Insurance companies are worried about the state of the credit markets, according to Goldman Sachs Group’s asset management unit.
Deteriorating credit quality was the investment risk most cited by insurers in a Goldman Sachs Asset Management survey of more than 300 insurance executives. Eighty-five percent of the chief investment officers and chief financial officers surveyed by GSAM believed that global markets had reached the late stage of the credit cycle — a drastic increase from 34 percent last year.
Last year, 60 percent of the surveyed insurance investors believed credit markets were still in the middle stage of the cycle, and that credit quality was stable. Now, insurers believe that credit quality is weakening.
Despite these concerns, the vast majority of surveyed respondents believed the next U.S. recession was still at least a year or two away. Eighty-two percent predicted the next downturn would come in either 2020 or 2021, with opinion split evenly on which year was most likely. Meanwhile, just 2 percent expected to experience a recession this year.
Regardless, insurers broadly were not planning on either de-risking or adding risk to their portfolios over the next 12 months — though they did indicate plans to swap out equity risk for other types of risk, such as adding duration, while increasing the liquidity of their portfolios.
[II Deep Dive: KKR Sees Insurers Reaching for Yield in Alternatives]
“They have a lot of money to put to work, and they’re not backing away from the capital markets,” said Mike Siegel, global head of GSAM’s insurance asset management business.
According to Siegel, insurance portfolios are already “very well positioned” for a downturn, having been increasingly diversified since the last financial crisis. Risk management has also improved, Siegel added.
“In the U.S. it’s a steady-as-she-goes approach,” said Matt Armas, who leads fixed-income portfolio management for GSAM’s insurance business. “We’re seeing no big shifts in asset allocation.”
That said, insurers surveyed by GSAM continued to target higher allocations to private assets, including private equity and private debt. According to Armas, private credit was viewed by insurance investors as a potentially less risky investment compared to debt issued in the public markets.
“Our clients feel that private markets give them better protections,” he said, referring to the borrowing terms included in loan covenants. If investors are more concerned about credit markets, Armas said, they are more likely to go private.
Despite concerns about credit quality, many insurance executives surveyed by GSAM said they planned to take on more credit risk over the next year, though credit risk appetite varied widely by region. Respondents based in Europe, the Middle East, Africa, and Asia intended to add credit risk — with Asia-Pacific insurers expressing the highest risk appetite — while insurance companies in the Americas said they planned to take somewhat less credit risk going forward.