Global insurance companies are taking advantage of the “higher for longer” interest rate environment by increasing asset allocations into high quality and private credit, as well as increasing duration and overall investment risk, according to Risk & Resilience: The 13th Annual Global Insurance Survey by Goldman Sachs Asset Management.
“After a year of stronger than expected economic returns, insurers are showing signs of cautious optimism about markets and the global economy in 2024,” said Michael Siegel, global head of the Insurance Asset Management and Liquidity Solutions businesses, Goldman Sachs Asset Management.
The survey draws insights from 359 CIOs and CFOs representing more than $13trn in balance sheet assets, conducted in January and February 2024.
Insurers selected the top five asset classes they expect to have the highest total return over the next 12 months. Four of the top five relate to private credit and high-quality credit: private credit (53%), US equities (46%), government and agency debt (34%), investment grade private debt (33%), and developed markets investment grade corporate debt, and private equity (31% each).
“Private credit’s appeal to insurers will endure even as interest rates begin to move lower,” said Stephanie Rader, co-head of Alternatives Capital Formation, Goldman Sachs Asset Management.
Conversely, just 5% of insurers expect to see the highest returns in commercial mortgage-backed securities, and 6% to commercial mortgage loans.
To lock in higher yields, 42% intend to increase duration risk in 2024. This is the highest level in the survey’s history, up from 38% in 2023. Only 5% plan to decrease duration.
Despite economic uncertainty, 27% of insurers plan to add risk to their overall portfolios. Yet, they do have a concerns.
Major risks
The most prominent include economic slowdown/recession in the US (52%), credit and equity market volatility (48%), geopolitical tensions (46%), inflation (42%) and monetary tightening (27%).
“The weak returns of 2023 remain fresh in their memories, while global inflation has remained elevated,” said Siegel.
Yet, concern over inflation fell to 42%, from 55% last year, while insurers’ expectations of a US recession this year fell to 16%, down from 44% in 2023. Yet longer term recession fears persist, as 50% of respondents expect a recession in the US within 2-3 years – up from 38% in 2023.
“We expect central banks to execute gradual easing strategies later this year which should be supportive of risk assets across both fixed income and equities,” said Alexandra Wilson-Elizondo, co-CIO of Multi-Asset Solutions, Goldman Sachs Asset Management.
“However, given increasing macro risks and the upcoming US elections, there is the potential for higher levels of volatility along the way and a wide variety of outcomes for returns by the end of the year,” she said.
“Given this backdrop, and current levels of yields, insurers do not have to stretch on the risk spectrum to seek good risk adjusted returns,” she said.
“We like capitalizing on higher rates by locking in yield in duration, diversifying across public spread products into securitized products, creating sector diversification and gaining exposure to emerging macro investing themes through investments in privates.”
