There's growing pessimism among insurers about investment opportunities and an increasing interest in allocating to less liquid private assets, frequently with the assistance of third-party asset managers, according to the just-released Goldman Sachs Asset Management (GSAM) annual insurance survey.
"Insurers are concentrating on finding new investment opportunities, which are sparse because yields still remain at low levels, and insurers are not anticipating a meaningful increase in rates this year," said Michael Siegel, GSAM's global head of insurance asset management.
"Nonetheless, one-third of insurers globally intend to increase overall portfolio risk. Insurers believe equity asset classes will outperform credit assets and they are looking to increase allocations to less liquid, private asset classes."
The GSAM survey, entitled Too much capital, too little return, also noted:
- Insurers globally intend to increase allocations to commercial mortgage loans, infrastructure debt, private equity and middle market loans. Consistent with their return expectations, insurers intend to decrease allocations to highly liquid assets such as cash and short-term instruments and government and agency debt.
- Equity asset classes are expected to outperform credit asset classes. Insurers anticipate that the highest-returning asset classes will be private equity, US equities and European equities this year.
- Despite years of unprecedented global monetary easing, insurers have become more concerned about deflation in the near term because of slow global growth and lower commodity prices. Insurers anticipate commodities will be amongst the lowest-returning asset classes this year. Insurers' concerns about inflation have receded into the medium term.
- Insurers are looking to outsource both core and niche asset classes to third-party asset managers. They intend to outsource hedge funds (26%), emerging market equities (23%), US investment-grade corporates (23%) and private equity (22%).
The GSAM report noted that EMEA and pan-Asian insurers demonstrated a stronger risk appetite compared with their peers in the Americas who, having demonstrated a strong risk appetite in prior years, are now comfortable with their risk levels and planning to maintain overall risk.
The report also found insurers singling out the pace of US economic growth as the greatest macroeconomic risk. CIOs and CFOs believe the dollar will continue to strengthen from a stronger economy and relatively higher interest rates. As yields moved lower in 2014 and central banks expanded quantitative easing programmes, insurers lowered their expectations on rates.
GSAM, which oversees $160bn in insurance assets, conducted its survey in February 2015 in partnership with KRC Research. The majority of the 267 respondents were chief investment officers from a broad cross-section of life, property & casualty, multi-line and health insurers and reinsurers.