Insurance company executives expect a recession in the U.S. and a deterioration in credit quality, while they are gravitating more heavily into fixed-income investments and seeking to increase duration and credit risk.
Those were some of the findings of Goldman Sachs Asset Management's 12th annual global insurance investment survey, released Tuesday.
The survey comprised the views of 343 insurance firm chief investment officers and chief financial officers from around the world representing more than $13 trillion in balance sheet assets, which represents about one-half of such assets for the global insurance sector, the survey said.
Their responses were collected between Feb. 1 and Feb. 17.
Insurance investors identified inflation, an economic slowdown/recession in the U.S., and credit and equity market volatility as the top three macroeconomic factors posing the greatest risks to their investment portfolios.
Respondents saw inflation as "structurally embedded in the investment landscape," the report noted.
Fully 76% of respondents said they think inflation will remain high for the next two to five years, and 5% believe inflation will be elevated for the next five to 10 years.
Structurally higher inflation is primarily being driven by deglobalization (44% of respondents), and by energy transitions or disruptions (33%).
With interest rates still rising, some 27% of insurers favored floating-rate assets as the best way to hedge inflation, followed by inflation-indexed securities (18%).
Some 82% of respondents believe that the U.S. will enter an economic recession within the next three years. About 44% expect a recession this year.
Despite the clouds on the horizon, 53% of insurers said the overall investment landscape is improving while 32% believe opportunities are the same.
Also, despite growing concerns about an economic slowdown, investor risk appetite remained robust, with 51% of respondents planning to increase their allocation to private assets over the next 12 months, and another 43% seeking to maintain their present allocations there.
The attraction to private assets was especially pronounced among Asian insurers, where 61% of respondents plan to increase their allocation to private assets, and the remaining 39% seek to keep their current exposure to private assets.
Private equity, private equity secondaries and emerging market equities ranked as the top three asset classes that respondents picked as a "first choice" to deliver the best total returns this year.
Coming in dead last for expected returns was commercial mortgage-backed securities, likely "as a result of federal rate hikes and concerns on loan defaults," the report noted.
Respondents also said they were most likely to significantly increase allocations to these three asset classes in 2023: private corporate debt, green bonds and U.S. investment-grade corporates.
Long-duration fixed income, especially investment-grade credit, can "offer protection against a negative economic outlook, and insurers have expressed intentions to take advantage of this to achieve higher returns with less volatility," the report noted.
Moreover, rising yields may create a "fixed income renaissance" as some 68% of insurers cited increasing yield opportunities as the most important factor driving their asset allocation decisions in the coming years.
An overwhelming 90% of respondents said environmental, social and governance factors and impact investing were among their top considerations when constructing their portfolios.
Overall, insurers cited current and future regulations as their principal motivation for implementing ESG, followed by directives from their boards of directors and risk mitigation.
