In a rapidly shifting market environment, this year’s GSAM Insurance Asset Management survey reveals a dramatic turn in expectations regarding the credit cycle, inflation, rates and equity returns. However, with rates low and equity valuations high, insurers’ dominant concern remains achieving adequate returns. In April 2017, GSAM Insurance Asset Management conducted its sixth annual survey, which synthesizes perspectives from 317 Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs), representing over $10 trillion in global balance sheet assets.
Over 80% of insurers anticipate an increase in 10-Year US Treasury yields and 88% of insurers believe S&P 500 Index returns will be positive in 2017. In a dramatic reversal, only one-third of insurers now believe we are in the late stage of the credit cycle compared to three quarters of respondents last year, expressing a view that the credit cycle has lengthened. Moreover, only 2% of the respondents feel that credit spreads will widen significantly this year. The “backpedaling” view on the credit cycle has seen an increase in corporate credit allocations with a third of insurers planning to increase their exposure to credit risk. Brent crude oil prices are anticipated to be range bound between $50 and $75.
Political event risk jumped to the top of macroeconomic concerns in 2017, whereas previously it was near the bottom of the list. Considering macroeconomic risks, inflation dominated deflation as a concern, also a significant reversal from the prior two years. Reflecting the improving macro backdrop, we have seen a dramatic shift in inflation expectations with concerns around deflation in the next three years declining 39 points to 16% of respondents, while concerns around inflation over the next three years rose 31 points to 62%.
This year, insurers expressed a more optimistic view of investment opportunities; only a third of survey respondents believe investment opportunities are getting worse, compared to 48% in 2016. Insurers showed a modest inclination to increase overall portfolio risk, expressing views to increase equity and credit risk. Insurers are looking to extend duration as years of low rates persist. With a significant decline in concern about growth prospects for China, Asia Pacific insurers indicated a strong preference to increasing portfolio risk. Insurers have expressed confidence in the expected returns of growth-related asset classes (private equity, US equities and emerging market equities). Similarly, they anticipate increasing their asset allocations to higher yielding assets such as middle market corporate loans, infrastructure debt and collateralized loan obligations.
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 European-based insurers. Environmental, Social, and Governance (“ESG”) factors continue to grow as an investment consideration.
