Inflation may drive insurers to invest in private equity, Goldman survey finds – InsuranceNewsNet

Chairman Jerome Powell says inflation is the Fed’s #1 goal.

Insurers expect the reemergence over the next few years of two infamous villains, inflation and recession, according to Goldman Sachs’ annual global insurance survey.

Inflation was a clear leader in the race for top concerns, with 28% of insurance companies globally citing it as the biggest macro risk to their portfolio for the first time in the 11 years Goldman has led the investigation. In fact, 91% of businesses in the Americas expect inflation to be a risk this year, and 79% globally.

Inflation may drive insurers to invest in private equity, Goldman survey finds

Inflation won’t come to a halt, according to Insurers of the Americas, with 74% of respondents saying inflation will last two to five years, eventually brought under control by rising interest rates.

Inflation may drive insurers to invest in private equity, Goldman survey finds

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After inflation, it was a close race for the next three with 20% citing US monetary tightening, which goes hand in hand with an inflation response. The majority of respondents (87%) said they believe the Federal Reserve will raise rates at least three times this year, with 36% in the Americas expecting more than four increases.

Credit and equity volatility comes next on the risk list at 18%, with the fourth battle horse, the US recession, closing in at 16%. Sixty-three percent of respondents said they believe an economic recession will hit the United States in the next two to three years, with Asian businesses leading the pack with this prediction. On the positive side, respondents did not expect the recession to start this year, said Michael Siegel, global head of insurance asset management for Goldman Sachs Asset Management.

Inflation may drive insurers to invest in private equity, Goldman survey finds

“You can see this year seems like clear sailing,” Siegal said during a media preview of the report, “but planning for a recession down the road.”

Those concerns, especially about inflation, should accelerate the shift to private asset classes for yields, Siegel said, citing two big trends in the race for yield.

“One is a continued movement from public assets to private assets. It would be public equity to private equity, it would be public fixed income to private fixed income to recoup the illiquidity premium,” Siegel said during a media preview. “And then, within the asset classes themselves, a continued movement towards private equity, green or impact bonds, middle market corporate loans, which are variable rate assets, infrastructure, debt and equities, real estate equities and high-quality U.S. private placements.”

From public to private

One of the main factors pushing for an investment shift is the expectation of an aggressive 10-year US Treasury hike, with 72% of respondents predicting the bond will be at least 2% this year, putting investors at a disadvantage. older obligations while improving conditions. for new ticket purchases.

“If we get a big, big hike in rates, it will eventually cause disruption in the markets,” Siegel said. “And volatility tends to be bad.”

Although the 10-year Treasury is the foundation of insurance investing, it’s not the best bet. In fact, government and agency debt was rated the worst performer by 29% of respondents, with 65% saying it was one of the three worst performers.

By far, companies are turning to private equity to bank, with 32% of respondents expecting the asset class to offer the highest returns this year, with 58% ranking it in the top three .

Inflation may drive insurers to invest in private equity, Goldman survey finds

“You see a bit of a theme here,” Siegel said of the asset leaders, “stocks, stocks, stocks, stocks and commodities.”

Despite being second on the list, Commodities lag 14%, with 34% putting it in their top three. But this is the first time that commodities have made it into the top three. According to the report, its appearance at the top of the list of returns could be an aberration due to supply chain problems and concerns about geopolitics and inflation.

Even if companies respect commodity yield right now, that doesn’t necessarily mean they will bet on it. Respondents indicate little appetite for the asset class this year, likely due to high historical volatility and capital inefficiency, according to the report.

The survey indicated that the money will accelerate the migration to private assets. Money from investment-grade corporate bonds and government securities is moving into private credit and public equity investments into private equity, Siegel said.

Inflation may drive insurers to invest in private equity, Goldman survey finds

“In credit, covenants tend to be better in private equity,” Siegel said, noting that 70% of companies plan to increase their allocation to private assets. “It has been demonstrated over the past few decades that returns to private capital exceed returns to public capital. You give up liquidity, but the industry is flooded with liquidity.

ESG and crypto

Environmental, social and governmental considerations have been increasing for several years. Six years ago in the Americas, 85% of respondents said ESG was not an important investment consideration, and 15% said it was just one consideration among others. This year, 77% of companies said it was one of many and 15% said it was not a consideration.

“I suspect that next year this graph will continue to present itself in the same way, increasing its importance,” Siegel said.

ESG is already more important in other regions, with 37% of European companies saying it is a primary consideration, and only 2% saying it is not a consideration at all. In Asia, 16% said it was a main issue, 84% said it was one issue among others, and no one said it was not a consideration.
This is the first time the survey has asked about cryptocurrency.

“We did this because every time we meet companies, they ask us about cryptocurrencies,” Siegel said.

Although the survey found that 94% of companies were not invested in or planning to invest in crypto, Siegel was surprised as 2% of companies had invested in crypto and 4% were considering it.

Inflation may drive insurers to invest in private equity, Goldman survey finds

“In our dialogues with companies that are investing or considering, their main motivation is to understand the instrument, to understand the market, and in particular to be prepared if it becomes a more dominant market,” Siegel said. “And maybe at some point the bounties are denominated in crypto.”

Steven A. Morelli is editor for InsuranceNewsNet. He has over 25 years of experience as a journalist and editor of newspapers and magazines. He was also vice-president of communications for an association of insurance agents. Steve can be reached at [email protected]

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