Insurers More Optimistic about Investment Risk

Insurers are increasingly optimistic about investment opportunities and many are willing to take on more portfolio risk, according to “Growing but Tempered Optimism,” the 2013 Goldman Sachs Asset Management insurance survey.

Chief investment officers and chief financial officers, however, have differing opinions; more than 40 percent of insurance chief investment officers intend to increase portfolio risk, whereas CFOs are more conservative regarding appropriate risk levels.

Chief investment officers ranked their macroeconomic concerns:

• The impact of accommodative monetary policy (23 percent)

• Credit and equity market volatility (18 percent)

• Inflation (14 percent)

Chief financial officers ranked their macroeconomic concerns:

• Credit and equity market volatility (29 percent)

• The European debt crisis (14 percent)

• Inflation (14 percent)

“It’s clear that insurers are feeling more optimistic, although there is still a good deal of caution. Insurers recognize the difficulty of generating adequate returns by holding predominantly high-grade portfolios,” said Michael Siegel, GSAM’s global head of insurance asset management. “Lower investment returns have challenged the industry’s ability to deliver strong financial results which have pressured insurance company equity valuations.”

Insurance chief investment officers said equities likely would outperform fixed-income assets in the near term, the survey found, and insurers intend to increase allocations to those offering potential for higher total returns, interest rate protection and/or an illiquidity premium, including equities, bank loans, real estate, commercial mortgage loans and private equity.

A majority of insurance CFOs said the industry is adequately or over-capitalized, but differ on whether excess capital should be retained or returned to shareholders, and their expectations for return on equity ranges from 5 percent to 15 percent.

Highlights from the report:

• Chief investment officers are more optimistic than last year; 31 percent said investment opportunities are improving compared to 14 percent in 2012.

• Chief investment officers increasingly are concerned about rising interest rates (32 percent vs. 16 percent in 2012); more than half said interest rates will increase significantly in the next two to three years.

• P&C CFOs (65 percent) are primarily concerned about inflation, whereas life CFOs are primarily concerned about credit and equity market volatility (59 percent).

• Inflation is considered a medium-term risk; deflationary concerns have retreated from last year.

• Insurers intend to increase allocations to bank loans (43 percent), U.S. equities (38 percent), and real estate (37 percent), and intend to decrease allocations to government and agency debt (42 percent) and cash and short-term instruments (37 percent).

• Globally, more than 90 percent of insurance CFOs said their peers are adequately or over-capitalized; 44 percent of CFOs in the Americas said the industry is over-capitalized.

• CFOs differ on the best use of excess capital; organic growth (25 percent), strengthening the capital base (22 percent) and returning capital to shareholders through dividends or share repurchases (25 percent) were ranked as the best uses of excess capital.

The global online survey received responses from 252 senior insurance professionals, including 189 chief investment officers, 54 chief financial officers and nine people who serve as both CIO and CFO. This global study represents over $6 trillion in insurance balance sheet assets.