Insurance Companies Show a ‘Risk On’ Approach to Investing

Companies surveyed by GSAM are looking to invest in private equity and illiquid asset classes; DB plans might be interested in insurance companies’ views since they face some of the same risks as insurers.

Goldman Sachs Asset Management (GSAM) has released its 10th annual Insurance Survey, which polled mostly larger firms in the insurance industry. Responses were collected from 286 firms representing $13 trillion in assets under management (AUM), or what GSAM says it thinks is more than half of industry assets.

Mike Siegel, global head of insurance asset management at GSAM, said during a GSAM roundtable that this year’s survey took a big turn toward a “risk on” attitude. “We haven’t had these kinds of readings since after the last recession when insurance companies re-risked,” he said. “Insurers face equity risk, credit risk, interest rate or duration risk, and liquidity risk.”

With this “risk on” attitude, companies are looking to invest in private equity and illiquid asset classes, Siegel said. He also noted there is a renewed interest in floating rate assets. “The interest in floating rate assets represents a view that inflation will become a problem,” he said. “These assets protect against inflation.”

Insurance companies are also showing an interest in collateralized loan obligations (CLOs). They expect equities to have positive returns and expect no actions from the Federal Reserve. Companies’ top concern is market volatility, he said.

The survey also finds more insurers are willing to put credit exposure on their balance sheets. “I think companies need to add duration to their portfolios,” Siegel said. He added that insurance companies have a desire to invest in emerging market debt and U.S. investment grade fixed income.

When asked to compare insurance companies’ expectations and investment strategies to those of defined benefit (DB) plans, Siegel said the run-up in equity values and the increase in interest rates are also helping plans with funding. “We are seeing them focused on de-risking by reducing equity and increasing fixed income because yields are higher,” he said. “We are also seeing an interest in risk transfer activity.”

However, some industry sources say they believe it is a risk factor that corporate bond exposure is so high in DB plans, and DB plan sponsors can take some lessons from insurance companies’ investing strategies. Sources who work with endowments as well as DB plans say alternative investments and private assets might help DB plans diversify and generate more returns.

DB plans face some of the same risks as insurance companies. Matt Armas, global head of insurance fixed income portfolio management at Goldman Sachs, said the top risks to insurers’ investment portfolios are credit and volatile equity markets. He noted that new to the survey this year are pandemic concerns, as well as U.S. monetary tightening and inflation.

“Our clients see credit as middle-stage stable quality rather than late-stage deteriorating quality,” Armas said. “They also expect that Treasury rates will increase and expect returns in the 0% to 10% range.”

Integrating ESG Approaches in Investing Decisions

Etienne Comon, head of Europe, the Middle East and Africa (EMEA) and Asia insurance portfolio management at GSAM, said environmental, social and governance (ESG) investing showed the most pronounced changes in the survey over the years.

The survey asked how insurance companies integrate ESG approaches in investing decisions and what obstacles they face. The number saying that ESG is not relevant has decreased sharply, Comon said.

There are differences across regions, he noted. European insurers have been focused for long time on ESG investing; now, U.S. companies are catching up to that level of focus. Insurers expressed that they plan to increase fixed-income allocations to green and impact bonds.

Sources have told PLANSPONSOR that DB plan fiduciaries can expand on their evaluations of ESG investments to show they are financially beneficial and not just a philosophical choice.

Respondents said they still face some hurdles to implementing ESG investments, including access to reliable standardized data (70%), which Comon said is also GSAM’s experience; availability of investments aligned with objectives (42%); the design of the investments policy/framework (41%); and technology costs (15%).

GSAM’s survey report, “Running the Risks,” may be accessed here.