Insurance industry execs seek higher yields amid bleak economy

A major survey of insurance industry CIOs and CFOs revealed they expect a deterioration of credit quality and a recession this year but, for the first time, ranked increasing yield opportunities in the current environment.

The 12th annual global insurance industry investment survey by Goldman Sachs Asset Management, released Tuesday, found insurers are leaning heavily into fixed income and seeking to increase duration and credit risk.

“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,” said 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.”

Many plan to increase allocation to private assets

More than half of global insurers surveyed plan to increase their allocation to private assets over the next 12 months, the insurance industry survey found. Across all asset classes, private corporate debt 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% 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,” said 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.”

Additional insurance industry survey results:

Other results of the insurance industry survey include:

• In contrast to 2022, 28% of insurance industry executives surveyed 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% of insurers believe inflation will remain through the medium (2-5 years) or long term (5-10 years). Insurers cite de-globalization (44%) as the top factor driving structurally higher inflation, followed by energy disruptions (33%).
• Most insurers (82%) 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% of respondents said they felt an economic recession was forthcoming in the next three years.
• Despite recession risk and rising geopolitical tensions, 29% of global investors plan to increase overall investment risk in their portfolio.
• A potential renaissance for fixed income is underway as 34% 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%). Conversely, low yields were the least concerning investment risk noted by insurers (10%) 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% of respondents considering these factors throughout their investment process.

The survey reflects the views of 343 Insurance company CIOs and CFOs representing more than $13 trillion in global balance sheet assets collected from February 1-17, 2023.

'Inflation is here to stay'

“First, inflation is here to stay,” said Siegel. “It's not transitory, rather, it's structurally embedded; 81% of the insurers that responded to the survey believe inflation will persist over the medium to longer term.”

The primary cause for inflation is “globalization and energy transition,” according to the survey.

“So inflation concerns are driving higher yields, driving potential for recession, driving credit quality deterioration, and it’s in the forefront of our clients in terms of how they're thinking about the environment,” Siegel said in a presentation last week.

At the same time, though, he said there are better investing opportunities in the current environment.

“Our insurers are on average looking to increase their exposure to market risks, higher yields, wider spreads that create better opportunities to put capital to work,” he said. “And in particular, we've seen them continuing their commitment to private markets. 94% of the insurers are looking to increase or maintain their allocation to private assets, predominantly private credit.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].