Interview, Conference Presentation
What’s on the minds of the world’s largest investors?
- The global insurance industry, managing approximately $30 trillion in aggregate assets, is one of the three largest investing sectors alongside banks and pension funds, allowing it to exert outsized influence on global capital flows.
- Goldman Sachs' 12th annual insurer survey captured the highest response rate to date, with 343 companies representing over $13 trillion in balance sheet assets across life, property-casualty, healthcare, and reinsurance segments globally.
- Insurers are navigating the current economic environment through two competing lenses: heightened concern over potential recessions and credit quality erosion, juxtaposed with enthusiasm for higher interest rates and fixed income yields.
- Unlike banks or pension funds, insurers generally benefit from rising interest rates because higher yields improve solvency for protection products (auto, property) and enable better returns on guaranteed savings products like annuities.
- Survey respondents intend to shift allocations toward longer-dated fixed income securities, including treasuries, government, agency, and municipal bonds, to lock in elevated yields.
- To mitigate recession risks, insurers are prioritizing the acquisition of higher-quality corporate credit and other assets viewed as superior credit risks, explicitly moving up in credit quality ratings.
- The survey data, finalized in late February 2023, indicates insurers were already structurally prepared for the volatility seen in the subsequent banking sector turmoil, particularly regarding rate hikes and credit deterioration.
- Insurers avoid the maturity mismatch issues plaguing recent banking crises by rigorously matching asset maturities to liability durations, holding short-dated high-quality liquid assets for catastrophe coverage while investing life insurance proceeds over longer policy horizons.
- Policyholders cannot force immediate liquidity withdrawals on life insurance or property policies in a manner that triggers a "run" on assets, providing insurers with the stable, patient capital required to invest in illiquid private markets.
- Inflation remains a primary concern as it can increase claim costs for property and casualty insurers while simultaneously eroding the real value of long-term savings policies and prompting central banks to tighten monetary policy.
- Regional concerns diverge slightly, with U.S. insurers prioritizing inflation and monetary policy responses, whereas European insurers focus more heavily on geopolitical tensions and energy disruptions linked to the war in Ukraine.
- Insurers are leveraging their direct access to private market borrowers to manage credit outcomes, allowing for contract amendments and proactive intervention during financial distress, a capability not available in public markets.
- Mike Siegel anticipates that global banks will become less levered and less capable of credit creation in the post-crisis environment, positioning well-capitalized insurers to fill the void as willing and experienced lenders in private markets.
- Higher investment returns generated by insurers are projected to trickle down to individual consumers, offsetting inflation-driven cost increases in property/casualty policies and enabling higher dividend rates or better returns on life savings and annuity products.
- ESG integration is evolving from board-driven mandates to a core component of risk mitigation and regulatory anticipation, with over 50% of clients in Europe and Asia committing to net-zero decarbonization goals.
- Despite prevailing concerns regarding inflation and recession, the insurer investor base views the current environment as superior to the past several years, demonstrating increased commitment to deploying capital into private markets and equities.
- The transcript was recorded on March 27, 2023, with Goldman Sachs Global Head of Insurance Asset Management Mike Siegel and Global Head of Insurance Asset Management Matt Armas serving as primary speakers.