Goldman Sachs Asset Management (GSAM) has released its third annual insurance survey with results indicating that insurers are looking to increase risk to combat low yields. This bellwether poll of 233 Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs) represents insurers with over $6 trillion in global balance sheet assets. “Insurers remain focused on the search for return, but view corporate bonds and public equities as either overvalued or fairly valued. This is driving CIOs to explore non-traditional asset classes that can offer higher total return potential and compensation for illiquidity,” said Michael Siegel, GSAM’s Global Head of Insurance Asset Management. “Against a backdrop of low yields and growing concern about monetary tightening, CIOs are planning to increase allocations to less liquid assets, alternatives and equities – rather than increase credit risk or lengthen duration – to bolster potential investment yields and returns.” In a notable change from last year’s GSAM survey, which indicated that CIOs planned to make substantial allocations to floating-rate bank loans, it appears that the insurance industry now intends to make the greatest allocation increases to less liquid assets including infrastructure debt, private equity, commercial mortgage loans, and real estate equity. As CIOs plan to allocate more to non-core asset classes, the survey indicates that CFOs are demonstrating significantly greater comfort with investment risk. CFOs believe the industry is well capitalized, and recognize the need to bolster returns amidst increasing competition from alternative capital providers, particularly in the Property & Casualty (P&C)/Reinsurance space. Key findings of this year’s survey, entitled “Risk On…Reluctantly,” include 1 :
- Alternatives and equities grow more attractive. More than one-quarter of the CIOs surveyed believe private equity will be the best performing asset class in 2014. Insurers also expect US equities and European equities to deliver strong relative returns.
- Portfolio allocations are shifting. CIOs plan to increase allocations to asset classes that can offer higher total return potential, an illiquidity premium, and protection against rising rates and inflation. They plan to decrease allocations to cash, short-term instruments, and government and agency debt, for which they have the lowest near-term return expectations.
- CFOs are more optimistic than CIOs about the investment environment. Roughly one-third of the CFOs surveyed believe investment opportunities are improving, compared to one-quarter of CIOs. Additionally, only 29% of CFOs believe investment opportunities are getting worse, compared to more than 40% of CIOs.
- CFOs are more comfortable with investment risk. Only 6% of the CFOs surveyed believe their peer group is taking on too much investment risk, compared to roughly 30% in 2013. Approximately 20% of CFOs believe their peer group is taking insufficient investment risk.
- Concern about market volatility is elevated. Globally, both CIOs and CFOs consider credit and equity market volatility the greatest near-term risk. Monetary tightening is also considered a top macroeconomic risk.
- Deflation is a nearer-term concern. More than 20% of the CIOs surveyed indicated that deflation is a risk in the next year, double the percentage for 2013. Inflation remains a medium term concern, with roughly 80% of CIOs viewing it as a risk in the next two to five years.
- Third party capital inflows are a growing concern. Half of the P&C insurers surveyed believe that alternative capital inflows will have negative implications for pricing, compared to only 13% of Life insurers. Nearly half of EMEA-based CFOs expect alternative capital to negatively affect pricing this year.
GSAM Insurance Asset Management currently oversees $160 billion in assets under supervision as of March 31, 2014 in insurance assets and is ranked among the top 10 insurance asset managers worldwide*. The group has more than 50 dedicated professionals focused on client relationship management, fixed income portfolio management, insurance advisory services and accounting policy. GSAM’s insurance capabilities include partial to full outsourcing solutions involving traditional fixed income strategies, alternative investments and equities. The group offers a suite of advisory services including asset liability management, strategic asset allocation, capital-efficient investment strategies and risk management. For more information, please visit: http://www.goldmansachs.com/gsam/worldwide/insurance/thought-leadership/cio-strategy/index.html.Goldman Sachs Asset Management is the asset management arm of The Goldman Sachs Group, Inc. (NYSE: GS), which oversees $1.08 trillion in assets under supervision as of March 31, 2014. Goldman Sachs Asset Management has been providing discretionary investment advisory services since 1988 and has investment professionals in all major financial centers around the world. The company offers investment strategies across a broad range of asset classes to institutional and individual clients globally. Founded in 1869, Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. 1 These findings represent an aggregation of responses from respondents of the GSAM Insurance Asset Management Insurance CIO & CFO Survey and do not reflect or represent the views or opinions of Goldman Sachs.*Source: Insurance Asset Manager Mid-Year Survey – 2012 Edition (data as at 30-Jun-12). Rankings based on Non-Affiliated General Account Assets and Subadvised Insurance Assets. General Disclosures:Survey information as of March 6, 2014. This material is provided for informational purposes only. It is not an offer or solicitation to buy or sell any securities. ConfidentialityNo part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.© 2014 Goldman Sachs. All rights reserved.