Insurance companies are looking to significantly increase their allocations to private equity, mid-market corporate loans and infrastructure debt, according to a survey of almost 300 firms by Goldman Sachs Asset Management (GSAM).
‘Insurers are planning to increase risk in their investment portfolios, probably by shifting liquidity to riskier asset classes,’ GSAM concludes. The asset manager calls the risk sentiment ‘decidedly positive’, due to reduced uncertainties amid the global pandemic.
Some 35% of insurers worldwide want to take more equity risk, 37% plan to up credit risk, 24 % want increase duration risk and 22% are ready to accept more liquidity risk. On the latter, GSAM writes that increased volatility last year in particular prompted insurers to increase the liquidity of their portfolios. ‘However, as markets recover, and in combination with continued low interest rates, most regions have generally reduced their liquidity as they focus more on illiquid asset classes.’
Private equity
When asked which asset classes they expect to deliver the highest returns, 55% of insurers opt for private equity. Emerging market equities (38%) and US equities (37%) also scored highly with insurers in terms of expected return. Government and agency debt are the asset classes with the lowest return expectations.
Consequently, 38% of insurers plan to increase their allocation to private equity in the next 12 months. 23% will stick to their current allocation in this category, while 37% will not invest in private equity at all. The remaining 2% are planning to reduce their allocation to this private category.
Other alternative fixed income strategies such as middle market corporate loans are also high on the wish list. Some 36% want to increase their allocation to this category, while 33% want to allocate more assets to infrastructure debt. Although US investment grade corporate debt will still receive a larger allocation in 2021, this asset class has become less important to insurance investors compared to previous years, according to GSAM. The fund house also notes that two of the top five allocations are floating-rate: middle market corporate loans and collateralised loan obligations.