GSAM Insurance Survey

Too Much Capital, Too Little Return
GSAM
Insurance
Survey
GSAM INSURANCE ASSET MANAGEMENT
Michael H. Siegel, PhD
Managing Director, Global Head
Farzana Morbi
Vice President, Investment Strategist
APRIL 2015
TABLE OF CONTENTS
I.
Executive Summary
3
II. GSAM Insurance Survey Background
4
III. Introduction to Survey and Key Findings 6
IV. Investment Environment
8
V. Asset Returns and Allocation Decisions
13
VI. Capitalization and Regulatory Capital 20
VII.Outsourcing
22
VIII.Conclusion
23
The authors would like to thank Nina Onsager for her significant contributions.
GSAM Insurance Asset Management Insurance Survey
I. Executive Summary
Finding attractive investment opportunities has become a familiar challenge in a world of low to
negative yields, tight spreads, and high equity prices. This year insurers demonstrated the
greatest pessimism since we first began conducting the survey four years ago. Insurers believe
the industry is adequately or over-capitalized (“too much capital”), but that investment
opportunities are deteriorating (“too little return”). Our 2015 GSAM Insurance Asset
Management Survey received participation from 267 Chief Investment Officers (CIOs) and Chief
Financial Officers (CFOs), representing over $6 trillion in global balance sheet assets.
Despite the bearish sentiment on the investment environment, approximately one-third of
insurers globally are looking to increase overall portfolio risk. EMEA and Pan Asian insurers
demonstrated strong risk appetite this year. EMEA insurers have increased their risk appetite
over the years and this year they intend to take more liquidity risk, while Pan Asian insurers are
looking to increase credit and equity risk. The majority of Americas-based insurers intend to
maintain their overall risk level.
Insurers are concerned about the pace of US economic growth and consider it to be the
greatest macroeconomic risk. CIOs and CFOs believe the US dollar will continue to strengthen
due to a relatively stronger economy and relatively higher interest rates. Higher rates are critical
for insurers to improve returns, but after yields moved lower in 2014, contrary to expectations,
and central banks expanded “QE” programs, insurers are not anticipating a meaningful increase
in rates this year. One-third of insurers now believe we have moved into the late stages of the
credit cycle with deteriorating credit quality conditions.
Despite years of unprecedented global monetary easing, insurers have become more
concerned about deflation due to slow global growth and lower commodity prices. Insurers are
not expecting a meaningful increase in oil prices this year, and they anticipate commodities will
be amongst the lowest returning asset classes. The last time insurers indicated this level of
concern around deflation was in 2012 when they were anxious about the European debt crisis.
Similar to previous years, insurers have pushed out concerns about rising inflation to the
medium term.
Equity assets are anticipated to outperform credit assets this year, but insurers have more
modest expectations for US public equities relative to last year’s returns. Insurers are looking to
less liquid, private asset classes to bolster returns, and intend to increase allocations to
commercial mortgage loans, infrastructure debt, private equity, middle market loans and real
estate equity. Negative sovereign yields are leading EMEA and Pan Asian companies to diversify
into US investment grade corporates, an asset class insurers have not demonstrated strong
incremental demand for since 2012.
Goldman Sachs Asset Management | 3
GSAM Insurance Asset Management Insurance Survey
II. GSAM Insurance Survey Background
MARKET ENVIRONMENT
Global financial markets were relatively benign last year with low volatility as equities and bonds
delivered strong returns. This year started with higher volatility as headlines were dominated by
falling oil prices and unanticipated aggressive central bank actions. Asset correlations increased
as risk assets sold off broadly. The global oil market is currently facing an oversupply as the US
is producing higher levels of oil, and OPEC, concerned about losing market share, has not cut
production. Demand growth has slowed due to weak economic growth in Europe, Japan and
China. The overall economic impact of lower oil prices is positive for the largest global
economies given the US, China, Japan and Eurozone are net oil importers.
