Insurers are far from done moving money from public to private assets.
That was one takeaway from a report by Conning, the $214 billion asset manager, at the end of 2022, which surveyed a few hundred investment professionals at insurance companies about their allocations for the year.
Then, throughout 2023, insurers did what they said they were going to. They remained optimistic, hit the risk-on switch — to the surprise of some asset managers — and continued to invest more in private assets. The trend, coupled with rising interest rates and “uncharted lapse territory,” caused Barings to publish research warning that life insurers could face liquidity problems and jeopardize their financial health. Moody’s Investors Service also warned about the growing allocations to private credit. The shifts within the large pool of capital owned by insurers made demand for investment professionals with related experience soar, creating a peculiar talent crunch.
This year, insurers surprised observers again — by telling them they planned to do more of what they did in 2023.
Out of 300 insurance professionals surveyed in the fall, 80 percent were optimistic about markets and 62 percent plan to increase their risk tolerance again in 2024, according to Conning’s latest report published Tuesday. Higher interest rates have made publicly traded fixed income as attractive as it’s been in years and insurers are investing more in it. But the majority also plan to increase their allocations to private equity and private debt as much or more than they plan to increase allocations to stocks.
“The fact that insurers generally remain optimistic about the landscape as well as the fact that they expect to increase their risk tolerance, that surprised people I think a little bit last year,” Matthew Reilly, a managing director and the head of Insurance Solutions at Conning, said. “There continues to be an interest in allocating more to private assets. So whether that be real assets like real estate debt and equity, infrastructure, or whether that be private fixed income in the form of private placements or private credit or private equity, even in a landscape of higher interest rates, there continues to be interest in that.”
Insurers were among the investors eager to lock in higher yields before the Federal Reserve potentially begins cutting its benchmark rate this year. However, some didn’t have the cash or liquidity to do that like others, so they tried to find ways to do that outside of public markets now that yields have fallen some.
“One of the things that anecdotally we have seen is…some insurers who have been on the margin are a little bit more interested in locking in longer term yields, mindful of where rates are and that they might not persist there forever,” Reilly said.
Survey participants ranked inflation as their top concern in response to Conning’s question on how worried they were about macroeconomic forces in 2024.
When asked about artificial intelligence, respondents were most concerned about ethical considerations and a lack of human oversight. Still, the majority of insurance professionals surveyed said that they were currently using AI or piloting it at their firm. Similar to managing complex portfolios filled with private assets, AI will require insurers to rely more heavily on expertise outside their organization.
“The growth in private assets and portfolio diversification, the rising prominence of artificial intelligence (AI), and the increasing challenges of staying current with investment markets can be a challenge to any insurance company,” Scott Hawkins, head of Insurance Research at Conning and co-author of the survey report, said. “Outside expertise can be an answer for many.”