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With market volatility and regulatory changes forcing banks to cut the size of their balance sheets, BlackRock predicts insurers will fill this void, branching into new markets in order to capture the higher yields and superior risk-adjusted returns of non-traditional credit assets.
The improved regulatory treatment of illiquid assets, such as through Solvency II's matching adjustment, will also encourage insurers to increase their exposure to illiquid assets, particularly those with predictable cashflows, such as infrastructure project finance, the firm says. Opportunistic credit, real estate debt, social housing, high-yielding bank loans and equity dividend strategies, will also provide attractive opportunities for insurers, as will leveraged loans and collateralised loan obligations.
David Lomas, New York-based head of the financial institutions group at BlackRock, says insurers will need to be more selective and opportunistic with their fixed-income allocations than they have previously been as a result of persistently low interest rates.
Insurers' exposure to emerging markets is also likely to increase, as companies look to boost and diversify revenues, the firm said. Allocations to emerging market sovereign hard currency debt, emerging market corporate debt and local currency denominated debt are expected to increase. Insurers will increasingly implement their investment strategies through exchange traded funds, BlackRock predicts.
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