Developed market central banks are pursuing divergent monetary policies as developed
economies demonstrate differing growth trajectories. The US economy is on an upswing with a
strong labor market supporting a housing recovery. Many investors anticipate the Fed will
tighten in the second half of 2015, though weaker commodity prices have contributed to low
inflation. The US dollar continues to strengthen, and rising wealth and falling oil prices are
supportive of higher consumer spending which accounts for approximately 70% of US GDP.1
Euro area GDP growth has picked up, particularly in Germany and Spain, and business
confidence is improving. The ECB is committed to quantitative easing with its €60 billion
monthly purchases from March 2015 to September 2016. The program is focused on supporting
growth in the region but an easy monetary policy will likely further weaken the euro. Greece
reached an agreement with European leaders to extend the bailout, leading to a temporary
reprieve to the question of a Greek exit. In January, the Swiss National Bank surprised the
market with the removal of the exchange rate floor leading to a substantial appreciation of the
Swiss Franc.
Japan’s economy is benefiting from lower oil prices and is experiencing a recovery in consumer
confidence. The impact of Abenomics remains to be seen, but Japanese corporate profitability
has improved. A weaker yen has benefited Japan’s export-oriented economy.
Emerging market economies are still growing faster than developed market economies, albeit
below recent trends. India made a surprise interest rate cut which has supported equities, and
investors generally view Modi’s leadership favorably. S&P downgraded Russia’s foreign currency
rating to below investment grade due to economic deterioration following sanctions that were
implemented as a result of the conflict with Ukraine. In China, lower oil prices, a housing market
correction and sluggish demand growth have led the central bank to cut rates.
1
World Bank data as of 2013.
4 | Goldman Sachs Asset Management
GSAM Insurance Asset Management Insurance Survey
INSURANCE OPERATING AND REGULATORY ENVIRONMENT
US Life insurers began the year well-capitalized with strong balance sheets resulting from
favorable equity and credit markets throughout 2014. Pan Asian insurers are experiencing strong
premium growth. European Life insurers are facing a more difficult environment with low to
negative interest rates in addition to preparing for implementation of Solvency II.
US P&C insurers have utilized share repurchases and dividends to redeploy growing capital
levels. Although the P&C industry is faced with increasing competition and slower premium
growth, the sector is expected to maintain underwriting profits. The pricing environment
continues to soften in the reinsurance market due to an influx of alternative capital. As a result,
M&A activity has picked up and is expected to gain momentum throughout the year.
Insurers globally are facing increased regulatory requirements as international and national
frameworks continue to evolve. In Europe, Solvency II will go into effect on January 1, 2016.
Given a 16 year transition period to fully implement certain components of the directive, the
impact on European insurers is not expected to be severe. The European Insurance and
Occupational Pensions Authority (EIOPA) stress test results indicate insurers are generally
sufficiently capitalized under the Solvency II regime. Asian insurers are broadly moving towards
regulatory standards similar to Solvency II or aligned with global Insurance Core Principles
(ICPs). In the US, as part of the Solvency Modernization Initiative (SMI), insurers are required to
file their Own Risk and Solvency Assessment (ORSA) reports beginning in 2015 to internally
assess their ability to withstand financial stress. ORSA is an additional tool to the Risk Based
Capital framework, and may create the need for insurers to alter product offerings and risk
management policies based on their results.
Goldman Sachs Asset Management | 5
GSAM Insurance Asset Management Insurance Survey
III. Introduction to Survey and Key Findings
SUMMARY OF SURVEY RESPONDENTS
GSAM Insurance Asset Management continued its partnership with KRC Research, an
independent research provider. The survey provides valuable insights from insurance CIOs and
CFOs regarding the macroeconomic environment, return expectations, asset allocation decisions,
portfolio construction and industry capitalization. We received responses from 208 CIOs, 48 CFOs
and 11 individuals who serve as both the CIO and the CFO. This year our survey included
insurance companies that invest over $6 trillion in global balance sheet assets. The participating
companies represent a broad cross section of the global insurance industry in terms of size, line
of business and geography. The table below summarizes the profile of respondents.
