More insurers are seeing investment opportunities this year, but by and large, their return expectations continue to diminish, said a survey conducted by Goldman Sachs Asset Management.
In GSAM’s fifth annual review of the investment sentiment of the global insurance industry, nearly 30% of insurers believe investment opportunities are improving, compared to only 9% of insurers last year. Although nearly half of the insurers surveyed — 48% — believe the opportunity set is getting worse, this is down considerably from 63% during the prior year, when insurers demonstrated the greatest level of pessimism since the start of the survey.
The majority of insurers intend to maintain current levels of portfolio risk, albeit with a modest nod to increasing credit risk and portfolio duration. Insurers plan to increase allocations to U.S. investment-grade corporate bonds, private equity, real estate equity and less liquid fixed income.
Michael Siegel, managing director, global head of insurance at GSAM, said in a phone interview that he was surprised that so many respondents are more optimistic about investing.
“We thought companies would be throwing in the towel, but they’re getting increasingly optimistic,” Mr. Siegel said, noting however, that it “doesn’t mean they think returns are going to be good — they just think there’s going to be an avoidance of a disaster and are more willing to put risk capital to work.”
Part of the reason for the increased optimism is because there currently is not a major disconcerting market event as there has been over the last several years, including Greece’s economic woes, concern over the solvency of the European banking system and talk of a default on U.S. debt.
“Each one of these was a potentially dramatic major event,” Mr. Siegel said. “Right now, there doesn’t look like there’s a major event affecting markets like that.”
Even so, market return expectations are muted as insurers worry about the impact of a slowdown or recession in the U.S., as well as slowing growth in China. Insurers do not expect a significant increase in the 10-year U.S. Treasury yield. More than 40% of insurers believe S&P 500 index returns will be negative in 2016.
With rising default rates and widening credit spreads, there is a significant consensus that the industry has entered the late stage of the credit cycle, which is characterized by deteriorating credit quality, the report said. While most insurers believe credit spreads will widen, few expect spreads to widen significantly.
As global central banks continue to implement easing measures and lower rates, insurers globally intend to increase allocations to U.S. investment-grade corporate bonds because of higher interest rates in the U.S., the report said. They also intend to allocate to less liquid asset classes with higher return potential such as private equity and infrastructure debt, as they generally believe that the insurance industry is well capitalized.
The 2016 GSAM Insurance Asset Management Survey received responses from 276 chief investment officers and chief financial officers, representing an industry with more than $7 trillion in assets.