A new set of revisions to the National Association of Insurance Commissioners requirements that govern real estate investments on the part of life insurers could be teeing up the asset class for growth in the future, as barriers to entry are lowered.
Late last year, the NAIC released a set of changes to its risk-based capital requirements that, for life insurers, lowered the factor for life and health companies. For so-called Schedule A investments—properties owned outright by carriers—the required set-aside was lowered to 11% from 15%. In the case of Schedule BA investments, such as partnerships and funds where the carrier isn’t the sole owner, that figure went down to 13% from 23%.
George Hansen, senior industry research analyst, AM Best, said life insurers traditionally have only placed about 6% of their portfolios in Schedule BA real estate products and less than 1% in Schedule A real estate investments. Whether there’s any increase and by how much will likely be tied to which segments of the industry carriers are in, but Hansen said he doesn’t expect a huge increase.
The California Public Employees’ Retirement System reported a negative 6.1% return for the year, which includes a 21.3% positive return on private equity and 24.1% return on real estate as reported through the second quarter of 2022. What will happen if real-estate prices start to fall and some leveraged private-equity buyouts go south amid rising interest rates?
Collective-bargaining agreements limit how much workers must contribute to their pensions, so taxpayers are required to make up for investment losses. Employer retirement contributions—that is, taxpayers—make up 20% of government worker compensation. That amount has soared over the past decade as pension funds tried to make up for losses during the 2008-2009 financial panic.
A recent report by the Equable Institute found that state and local pension plans now are only 77.9% funded on average, which is about the same as in 2008. But some like Chicago’s are less than 40%. Advice to taxpayers in Illinois: Run.
The U.S. insurance industry’s reported BACV of $522.8 billion in other long-term invested assets on Schedule BA represented an increase of 14.8% at year-end 2021 compared to year-end 2020 (see Table 1 and Table 2). Schedule BA assets have experienced strong double-digit growth in recent years, with 2021’s 15% increase in exposure following YOY growth of 13% and 10% in 2020 and 2019, respectively. Total Schedule BA exposure as of year-end 2021 represented 6.5% of the industry’s total cash and invested assets, an increase from 6.1% as of year-end 2020 and 5% as of year-end 2012.
Like previous years, hedge fund, private equity, and real estate investments represented most of the industry’s Schedule BA exposure. Together, they accounted for 75% of total exposure at year-end 2021 compared to 70% at year-end 2020. Exposure to private equity investments experienced significant growth, increasing by 34% YOY to $173 billion as of year-end 2021. Private equity’s share of total Schedule BA exposure rose to 33% from 28% at year-end 2020, surpassing hedge fund investments to become the largest component of the industry’s exposure.
Author(s): Michele Wong and Jean-Baptiste Carelus
Publication Date: 3 June 2022
Publication Site: NAIC Capital Markets Special Report
Growing investor angst about China’s real estate crackdown rippled through markets on Monday, adding pressure on Xi Jinping’s government to prevent financial contagion from destabilizing the world’s second-largest economy.
Hong Kong real estate giants including Henderson Land Development Co. suffered the biggest selloff in more than a year as traders speculated China will extend its property clampdown to the financial hub. Intensifying concerns about China Evergrande Group’s debt crisis dragged down everything from bank stocks to Ping An Insurance Group Co. and high-yield dollar bonds. One little-known Chinese property developer plunged 87% before shares were halted.
Hong Kong’s benchmark Hang Seng Index slumped 3.3%, its biggest loss since late July. The selling also spilled over into the Hong Kong dollar, offshore yuan and S&P 500 Index futures. Holiday closures in much of Asia may have exacerbated the volatility, traders said.
“The repercussions from Evergrande’s prospective collapse will likely contribute to China’s ongoing economic deceleration, which in turn anchors global growth and inflation, and casts a pall over commodity prices,” wrote analysts led by Phoenix Kalen, head of emerging-market strategy in London.