Insurance companies are more pessimistic than they have been in years about finding attractive investment opportunities, according to the global Goldman Sachs Asset Management (GSAM) Insurance Survey. Insurers are worried about US economic growth, credit and equity market volatility and deflation.
Since 2012, the global survey has canvased the forward looking sentiment of insurance company CIOs and CFOs globally. In this year’s survey, GSAM received responses from 267 CIOs and CFOs, representing over US$6 trillion in investable global balance sheet assets. The survey covered companies based in the US, Europe, Middle East & Africa (EMEA) and Asia Pacific.
“It’s not that insurers think markets are too volatile; it’s that yields are too low, credit spreads are too tight and equity prices are too high,” said Mr Michael H Siegel, managing director, global head of GSAM’s insurance business and co-author of the report. “There’s concern about getting adequate returns on investing.”
Asia insurers focussing on duration matching in upcoming regulation
Despite the outlook, EMEA and Pan Asian insurers demonstrated an increased appetite toward taking on investment risk. In a continued low yield environment, insurers have begun to take certain investment risks. “Pan Asian insurers are looking to increase credit and equity risk, while EMEA insurers intend to take more liquidity risk and the majority of Americas-based insurers intend to maintain their overall risk level”, Mr Siegel added.
The GSAM Insurance 2015 found that 57% of Pan Asian insurers indicate they plan to increase credit risk in 2015. Pan Asian insurers plan to diversify into US investment grade corporates, an asset class that has not seen strong incremental demand since 2012.
“Asian insurers’ interest in US investment grade credit is driven by the need for both yield and duration. The change in upcoming regulation in Asia will cause insurers in this region to focus on duration matching under Risk Based Capital II, Solvency II and its equivalents as duration mismatches become penalised”, said Ms Juliet Siette, who runs the Asia Pacific insurance business.
Looking at less liquid assets
On asset allocation, insurers are considering increasing exposure to less liquid assets. The top four asset classes are private including commercial mortgage loans, infrastructure debt, middle market corporate loans and private equity.
Pan Asian insurers intend to make the greatest net allocations to infrastructure debt and US investment grade corporates, followed by private equity, European equities and infrastructure equity. Pan Asian insurers are also more likely to allocate to high yield debt and securitized credit compared to their counterparts in the US and EMEA.
“In parts of Asia, insurers have access to higher yielding emerging market securities. As such, they seek long duration bonds to match liabilities, and access less liquid assets for their surplus account,” Ms Siette added.
Keen interest in private equity
Further, the survey found that 45% of Pan Asian insurers demonstrated strong appetite for increasing equity risk. Overall nearly a quarter of the CIOs (23%) believe that private equity will be the best performing asset class in 2015.
When it comes to outsourcing, the demand for third party managers remains strong. More than half of Pan Asian insurers intend to outsource more of their portfolio.