Insurers expect to slow purchases of high-grade corporate debt and hold more cash over the next two years, potentially squeezing already low returns, BlackRock Inc. said.

“Cash balances are ticking upward,” said Zach Buchwald, head of BlackRock’s insurance asset-management business in North America. “In today’s environment, where every basis point is so precious, within your core fixed income, we want to be investing wisely and generating the best risk-adjusted returns we can, and a large cash balance doesn’t help.”

About half of 315 insurers surveyed globally are looking to increase cash holdings in coming months, up from 36 percent last year, according to a BlackRock study released Monday. Companies have been stung recently by alternative investments such as hedge funds, and have been turning to other illiquid assets such as real estate, infrastructure and timber to generate returns as interest rates have remained persistently low.

About 47 percent of respondents expect to increase risk, compared with just 8 percent who plan reductions, while the rest intend to maintain their exposure. A year earlier, 57 percent planned to boost risk.

“While overall risk appetite has moderated slightly since last year, insurers are taking on significantly more risk compared to historical norms as they widen their search for additional sources of yield and returns,” Buchwald said in the statement.

‘Very Skeptical’

Only 21 percent of companies surveyed plan to boost allocation to investment-grade corporate credit, compared with 45 percent last year, as investors anticipate deteriorating credit conditions, BlackRock said.

“Insurers are really struggling and they’ve been struggling for a very long time, and I think we’re also now past the period where there’s an expectation that rates are going to start rising meaningfully,” Buchwald said in a phone interview. The decreased desire to boost bets on high-grade credit “is the indication that insurance clients are getting very skeptical about the state of the corporate credit market.”

Companies have been turning more to alternative assets amid central bank easing that has limited returns on other investments. American International Group Inc. and TIAA are among firms that have have expanded into direct lending to generate higher returns, while MetLife Inc., the largest U.S. life insurer, said its commercial real estate loans reached a record $14.3 billion in 2015.

As more insurers cut hedge-fund investments, they are increasing allocations to private equity. About 49 percent of firms surveyed saying they plan to boost such bets, up from 27 percent last year, BlackRock said.

‘Good Performer’

“Private equity has proven to be a good performer, and in some cases, sort of an outperformer,” Buchwald said. “As insurers have gotten more comfortable with taking illiquidity on their balance sheet, private equity has played a larger role.”

While cash is safe and offers flexibility, it may hinder the insurers’ already-pressured portfolio yields, BlackRock said. And with low rates and market volatility coinciding with a need to generate higher returns, those firms need to move cautiously, BlackRock said.

“It just makes you have a tougher risk-management lens as you’re thinking about your investments,” Eric Kirsch, chief investment officer at Aflac Inc., said in the report.