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Incorporating Alternatives Into Insurance Portfolios Through Structured Solutions

September 2022

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Past performance is not necessarily indicative of future results. No assurance can be given that any investment will achieve its given objectives or avoid losses. Unless apparent from context, all statements herein represent GCM Grosvenor’s opinion.

Select risks include: market risks, credit risks, macroeconomic risks, liquidity risks, manager risks, counterparty risks, interest rate risks, and operational risks.

Insurers are increasingly investing assets in alternatives to generate returns that complement their broader portfolios. However, there are many considerations, such as capital requirements and state regulations, that if not properly addressed, may constrain or cause challenges in implementing a successful alternative investment strategy. There are also a range of investment structures and approaches for insurers to consider when integrating alternatives investments to optimize the success of their overall portfolio.  

 

In this piece, we look at the evolving alternatives industry as it relates to US insurers, discuss considerations insurers must keep in mind when making investment decisions, and explore several structured solutions in detail. We also discuss the recent regulatory changes and their potential impact on structured solutions to investing in alternatives. 

This excerpt is taken from a paper in the GCM Grosvenor In-Depth series.   

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Over the last 15 years, alternative investments have become an increasingly important part of a diversified insurance portfolio as a way to enhance long-term total returns. As illustrated in the above chart, the amount of Schedule BA alternatives on US insurers’ balance sheets more than tripled, from $63 billion to $217 billion, between 2006 and 2021. As a percentage of total invested assets, alternatives allocations doubled from 1.6% to 3.1% during the same time period.
Over the last 15 years, alternative investments have become an increasingly important part of a diversified insurance portfolio as a way to enhance long-term total returns. As illustrated in the above chart, the amount of Schedule BA alternatives on US insurers’ balance sheets more than tripled, from $63 billion to $217 billion, between 2006 and 2021. As a percentage of total invested assets, alternatives allocations doubled from 1.6% to 3.1% during the same time period.
There are several areas for insurers to consider that can inform their strategy and impact their success when investing in alternatives.
There are several areas for insurers to consider that can inform their strategy and impact their success when investing in alternatives.
Over the past decade, various structures have been designed to help insurers access alternative investments more efficiently than they can by investing directly into such strategies. In the above graphic, we outline two structured solutions that have recently grown in popularity.
Over the past decade, various structures have been designed to help insurers access alternative investments more efficiently than they can by investing directly into such strategies. In the above graphic, we outline two structured solutions that have recently grown in popularity.
As illustrated in the above table, the regulatory environment is dynamic. The key to a successful structured solution is understanding the current regulatory environment as well as staying aware of and planning for potential future changes.
As illustrated in the above table, the regulatory environment is dynamic. The key to a successful structured solution is understanding the current regulatory environment as well as staying aware of and planning for potential future changes.
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Conclusion

Insurers’ allocations to alternative investments have continued to grow steadily over the last 15 years and show no signs of slowing down. However, along with the increase in allocations comes heightened scrutiny from state regulators, complex capital requirements, and many other considerations for insurers to navigate as they plan and execute their alternatives strategy.

Further, given the complex nature of the insurance industry and the heavy regulatory scrutiny insurers face, efficient structuring for alternative investments can play a critical role in success.

With considerable dry powder available for alternatives, insurers have an opportunity to integrate alternatives in a way that best fits their unique portfolio needs. Given this, insurers need a partner who can craft a customized approach to alternative investing that utilizes the full breadth of alternatives strategies. By selecting an experienced partner and working collaboratively together, insurers have an opportunity to use alternatives to pursue strong, risk adjusted returns in an efficient format.

Learn about GCM Grosvenor’s structured and customized asset management solutions for the insurance industry here.

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Important Disclosures

For illustrative and discussion purposes only. The information contained herein is based on information received from third parties. GCM Grosvenor has not independently verified third-party information and makes no representation or warranty as to its accuracy or completeness. The information and opinions expressed are as of the date set forth therein and may not be updated to reflect new information. 

Investments in alternatives are speculative and involve substantial risk, including market risks, credit risks, macroeconomic risks, liquidity risks, manager risks, counterparty risks, interest rate risks, and operational risks, and may result in the possible loss of your entire investment. Past performance is not necessarily indicative of future results. The views expressed are for informational purposes only and are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by GCM Grosvenor. All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. The investment strategies mentioned are not personalized to your financial circumstances or investment objectives, and differences in account size, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. Certain information included herein may have been provided parties not affiliated with GCM Grosvenor. GCM Grosvenor has not independently verified such information and makes no representation or warranty as to its accuracy or completeness. 

 

Data Sources 

All data and discussion assume US insurance companies 

 

1 Source: Capital IQ Pro and SNL, Statutory carrying values, excluding affiliated investments. Statutory carrying values, excluding affiliated investments. Alternative investments are defined as Schedule BA investments excluding surplus debentures, low-income housing tax credit, mineral rights, oil and gas production, capital notes, transportation equipment, and working capital finance investments. “Other” includes hybrid investments, natural resources, other private funds, investments that cannot be identified, etc. 

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