Insurance asset managers are confident their portfolios are already well positioned for an uncertain market environment marked by significant volatility.
Matthew Armas, global head of insurance at Goldman Sachs Asset Management, said the industry has already been positioning itself defensively for the past year before President Trump’s April 2 “Liberation Day” announcement of tariffs. This is despite a pivot in recent years to private markets.
While Armas said that pivot looks like a risk-on trade, he argues that it represents a defensive trade because it shows an industry that was already concerned about inflation.
“Our inflation reading accelerated from year to year, and people were concerned about recession globally, but particularly in the U.S.,” said Armas. “So people were already starting to think about how a recession would impact portfolios, and people were worried about volatility.”
In Goldman Sachs Asset Management’s 14th annual Global Insurance Survey released in March and conducted before the end of 2024, the three top macroeconomic risks cited by senior insurance company executives were already inflation, the risk of a U.S. economic slowdown, and credit and equity market volatility.
“Over the two weeks since we've had the April 2 tariff announcement, I think those things have just accelerated,” said Armas. “The industry was already preparing for those three things, so I would argue the allocation decisions are very much in response to that macro condition.”
Armas argues that the pivot into private assets is a defensive trade because by doing so, the insurance industry is increasing diversification and resilience and using a very strong liquidity position they have thanks to their “very patient” liabilities.
“(Then they are) earning the premiums associated with illiquidity or complexity or structure in addition to deep credit underwriting while diversifying the portfolio,” Armas said.
“Diversification is the friend to the portfolio manager. So you're getting incremental diversification through the private asset introduction, whether that's asset-based finance, it's IG (investment grade) private corporate debt, or whether it's private credit,” said Armas. “You're growing the diversification of the portfolio, and you're leaning on premiums for your return enhancement. So as opposed to taking views on idiosyncratic direction or market beta, you're looking much more for premiums to earn your returns.”
Armas said it is important when looking at insurance portfolios to understand that insurers do two principal things: One is protect items like homes and automobiles, and they also provide savings products such as annuities that will earn individuals a guaranteed rate of return and then receive their principal back.
“For protecting things, inflation has been a problem, and we saw that as a problem in 2022 and ‘23 where replacement cost of the underlying insured items, cars and homes, went up, and you saw the industry have to readjust their rates in order to deal with the rising costs of the underlying thing being insured,” said Armas.
As a result, insurers’ combined ratios — which measure profitability by comparing its total costs (claims and expenses) to its earned premiums — were above 100 during those two years, which meant they needed to access their portfolios in order to pay insurance claims, Armas said.
“They were adjusting the portfolio generally shorter in duration, generally more liquid to deal with that inflation,” said Armas. “As interest rates or product prices have gone up, inflation … has slowed, and you've seen the industry return back to profitability. You've seen the portfolios then have surplus. They have that extra liquidity, because the inflation has slowed, and now they’re also extending duration a little bit and there they're adding a little bit of private assets.”
Armas said that in annuities, insurers are typically writing a fixed-rate savings product, there is no inflation in the liabilities and insurers can invest in nominals, and while liabilities have some sensitivity to interest rates that can create some need for liquidity, it doesn’t create inflation in the liabilities.
Risks of private assets
Gregory Halagan, managing director and global head of insurance solutions at Oaktree Capital Management, said the current market is going to answer questions about the risks of private credit.
“I think the real question is: Where are there exposures in portfolios that turn out to be at a higher risk of loss than expected? In that sense, the largest area of growth by far in insurance company portfolios has been within private credit, and as Warren Buffett likes to say, and (Oaktree Capital Management Co-Chairman) Howard (Marks) likes to repeat, that it’s only when the tide goes out you discover who's been swimming naked,” Halagan said.
“In other words, we don't know which credit managers didn't properly underwrite the risks in their portfolio and aren't set up to go through an environment of elevated defaults. From Oaktree’s perspective, one of our key tenets of investing is a focus on risk control,” said Halagan. “We tend to differentiate ourselves in periods of market stress, and in particular, given our history managing opportunistic credit assets, it is environments where there is dislocation that we tend to see the most attractive opportunities and deploy capital in the most meaningful way. With the prospect of a global recession higher today, we think that the opportunity set for our clients is only going to increase as a result.”
Overall, insurance companies aim to be resilient by emphasizing capital preservation and income generation, said Kerry O’Brien, global head of insurance asset management and liability solutions at MetLife Investment Management.
“What we've seen over the past few years is just a stronger push into private assets, and that's been getting a lot very topical lately, given the lower liquidity and some opaqueness there from a pricing perspective,” said O’Brien.
“But these investments were made with credit enhancements, structural enhancements and incremental spread over public (investments) so re-underwriting what you own, given the tariff news, understanding how these investments are behaving, staying really close to the underwriting that you've done is very important. From a big picture perspective, there are a lot of analysis scenarios, probabilities that are being done to test the resilience of insurance portfolios globally. This is a global event, absolutely.”
The level of uncertainty has been such for the past four to six weeks it’s been nearly impossible to position for what the economy is experiencing right now, said Katie Cowan, head of insurance client solutions at First Eagle Investments.
“We speak to the fact that the only thing that is certain right now is uncertainty,” said Cowan, “And I think that’s leading to a couple of themes in insurance. Specifically, I’m seeking kind of this divergence of themes. One is, inaction and taking a pause to see where this is going to go. Are we going to continue with this extreme volatility and waking up every morning, scrolling through our phones to see what new policy was enacted overnight?”
“Will that stop this summer? Will it continue into the fall? You know, nobody’s really sure,” said Cowan, “so I think a lot of people are just sitting and pausing on allocations that they may have queued up for the year with their SAA (strategic asset allocation) to just see where it’s going to go.”
"Then on the flip side, there's others who are being a bit more proactive and saying now is a good time to really look at where (they) can play into some more defensive or resilient opportunities to get some additional yield and diversify. Because that is, you know, one thing that can help you build a bit of a safety net into your portfolio, regardless of where the market's going to go, so it can go both directions," Cowan said.
"And I think that the theme of diversification is where we're leaning into in conversations I'm having with insurers to talk about areas, particularly on the alternative side, where they can build up defensively where they are positioned currently."
Geoff Cornell, senior vice president and chief investment officer of insurance at AllianceBernstein, said with so much uncertainty and so much volatility in the market, insurers want to sit on the lower end of the risk range and watch what’s happening.
“Tariffs are a lot like COVID, right? First of all, we don't even know what the tariffs are like. It's impossible to know exactly what they are but you don't know what the effect of them is going to be. Directionally, we think we understand what the effect is going to be, but there's a lot of uncertainty. There's a lot of volatility, and I think that makes us think that we should be on the lower end of the risk scale and be a little cautious,” Cornell said.
“The question really is as balance sheets have morphed over the past five years from very liquid to less liquid: How do those assets actually perform when you get into a stress scenario, right? We haven't really seen a credit stress scenario in many, many years,” said Cornell.
“So what we do is we rely on the deep fundamental analysis that we've been doing for decades in insurance, and look at it and say what we think the stress scenarios could be, and what does it do to our capital, and what does it do to other things? There are a lot of new entrants into the markets that haven't had those decades of experience, and maybe haven't seen the cycles that we've seen, and it'll be interesting to figure out if these are true cycles.”
“If we do go into a recession or a slowdown or something like that, how do all these different balance sheets that have been taking various forms of risk perform? I don't have a crystal ball. I don't have a really good answer, but I'll say we try to be a little bit more cautious when you see volatility and markets like this, and then we try to rely on the deep fundamental analysis that we've done over the years to make sure that we can withstand some of these stresses as they happen.”
