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April 2015 | Insurance

Too Much Capital, Too Little Return


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2015 GSAM Insurance Survey

Finding attractive investment opportunities has become a familiar challenge in a world of low to negative yields, tight spreads, and high equity prices. This year insurers demonstrated the greatest pessimism since we first began conducting the survey four years ago. Insurers believe the industry is adequately or over-capitalized (“too much capital”), but that investment opportunities are deteriorating (“too little return”). Our 2015 GSAM Insurance Asset Management Survey received participation from 267 Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs), representing over $6 trillion in global balance sheet assets.

Despite the bearish sentiment on the investment environment, approximately one-third of insurers globally are looking to increase overall portfolio risk. EMEA and Pan Asian insurers demonstrated strong risk appetite this year. EMEA insurers have increased their risk appetite over the years and this year they intend to take more liquidity risk, while Pan Asian insurers are looking to increase credit and equity risk. The majority of Americas-based insurers intend to maintain their overall risk level.

Insurers are concerned about the pace of US economic growth and consider it to be the greatest macroeconomic risk. CIOs and CFOs believe the US dollar will continue to strengthen due to a relatively stronger economy and relatively higher interest rates. Higher rates are critical for insurers to improve returns, but after yields moved lower in 2014, contrary to expectations, and central banks expanded “QE" programs, insurers are not anticipating a meaningful increase in rates this year. One-third of insurers now believe we have moved into the late stages of the credit cycle with deteriorating credit quality conditions.

Despite years of unprecedented global monetary easing, insurers have become more concerned about deflation due to slow global growth and lower commodity prices. Insurers are not expecting a meaningful increase in oil prices this year, and they anticipate commodities will be amongst the lowest returning asset classes. The last time insurers indicated this level of concern around deflation was in 2012 when they were anxious about the European debt crisis. Similar to previous years, insurers have pushed out concerns about rising inflation to the medium term.

Equity assets are anticipated to outperform credit assets this year, but insurers have more modest expectations for US public equities relative to last year’s returns. Insurers are looking to less liquid, private asset classes to bolster returns, and intend to increase allocations to commercial mortgage loans, infrastructure debt, private equity, middle market loans and real estate equity. Negative sovereign yields are leading EMEA and Pan Asian companies to diversify into US investment grade corporates and asset class insurers have not demonstrated strong incremental demand for since 2012.

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