Amid increasing global economic volatility, and with a US recession seemingly on the horizon, re/insurers are leaning heavily into fixed income investments and are seeking to increase duration and credit risk, according to analysts at Goldman Sachs.
Goldman Sachs Asset Management’s latest global insurance investment survey shows that more than half of global insurers plan to increase their allocation to private assets over the next 12 months.
More than two thirds of insurers also ranked increasing yield opportunities in the current environment as the most important factor driving asset allocation decisions, while only a quarter said they are decreasing risk due to concern with equity or credit losses.
“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,” Armas added.
Goldman Sachs’ survey incorporated the views of more than 300 insurance company CIOs and CFOs during February 2023, collectively representing over $13 trillion in global balance sheet assets.
Across all asset classes, responses to the survey showed that private corporate debt is the top asset class that insurers plan to allocate more to over the next year, with 41% of respondents having picked it as their top choice.
Additionally, Goldman Sachs found that 29% 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.”
In other notable findings from the report, 28% of insurers plan to significantly increase duration exposure, consistent with the market pricing in rate cuts following a year of intense hiking.
Furthermore, hopes of transitory inflation are waning, as 81% of insurers believe inflation will remain through the medium or long term, with deglobalization cited as the top factor driving structurally higher inflation, followed by energy disruptions.
Most insurers also believe an economic recession in the US will occur within the next three years, although 29% of global investors still plan to increase overall investment risk in their portfolio.
