Insurance Investors Rethink Approaches Near End of 2023

Institutional insurance investors are rethinking their strategies after a far from normal year for the markets. Clearwater Analytics’ 2023 insurer cash and short-term investment management outlook study found some insurers are stockpiling cash in “high-quality short-term” investments—no longer a drag on their portfolios—while waiting for markets to settle.

Clearwater, an investment accounting software firm, conducted the survey in September, polling more than 120 insurers that manage a combined $2 trillion in assets.

“Today’s economic uncertainty and complexities are leading insurers to rethink their investment strategy,” said Scott Erickson, chief revenue officer at Clearwater Analytics, in a press release. “The study marks an increased focus on short-term assets, driven by higher rates and an inverted yield curve.”

Short-term Investments Take the Podium

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Regarding the current economic environment of higher interest rates and an inverted yield curve, 52% of investors polled said the inflows to short-term investments are temporary. According to the report, these investors do not want to hold excessive short-term investments but will do so if the opportunity cost is not high and long-term options are not as optimal on a risk-considered basis.

Clearwater Analytics found some investors intend to wait and take advantage of an opportunity when rates peak, based on the sentiment that rates will decline in the medium term. These investors are looking to extend the duration and lock in higher rates to take advantage of market appreciation.

Impact of the Banking Crisis

The collapse of several regional banks earlier this year led to insurers changing their banking relationships, according to Clearwater’s study, and insurers have taken numerous actions to reduce risk. Nearly 40% of those surveyed reported having changed banks as a result of the banking crisis.

Furthermore, almost 40% of insurers have increased the number of banks managing their liquid assets and short-term investments. Slightly more than 30% reduced their exposure to debt in the financial sector, and roughly 25% of insurers said they deliberately shifted to larger “and presumably safer” bank counterparties from smaller, regional banks like those that failed, according to the report.

While many insurers are taking steps to review their banking relationships, approximately 43% of those polled said banking sector turmoil has not had any impact on their banking relationships or investment strategies.

Becoming Active Investors

Clearwater’s poll found some insurers, traditionally long-term investors, are now actively managing their short-term investments. One-third of polled insurers said their firms were actively managing short-term investments, typically through money market funds and other short-term vehicles. According to the report, these insurers are either hiring dedicated short-term managers or having their long-term portfolio managers take on a short-term active strategy.

Clearwater suspects that “insurance investment managers think a few extra basis points are worth the commitment of resources” and expects these activities to continue if short-term rates continue to stay elevated.

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Tags: Asset Allocation, Clearwater Analytics, insurance, rates, Scott Erickson

Investors are divided about the value of environmental, social and governance-minded investing, according to a survey by alternative asset management firm Dynamo Software. Respondents to the poll were almost evenly split on whether ESG-focused investments perform better (45%) or the same (44%) as non-ESG investments, with 11% saying they perform worse.

The global survey queried limited partners and general partners in investment funds, which included many asset allocators and managers, about all kinds of investments. The Dynamo report attributed the split to a lack of extensive metrics to assess an investment’s ESG bona fides.

While many ratings exist to assess how funds’ potential portfolio companies stack up as ESG-friendly, LPs and GPs are not satisfied with the raters’ lack of detail. Danielle Pepin, Dynamo’s vice president of product, explains in an interview that ESG ratings usually fail to explain how companies have changed over time, say, by tracking their history of carbon emissions. Another shortcoming: A company’s strong environmental record might overshadow its poor social history, such as treating its employees poorly.

This comes at a time when Detroit automakers are cutting back on producing electric vehicles, offshore wind power developers are canceling or delaying projects, and home solar panels sales are down. The largest ESG exchange-traded fund, which serves as an ESG benchmark, the iShares MSCI EAFE Growth ETF, is up 8.6% this year, trailing the S&P 500 (ahead 15.9%)

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Perhaps as a result of a more sour view of ESG lately, U.S. assets under management in public equity ESG funds declined to $315 billion in Q3 2023 from $339 billion the quarter before, as seen in Lipper data, the report surmised.

Asked how important ESG ratings are to deciding on investments, many respondents (45%) said they were either “very important” or “extremely important/essential.” Another 37% termed ratings as “somewhat important.” Only 18% chose “not important.”

One clear message from the survey was that investors thought that “environmental factors appear to carry more weight than social and governance.” In general, they ranked carbon emissions as the top ESG metric to peruse, followed by energy efficiency improvements and water usage. When asked about their own funds, they ranked climate change/carbon emissions as most important, followed by energy efficiency improvements and then established business ethics.

The tilt toward environmental concerns also showed up in how the investors viewed diversity, equity and inclusion. Although DEI ranked as second most important behind the environment, the majority (68%) of investors indicated they are not allocating money based on it.

At the same time, respondents who showed their zest for environmentalism also carried some healthy skepticism. Some 60% said they were wary about greenwashing, when companies appear more environmentally conscious than they really are.