Respondent Profile
Type
CIO
CFO
Both
Life
74
15
5
94
P&C / Non-Life
66
24
4
94
Multi-Line
40
4
1
45
Health
16
2
0
18
Reinsurance
Total
12
3
1
16
Total
208
48
11
267
Region
CIO
CFO
Both
Total
Americas
127
25
3
155
43
18
7
68
EMEA
Pan Asia
Total
38
5
1
44
208
48
11
267
KEY FINDINGS
Investment Opportunities
This year insurers demonstrated the most pessimism regarding investment opportunities as the
vast majority believes investment opportunities are getting worse. This is a significant increase
in negative sentiment from previous years.
Macro Risks
Insurers are most concerned about US economic growth, credit and equity market volatility and
deflation. Insurers believe China, Russia and the US have the greatest potential to unexpectedly
roil global financial markets.
Market Outlook
Market expectations are tempered. After rates moved lower in 2014 contrary to expectations,
most insurers do not anticipate a meaningful rise in rates in 2015. The majority of survey
respondents believe the 10-Year US Treasury yield will be between 2.0-2.5% at year-end, while
almost one-third believe it will be between 2.5-3.0%.
Most insurers hold the view that the US dollar will appreciate relative to other major currencies
with the exception of the Swiss Franc.
There is strong consensus on the trajectory of public equities and oil prices among insurers.
Most believe equities will return between 0-10%, and oil prices will be range-bound between
$50-$75 per barrel.
The majority of insurers believe we are in the middle stage of the credit cycle with stable credit
quality and do not anticipate major movements in the credit markets. One-third of insurers think
we have now entered the late stage of the credit cycle with deteriorating credit quality.
6 | Goldman Sachs Asset Management
GSAM Insurance Asset Management Insurance Survey
Deflation/Inflation
Deflation concerns have reemerged but expectations are fairly barbelled. More than one-third of
insurers believe deflation will be a concern in their domestic market over the next year, while
more than 40% believe deflation will not be a risk within the next five years.
Near term concern around inflation remains muted as most believe inflation will be a risk in the
next 2-5 years.
Investment Risk
Approximately one-third of insurers globally are looking to increase overall portfolio risk, while
the majority intends to maintain current risk levels. EMEA and Pan Asian insurers demonstrated
strong risk appetite this year. EMEA insurers intend to take more liquidity risk, while Pan Asian
insurers intend to increase credit and equity risk.
Low yields continue to pose the greatest portfolio risk for the majority of insurers.
Asset Class Return Expectations
Equity asset classes are broadly expected to outperform credit asset classes. Private equity, US
equities and European equities are anticipated to be the highest returning asset classes.
Insurers have the lowest return expectations for cash/short-term instruments, government and
agency debt and commodities.
Asset Allocation Decisions
Insurers globally intend to increase allocations to less liquid assets. The top four asset classes
are all private: commercial mortgage loans, infrastructure debt, middle market corporate loans
and private equity.
Consistent with their return expectations, insurers intend to decrease allocations to cash/
short-term instruments and government and agency debt.
Impact of Regulatory Capital on Asset Allocation
Most insurers believe their industry is either adequately or over-capitalized.
A significant percentage of EMEA and Pan Asian insurers stated they are more likely to allocate to
long duration bonds due to regulatory capital treatment. This is likely a result of insurers focusing
on duration matching under Solvency II and its equivalents as duration mismatches are penalized.
Outsourcing
Insurers are looking to outsource investments in hedge funds, emerging market equities, US
investment grade corporates, private equity and middle market loans.
SURPRISING FINDINGS
• This year insurers demonstrated the most pessimism regarding investment opportunities as most
believe investment opportunities are getting worse.
• Insurers are not anticipating a significant move in interest rates. The vast majority believes the 10-Year
US Treasury yield will not exceed 3.0% by year-end.
• Insurers believe oil prices will remain range-bound at $50-$75 per barrel.
• One-third of insurers believe we have now entered the late stage of the credit cycle with deteriorating
credit quality.
• Although credit spreads continue to tighten and equity markets continue to move higher, approximately
one-third of insurers globally are looking to increase overall portfolio risk.
• EMEA and Pan Asian insurers demonstrated strong risk appetite this year. EMEA insurers intend to
take more liquidity risk, while Pan Asian insurers intend to increase credit and equity risk. Both EMEA
and Pan Asian insurers expressed demand for European equities.
