Asset Allocation

High Yield’s Out, and Stocks Are In for Insurers

Top insurance specialists at Goldman Sachs Asset Management said they’re surprised by how fast their clients have turned from credit to equities.
Reported by Featured Author

(April 26, 2013) – Insurance CIOs spot rising interest rates on the horizon, and many are allocating proactively to prepare their portfolios, according to one team of insurance specialists. 

“Interest rate risk is something insurers are used to thinking about and adept at modeling: These companies are well positioned to accommodate rising rates,” said Robert Goodman, global head of insurance relationships for Goldman Sachs Asset Management (GSAM).  

While rates remain low and steady at present, Goodman and two of his colleagues from GSAM told aiCIO that many of their insurer clients are anticipating and preparing for a rise in the “medium to long term.”

This is reflected in companies’ asset allocation plans for 2013, which have significantly transformed over the course of a year, according to GSAM research. The most popular asset classes in terms of net allocation changes (the percentage of survey respondents planning to increase minus the percentage planning to decrease their allocation) this year are bank loans (+41%), real estate (+34%), US equities (+33%), emerging market external corporates (+26%), and emerging market equities (+25%). 

In 2012, the high yield credit took the top spot (+33%) in the same survey. This year, only a net 12% of insurers indicated that they plan to increase their allocation, ranking the asset classes in the bottom half of popularity.

“Comparing the research with our personal experience with clients, I was a bit surprised at the decisiveness insurers showed in the shift from credit to equities,” Goodman said. “At this time last year there was quite a bit of credit. The huge popularity of bank loans makes sense: They’re floating rate and offer better security than high yield debt. Still, we would not have been surprised if equities were not among the most popular asset classes.”

Along with interest rate risk, insurance CIOs—particularly in the Americas—are concerned about the prospect of inflation, according to GSAM.  

“I think that you see more concern about inflation in the Americas and Asia because the economies are stronger than those in EMEA [Europe, the Middle East and Africa],” Michael Siegel, GSAM’s global insurance chief, told aiCIO. “Quantitative easing programs were highlighted as single largest concern among insurers globally in our research—and more of it has been taking place at an earlier stage in the Americas.”