Insurers Make an About-Face on Market Expectations

In the past year, insurance investors have reversed their stance on the market environment.

Although insurers were fearing an imminent recession in early 2016, CIOs and CFOs surveyed by Goldman Sachs Asset Management (GSAM) this year expressed a significantly more positive view. Of the 317 insurers surveyed — representing more than $10 trillion, or roughly 40 percent of the total insurance industry — the vast majority were optimistic about interest rates, equities, and credit. Four out of five said they believed U.S. Treasury yields would surpass 2.5 percent this year, while 88 percent predicted positive 2017 returns from the Standard & Poor’s 500 stock index. In comparison, just over half in 2016 had expected negative S&P 500 returns that year.

Michael Siegel, managing director and global head of GSAM’s insurance division, attributes the new optimism to positive economic indicators, including rising GDP, and expectations that aTrump presidencywill improve the U.S. economy through infrastructure and government (or federal) spending programs. That said, “political event risk” zoomed to No. 1 on investors’ list of macroeconomic concerns, from the bottom of the list one year ago.

On an international level, the stabilization of economic activity in China has also served to reassure investors. “It feels like the economy is on better footing,” Siegel says.

With this more positive outlook, insurers are looking to increase the overall risk of their portfolios, in particular upping their exposures to credit risk and duration. With low yields still ranking high among investment concerns, insurance investors said they planned increases to higher-returning, less liquid asset classes such as middle-market corporate loans, infrastructure debt, private equity, and collateralized loan obligations.

Private equity in particular is expected to be a top performer, with 27 percent selecting it as the highest-returning asset class. “[Insurers] feel private equity returns will be superior,”says Robert Goodman, managing director and global head of insurance relationships at GSAM.

Although “no one is happy about fees,” Goodman says insurers generally viewed the relatively expensive asset class on a net-return basis. He added that many insurers already coinvest in private equity — an approach that generally yields lower fees — and that the number of coinvestments was increasing.

Public equities, including U.S. equities and emerging markets, were also predicted to perform well. Meanwhile, government and agency debt was chosen as the asset class likely to deliver the lowest returns, even below cash. As a result, 26 percent of surveyed investors said they would decrease allocations to government and agency debt.