In a period marked by low market volatility despite high geopolitical uncertainty, this year’s GSAM Insurance Asset Management survey reveals differing expectations regarding the credit cycle, rates, risk appetite and investment returns. With rates expected to rise and equity valuations high, insurers are concerned with achieving adequate returns without leaving their portfolios overexposed in the event of a downturn. In April 2018, GSAM Insurance Asset Management conducted its seventh annual survey, which synthesizes perspectives from 300 Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs), representing over $10 trillion in global balance sheet assets.
Two-thirds of insurers (65%) anticipate 10-Year US Treasury yields will end 2018 above 3.0%, and 77% believe S&P 500 Index returns will be positive this year. Expectations for the US dollar were split, as roughly one-third feel the dollar will depreciate and another third predict it will appreciate. Insurers expressed a growing consensus that we are in the late stage of the US credit cycle, while the broader global credit cycle is more middle stage. However, no insurers feel that US or global credit spreads will significantly widen this year. Similar to last year, 92% feel that Brent crude prices will be range-bound between $50 and $75.
After topping the list of macroeconomic concerns in 2017, political events risk receded, while the risk of an economic slowdown or recession in the US claimed the top spot. For the first time since we have surveyed post-crisis, inflation and US monetary tightening are significant concerns for insurers in 2018. Inflation as a concern over the next five years rose to 85%. On the opposite side of the spectrum, insurers’ concern surrounding deflation over the next five years diminished to 32% from 62% in the 2016 survey.
The survey saw a return of skepticism regarding the investment opportunity set. After only 36% of insurers last year felt that opportunities were getting worse, that number rose to 50% of insurers this year. Further expressing this view, more respondents plan to de-risk across equity and credit, increase portfolio liquidity and reduce duration. This represents a reversal in risk appetite from last year’s survey. Asian insurers are an exception, as they plan to increase credit risk and duration this year, similar to last year.
Respondents expressed continued confidence in returns for growth-related asset classes (private equity, emerging market equities, US equities). Similarly, they expect to increase their asset allocations to less liquid assets such as infrastructure debt, commercial mortgage loans and middle market corporate loans. Conversely, insurers plan to decrease allocations to high yield debt, tax-exempt municipal bonds and US equities.
Cryptocurrencies, a subject of much interest and discussion, are believed by most insurers to not have a role in an investment portfolio, while a third of respondents view cryptocurrencies as a potential risk to financial markets. Environmental, Social and Governance (ESG) continues to grow as a consideration in the investment process with 40% of global insurers taking ESG into account when making investment decisions, compared to 32% in 2017. Big Data/artificial intelligence (AI) is an emerging portfolio tool; 15% of global insurers currently have a role for Big Data/AI in their investment portfolio with an additional 40% considering implementation in the future.