Insurers Take On More Risk In Search Of Returns, Study Says

Insurance companies just get can’t enough for their money these days. Interest rates are at all-time lows and even the United States stock markets haven’t mustered much steam.

Flush with trillions of dollars, these once staid institutions are taking on bigger, flashier and riskier investments. Consider the latest billion-dollar deal: Among the players behind the 1.5 billion Canadian dollar acquisition of Cirque du Soleil on Monday was Fosun International, the Chinese insurer.

The industry is poised to take on more risk this year, shifting investments into private equity firms, real estate deals and hedge funds, according to a survey of the industry by Goldman Sachs.

“They really don’t have the luxury of sitting on cash,” said Michael Siegel, head of insurance asset management at Goldman, who was in charge of the survey. “The business is built on investing and getting positive returns.”

Among the most attractive investments for insurers are businesses that were once the domain of large banks, like lending to companies. Banks are getting squeezed out of these businesses under new regulation in the wake of the financial crisis. More lightly regulated investment firms like hedge funds and private equity have stepped in to fill the void.

Insurers are interested in making commercial mortgage loans and direct loans to middle market companies, according to Goldman, which surveyed insurers with more than a combined $6 trillion on their balance sheets, roughly a quarter of the industry globally.

“We’ve seen the banks withdrawing from these markets, and that is leaving opportunity for insurers to lend directly,” Mr. Siegel said. Insurers are among investors now looking to scoop up part of the hundreds of billions of dollars’ worth of assets from General Electric’s financial arm, GE Capital, which it has moved to sell or spin off.

In Europe and the Middle East, insurers faced with stalling regional economic growth have concentrated on investments in infrastructure debt and investment grade corporate bonds in the United States.

Chinese insurers, whose base of policyholders is growing, have been encouraged by the government to invest overseas, spurring a flurry of headline-grabbing investments. Last year, the once-obscure Anbang Insurance Group made a splash in New York after it bought the Waldorf Astoria hotel for $1.8 billion, a record amount for the purchase of an American building by a Chinese investor.

But as insurers make riskier investments, some in the industry have warned of the pitfalls that could affect policyholders one day.

“Any time an entity takes on an unknown or new risks, there are always possibilities of things going wrong,” said Robert Hunter, a director of insurance for the Consumer Federation of America.

In the United States, policyholders are protected by state guaranty funds in the event that an insurance company defaults. But when that happens, there are often serious delays for benefits to be paid out to policyholders.

Mr. Hunter recalled the near bankruptcy of the American International Group, which was bailed out by the government during the financial crisis.

“You had tens of thousands of policyholders, all of which would have had to scramble to find new policies,” he added.