
by receipt of this material that they are a Qualified Professional Investors.

In Taiwan – Independently operated by BlackRock Investment Management (Taiwan)

Limited. Address: 28F, No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel:
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For other countries in APAC – This material is provided for your informational purposes
only and must not be distributed to any other persons or redistributed. This material is
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offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment
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FOR INSTITUTIONAL, FINANCIAL PROFESSIONAL, PERMITTED CLIENT AND

WHOLESALE INVESTOR USE ONLY. THIS MATERIAL IS NOT TO BE REPRODUCED OR
DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT.

© 2018 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS,

iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylised
i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in
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Why BlackRock
BlackRock helps people around the world, as well as the world’s largest institutions and governments, pursue their
investing goals. We offer:

•• A comprehensive set of innovative solutions, including mutual funds, separately managed accounts, alternatives
and iShares ETFs

•• Global market and investment insights

•• Sophisticated risk and portfolio analytics

We work only for our clients, who have entrusted us with managing US$6.3 trillion (assets under management as at
30 June 2018), earning BlackRock the distinction of being trusted to manage more money than any other investment
firm in the world.

Want to know more?

blackrock.com

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