How Insurance Companies Are Inflation-Proofing Their Portfolios
Insurers, more than other institutional investors, are taking advantage of discounted assets, according to a new survey by Nuveen.
Insurance companies have come up with plans to mitigate the impact of inflation on their investment portfolios — and they are surprisingly enthusiastic about equities.
Like most institutional investors, most of the 193 insurance companies surveyed by Nuveen late last year said they were either making more changes to their portfolios than usual or actively considering significant changes in response to rising inflation.
Insurers were most worried about interest rate risk, with 72 percent saying it was their top concern, followed by economic stability (52 percent), liquidity risk (51 percent) and default risk (47 percent). More than half of insurers also believed that a positive correlation between stocks and bonds will continue for the foreseeable future, according to Nuveen’s report.
A third of insurers said their risk mitigation strategy would last through 2023 and another 50 percent said it would last two to three years, the same percentage of the 800 institutional investors surveyed by Nuveen.
However, the strategies to counter inflation look slightly different for insurance companies than they do for other allocators.
Insurers largely said they planned to allocate more to the same asset classes that other institutional investors are emphasizing. For example, 40 percent of the broader group and 39 percent of insurers planned to allocate more to private infrastructure, the top pick; 34 percent of both expect to invest more in inflation-linked bonds; and 23 percent of both are buying more public real estate.
But insurers favored equities more. Forty-two percent of insurance companies said they plan to invest more in stocks, and 33 percent intended to up allocations to private equity, compared to 35 percent and 28 percent of all institutional investors, according to Nuveen.
The gravitation toward equities is likely a result of investors with capital available taking advantage of lower prices, not a reversal of trends.
For years, insurance companies have been swapping public assets for private ones. Large life insurers now have 35 to 45 percent of their general account assets invested in private assets, usually a mix of mortgage loans, privately placed investment grade corporate bonds, infrastructure debt, and structured notes, as well as private equity, infrastructure equity, real estate equity, and transportation assets.
Out of the 193 insurance companies surveyed by Nuveen, 46 were from North America, 102 from Europe, the Middle East and Africa, and 45 were from the Asia-Pacific region.