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Insurers stick with risk-taking but worry about credit cycle

Insurers will continue to commit capital to less liquid investments despite concerns about a global economic slowdown, research has found.

The recent trend of insurance investors allocating to asset classes including private equity, infrastructure debt and middle market loans will continue, according to Goldman Sachs Asset Management (GSAM), while at the same time local government debt investments are being switched for US and European investment grade corporates.

GSAM polls the global insurance sector each year and this year found a big rise in the amount of insurance investors who were concerned that the credit cycle is at a late stage. The percentage with these worries jumped from 34% last year to 85% this year.

Concerns around rising interest rates decreased significantly (7%, down from 30% last year) as insurance investors said they were more concerned with credit quality deterioration.

Eighty-two percent of respondents believed the US economy will enter a recession in 2020 or 2021, and only 2% predicted a recession in 2019. This reflects a similar find from the recent Bank of America Merrill Lynch fund manager survey.

“Insurers predict a US recession is coming, just not this year,” said Michael Siegel, GSAM’s global head of insurance asset management. “As a result, they are continuing to commit capital but are more selective in the risks they are taking.”

The asset manager interviewed 307 chief investment officers and other senior professionals at global insurance companies with more than $13 trillion collectively in balance sheet assets - about half the size for the global insurance sector.

They have a positive view on equity returns as just over 60% expect the ten-year US Treasury yield to remain in the 2.5-3% range by year-end, a break from previous results that had an upward bias to rising rates. Insurers are looking to lengthen portfolio durations.

The research also found that more than half of insurers invest in exchange-traded funds (ETFs). Fixed income ETFs are most often used to manage short-term tactical exposures or achieve operational efficiency.

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