Goldman Sachs Asset Management has published the findings of its twelfth annual global insurance investment survey, Balancing with Yield on the Inflationary Tightrope.
The survey incorporates the views of 343 Insurance company CIOs and CFOs representing over USD13 trillion in global balance sheet assets. Their responses were collected from February 1 – 17, 2023. The results show that while insurers expect a deterioration of credit quality and upcoming recession in the US, they are leaning heavily into fixed income and seeking to increase duration and credit risk. For the first time, insurers ranked increasing yield opportunities in the current environment as the most important factor driving asset allocation decisions (68 per cent), nearly triple the percentage of those who say they are decreasing risk due to concern with equity or credit losses (25 per cent).
“With high inflation, rising geopolitical tensions, and the effects of tightening monetary policy, insurers are looking to take advantage of higher rates while managing their market risk,” notes Matt Armas, Global Head of Insurance Asset Management at Goldman Sachs Asset Management. “As shown in the survey results, the journey to rebuilding yield, is done with a balance of duration and high-quality credit opportunities.”
The survey revealed that more than half of global insurers (51 per cent) plan to increase their allocation to private assets over the next 12 months. Across all asset classes, private corporate debt (41 per cent) is the top asset class that insurers plan to allocate more to over the next year. Twenty-nine percent of respondents plan to allocate more to private equity, and 28 per cent plan to increase their allocation to infrastructure equity and infrastructure debt.
“Despite uncertain market conditions, we believe there are real opportunities for investors across private and public markets, particularly in credit, where increasingly attractive yields in fixed income have lured back insurance investors,” says Michael Siegel, Global Head of Insurance Asset Management and Liquidity Solutions at Goldman Sachs Asset Management. “We also expect insurers to continue to build positions in private asset classes, including private credit, private equity and infrastructure, as they seek to diversify portfolios and take advantage of expanding illiquidity premiums.”
Other notable insights from the survey include:
In contrast to 2022, net 28 per cent of insurers plan to significantly increase duration exposure, consistent with the market pricing in rate cuts following a year of intense hiking.
Hopes of transitory inflation are waning, as 81 per cent of insurers believe inflation will remain through the medium (2-5 years) or long term (5-10 years). Insurers cite deglobalization (44 per cent) as the top factor driving structurally higher inflation, followed by energy disruptions (33 per cent).
Most insurers (82 per cent) believe an economic recession in the U.S. will occur within the next three years. Views have carried over from the 2022 survey, in which 65 per cent of respondents said they felt an economic recession was forthcoming in the next three years.
Despite recession risk and rising geopolitical tensions, 29 per cent of global investors plan to increase overall investment risk in their portfolio. A potential renaissance for fixed income is underway as 34 per cent of insurers plan to increase their allocation to U.S. investment grade corporates in 2023.
In a reversal from the prior years, credit quality deterioration was cited as a primary investment risk by insurers (39 per cent). Conversely, low yields were the least concerning investment risk noted by insurers (10 per cent) for 2023 given the persistent elevated-rate environment.
Environmental, Social and Governance (ESG) factors continue to be at the forefront of portfolio considerations, with 90 per cent of respondents considering these factors throughout their investment process.
Despite recession risk and rising geopolitical tensions, US insurers’ risk appetite remains healthy in 2023. Seventy-eight per cent of US insurers cite increasing yield opportunities in the current environment as the most important factor driving their asset allocation decisions, more than the global average (68 per cent), and 35 per cent plan to increase their duration exposure over the next 12 months. Desire among US insurers for private assets also remains strong, with 56 per cent planning to increase their allocation to private assets over the next year.
Appetite for private assets is particularly strong among UK insurers, with 64 per cent planning to increase their allocation over the next 12 months, far higher than the global average (51 per cent). US investment grade corporates (58 per cent), private corporate debt (42 per cent), European investment grade corporates (36 per cent) and private placements (30 per cent) rank as the top asset classes that UK insurers plan to allocate more to over the next year.
Similar to global trends, increasing yield opportunities also ranks as the most important factor driving asset allocation decisions for European insurers (60 per cent). Forty percent plan to increase credit risk in their investment portfolio, and 35 per cent plan to increase their duration exposure. Thirty-six percent of European insurers also plan to increase their allocation to private assets over the next 12 months, a lower percentage compared to insurers in the U.S. (56 per cent), UK (64 per cent) and Japan (71 per cent).
Japanese insurers are the most optimistic about opportunities in private assets, with 71 per cent planning to increase their allocations over the next 12 months, far higher than the global average (51 per cent). Japanese investors expressed the strongest risk-on view, with 54 per cent planning to increase credit risk and 43 per cent looking to increase duration exposure, a higher percentage than the global average (35 per cent and 38 per cent, respectively).