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April 2016 | Insurance

Optimism Grows as Expectations Decline

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2016 GSAM Insurance Survey

Following several years of benign markets and muted volatility, the dominant concern of insurers remains achieving adequate returns in the persistent, low yield environment. In our fifth annual review of the investment sentiment of the global insurance industry, we found insurers expect an improvement in investment opportunities, while, at the same time, return expectations have diminished. Our 2016 GSAM Insurance Asset Management Survey received participation from 276 Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs), representing over $7 trillion in global balance sheet assets.

Insurers expressed a more optimistic view of investment opportunities compared to last year, but approximately half of survey respondents still believe investment opportunities are getting worse. The majority of insurers intend to maintain current levels of portfolio risk, albeit with a modest nod to increasing credit risk and portfolio duration. EMEA-based insurers demonstrated a greater risk appetite, while Asia Pacific insurers exhibited a lean towards reducing equity risk. Insurers are looking to extend duration as the fear of continued quantitative easing (QE) becomes a reality. Inadequate capital is not a concern for the industry, as over 90% of the respondents believe the industry is adequately or over-capitalized. The adoption of Solvency II regulations has become an investment consideration as noted by nearly 70% of EMEA based insurers.

Market return expectations are muted as insurers worry about the impact of a slowdown or recession in the US, as well as slowing growth in China. Insurers do not anticipate a significant increase in the 10-Year US Treasury yield, and over 40% of insurers believe S&P 500 Index returns will be negative in 2016. With rising default rates and widening credit spreads, there is significant consensus that we have entered the late stage of the credit cycle, which is characterized by deteriorating credit quality. While most insurers believe credit spreads will widen, few expect spreads to widen significantly. Oil prices are anticipated to remain lower for longer, making deflation a more near-term concern than inflation.

For the first time since we began conducting the survey, insurers expect government and agency debt to be among the highest returning asset classes – an indication of the bearish sentiment and the continuation of quantitative easing programs. Insurers believe equity assets will be the highest returning asset classes, pointing to private equity and real estate equity in particular. Accordingly, these are among the top asset classes to which insurers plan to increase their allocations. Given higher interest rates and stronger economic prospects in the US, insurers intend to increase allocations to US investment grade corporates, with the greatest incremental demand from Asia Pacific insurers. We also see a preference for less liquid loan asset classes including commercial mortgage loans, middle market loans, and collateralized loan obligations. Following a challenging year for emerging markets in 2015, insurers expect emerging market equities to be the lowest returning asset class this year, and intend to decrease allocations to both emerging market local currency corporate and sovereign debt.


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