The survey found that insurers see rising inflation and tighter monetary policy as the largest threats to their portfolios, with rising interest rates displacing low yields as the primary investment risk cited by insurers.
“Inflation is a key concern,” said Michael Siegel, global head of insurance asset management for Goldman Sachs Asset Management. “It is starting to drive some of the asset allocation decisions that companies are making, including into equity, real estate, and floating rate assets, which are viewed as good hedges against inflation.
“This is the first year that inflation is considered to be the top risk to the investment portfolio. This is followed by monetary tightening. If you’re concerned about inflation, you’re [often] of the belief that interest rates are going to be rising. This also leads to market volatility and concerns about a recession in Europe and the United States.”
More than three-quarters (79%) of insurers consider inflation to be a concern in their domestic market, but most think it will be a medium-term event lasting two- to five-years. There is a widespread perception that as monetary authorities raise interest rates, they will begin to tame inflation.
The survey respondents were asked: If you’re concerned about inflation, what is an appropriate asset class to hedge inflation? The majority said real estate was their top asset class, followed by floating rate assets and equities.
While insurers have growing concerns about the impacts that rising interest rates will have on their investment portfolio, their concerns about low yields are declining.
Seigel explained: “At the end of the day, the industry benefits as yields rise because the industry is taking in premium, the industry is receiving principal and interest off of its bonds, its receiving dividends off of its equities, and it needs to reinvest that into the market. It would prefer to reinvest at higher rates than lower rates.
“But the path of rates is important. If we get a sharp, steep rise in rates, that will end up causing disruptions in markets, and volatility tends to be bad. If we get a slow persistent rise and rates, at the end of the day, that’s preferable for the industry.”
The Goldman Sachs survey found that many insurers plan to move public assets – such as investment grade corporate bonds and government securities – into private credit, and public equities over to private equity.
“We see this continued movement from public assets to private assets – and that would be public equity to private equity, and public fixed income to private fixed income – in order to pick up the illiquidity premium,” said Siegel. “The general view is that the private markets offer better return potential than the public markets.
“In the area of credit, the covenants tend to be better. In the area of private equity, it’s been shown over the last several decades that private equity returns exceed public equity returns. You give up liquidity, but the industry is awash in liquidity, so it is something that they’re easily able to accommodate.”
When asked how the different asset classes have performed, private equity had the highest return on a global basis, followed by commodities, real estate equity, infrastructure equity, US equities, and emerging market equities.
“You see a little bit of a theme here: equity, equity, equity, equity and commodities,” Siegel emphasized. “Again, [these are] assets that should perform well in an inflationary environment. What would not perform well would be government and agency debt. Why? As interest rates are rising, the price of this debt comes down, and you’ll end up with a negative return.”
The survey also highlighted the impact of environmental, social, and governance (ESG) factors on investment considerations. Europe continues to be the leader in ESG in the investment portfolio, but, globally, insurers also said they plan to increase their allocation to green or impact bonds (42%) over the next year.
“Regulatory capital and ESG are by far the two most important non-economic considerations,” Seigel said. “Regulatory capital tends to more heavily weight riskier asset classes, such as equity or high yield, and as a result, you see less of that on a balance sheet. And ESG considerations really cover all of the asset classes, and also help explain the movement into green bonds or impact instruments.”