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It is extraordinary — and to some degree unnerving — to reflect on how much the world has changed since we published our last insurance survey in 2018. The pandemic has truly affected so many lives – in ways that most would suggest were previously unimaginable. Without question, the insurance industry and the lion’s share of the policyholders it dutifully serves will never be the same. Yet, at the same time, there are also other structural forces at work, including demographics, digitalization, and consolidation, that too are playing a major role in reshaping what the new normal looks like in this dynamic segment of the global financial services industry. Consistent with this viewpoint, we believe that KKR’s latest proprietary global insurance survey, which incorporates detailed responses from more than 50 CIOs who oversee nearly $7 trillion in assets under management, is illuminating for not only what has happened over the last three years, but also – and maybe more importantly – what is likely to come next. In particular, in light of the negative real interest rate environment that we believe will continue well into 2023, both our survey results and our conversations with leading CIOs confirm our thinking that a more innovative approach is required to meet policy holder promises and sustain attractive returns on capital. As part of the industry’s ongoing evolution, we see an important, structural convergence amongst three critical prerequisites of success within the global insurance industry: investment management, portfolio construction, and technological prowess that favors scale players with both sourcing and operating efficiencies as well as strong risk management capabilities. To this end, we strongly believe that now is the time for CIOs to Dream Big, including considering new ways of thinking about asset allocation, security selection, and competitive positioning in the macroeconomic environment that we envision unfolding over the next five to 10 years.

How did things ever get so far?
Don Vito Corleone The Godfather

When we completed our first insurance survey in 2018,

we titled the report New World Order. It reflected our strong belief that in a lower rate world, CIOs were going to have to rethink their traditional asset allocation processes. Specifically, we argued that they would need to think more creatively, including embracing more complexity, to generate returns sufficient to match their liabilities as interest rates kept trending down. At the time of our first survey, it seemed quite likely that non-traditional investments, including Alternatives, would become a bigger part of the asset allocation mix, and in doing so, there would be potential to generate significant upside differentiation. Whether we were lucky or good, our assessment of the macroeconomic landscape – and where it was headed – proved to be an accurate one. All told (and as we describe in more detail below), our most recent survey work shows that non-traditional investments, including Real Estate Credit, Structured Credit, and Infrastructure Debt and Equity, have surged to nearly one-third of total portfolios today, up substantially from about 20% in 2017.

In hindsight, however, we believe that there were several other areas where we should have had even greater conviction to lean in. Specifically, as many insurers found higher returning assets by moving out the liquidity spectrum as spreads tightened and competition increased, interest rates ultimately fell further than we were expecting. Meanwhile, the decrease in traditional public credit as a share of insurance companies’ overall investment portfolios was even faster than we had anticipated.

There is also the pandemic’s impact to consider. Beyond the substantial human toll this disease has had on society at large, COVID has served as a major catalyst to accelerate several important trends already in motion from the executive offices of insurance CIOs, including a faster shift to non-traditional investments, a more robust Yearn for Yield, improved risk management, and a further acceleration towards digitalization across most aspects of their businesses.

So, although in 2018 we discussed how enamored we were of the business and we did capture many of the upcoming changes, we feel we did not fully stretch ourselves as much as we could have. Said differently, we didn’t Dream Big enough. In particular, we did not fully anticipate how beneficial the addition of core competencies in insurance strategies, including origination, investment management, and portfolio construction, would be to KKR’s growth trajectory as a firm. For readers who don’t know how the story ultimately played out, in 2020 KKR ended up buying a majority stake in Global Atlantic, an extremely well-run retirement and life insurance company. That transaction has only intensified our passion for this business.

Fast forward to 2021: As we worked with our fellow insurance CIOs to complete the 2021 survey, it definitely felt like even more of a collaboration than in 2018 as we now share many of the same ups and downs of being an owner/operator in this dynamic space. Said differently, we now have a deeper understanding of what managing insurance risk entails and the type of investment solutions needed to protect both policyholders and shareholders. Through KKR’s expanded insurance team effort as well as the strategic capital support that KKR’s balance sheet provides, we have also strengthened our own internal capabilities to create as well as participate in differentiated, value-added offerings alongside our industry peers.

For me personally, I also can’t help but reflect how, as I mentioned in the 2018 note, I have truly come full circle in my career, one that began in earnest for me when I worked as an insurance analyst at Morgan Stanley in the early 1990s. To again quote Michael Corleone in Godfather III, “Just when I thought I was out, they pull me back in.”

As we look ahead today towards tomorrow, we remain quite excited about the future. However, there are headwinds to consider too. Indeed, with rates at record lows, fiscal deficits ballooning, and geopolitical tensions rising, we must all ask – to again steal a quote from The Godfather trilogy for this year’s survey – “How did things ever get so far?” To be sure, the pandemic encouraged politicians and central bankers to stretch further, but the ‘Authorities’ have been experimenting with new policies, including negative rates, that for quite some time have been significantly disadvantaging savers. In fact, one of the reasons that the economic snapback has been so strong is because this time, in contrast to during the Global Financial Crisis (GFC), global central bankers have embraced strategies that are now even more punitive to the saving community.

Not surprisingly, against this backdrop, leading CIOs from some of the world’s most profitable and innovative insurance companies, many of whom operate across a wide variety of geographies and products, are looking for new ways to generate better risk-adjusted returns in today’s low rate environment — an environment we envision persisting for quite some time. As we detail below, many insurers have adopted distinct deployment and risk management strategies, including simultaneously moving up the quality curve in barbell fashion across both public and private markets, to compensate for today’s difficult investing environment. To this end, we highlight the following conclusions from this year’s survey of more than 50 of the leading global CIOs with whom KKR engages:

Six Big Ideas On Which to Focus:

  1. The Yearn for Yield has only intensified since COVID-19
  2. Expect an ongoing move up the quality curve across both public and private allocations
  3. The shift towards non-traditional, illiquid investments is far from over
  4. The impact from outsized monetary and fiscal policy is the worrisome macro risk factor
  5. Expertise in asset allocation, portfolio construction, and technology are now perquisites for success
  6. Further consolidation is likely, favoring scale players who can Dream Big
  1. Asset Allocation