• As EMEA and Pan Asian companies face low to negative sovereign yields, they plan to diversify into US
investment grade corporates, an asset class insurers have not demonstrated strong incremental
demand for since 2012.
Goldman Sachs Asset Management | 7
GSAM Insurance Asset Management Insurance Survey
IV. Investment Environment
The ultra-low yield environment continues to be a challenge, and insurers demonstrated more
pessimism than in previous years regarding investment opportunities. Insurers are worried
about the potential impact of slower growth in the US, market volatility and deflation. They are
also concerned about the unanticipated impact China and Russia can have on global financial
markets. Deflation has returned as a concern due to the impact of lower oil prices and slower
global growth. Despite years of global monetary easing, most insurers have pushed out their
inflation concerns to the medium term, a theme we have seen over the last few years.
Insurers are optimistic about the strength of the US dollar relative to other currencies with the
exception of the Swiss Franc, but have softened their expectations for the 10-Year US Treasury
yield relative to last year. The vast majority of insurers do not expect the 10-Year yield to move
higher than 3.0% this year. Most insurers are not anticipating a significant move in credit
spreads, which highlights the difficulty of finding attractive investment opportunities. While most
insurers believe we are in the middle of the credit cycle, approximately one-third believe we
have entered the late stage of the credit cycle with deteriorating credit quality conditions.
Insurers are more optimistic about public equities and anticipate moderate returns. With the
current oversupply in oil markets, most insurers expect oil prices to remain range-bound at
$50-$75 per barrel. Oil price volatility may create attractive investment opportunities, and
insurers view private equity/distressed strategies and high yield debt as the best strategies to
exploit the market dislocation.
Regulatory changes including Basel III and Dodd Frank have impacted market liquidity
conditions. Approximately one-third of insurers are concerned about the impact that
deteriorating liquidity conditions will have on their investment portfolios, a concern that is
particularly concentrated in Asia.
INVESTMENT OPPORTUNITIES
This year insurers demonstrated the greatest amount of pessimism regarding
investment opportunities since we first began conducting the survey
• The majority of insurers believes investment
opportunities are getting worse (63%), while
only 9% believe opportunities are improving.
• EMEA-based insurers are particularly bearish as
74% believe investment opportunities are
getting worse. This is understandable given
sovereign yields in Europe are moving further
into negative territory.
Overall, do you feel that investment opportunities compared to a year ago are improving,
getting worse or staying the same?
2015 by Region (%)
Year Over Year (%)
74
66
63
58
48
26
31
28
39
38
34
43
30
25
24
14
9
12
3
Improving
2015
8 | Goldman Sachs Asset Management
Staying the Same Getting Worse
2014
2013
2012
27
7
Improving
Americas
Staying the Same Getting Worse
EMEA
Pan Asia
GSAM Insurance Asset Management Insurance Survey
MACRO RISKS
• Insurers identified slower US economic growth
(23%), credit and equity market volatility (19%)
and deflation (17%) as the greatest
macroeconomic risks.
• Nearly half of insurers globally (47%) identified
an economic slowdown or a sovereign crisis in
Europe as a top three macroeconomic risk.
• Insurers demonstrated a regional bias. Nearly
60% of Americas-based insurers selected slower
US economic growth as a top three macroeconomic risk; 75% of EMEA-based insurers
selected an economic slowdown/sovereign crisis
in Europe as a top three macro concern.
• Insurers believe the economies with the greatest
potential to unexpectedly roil the markets are
China (36%), Russia (24%) and the US (23%).
Which of the following issues pose the greatest macroeconomic risk to your investment
portfolio? Please select and rank your top 3.
2015 Macroeconomic Risks
% Ranked First Choice
% Total Ranked (1-3)
51
23
Slower-than-Expected US Economic Growth
53
19
Credit & Equity Market Volatility
43
17
Deflation
47
15
Economic Slowdown/Sovereign Crisis in Europe
31
13
Acceleration of Monetary Tightening
Economic Slowdown In Emerging Markets and China
5
Inflation
5
24
15
30
3
Deteriorating Liquidity Conditions
7
0
Volatile Energy Prices
In your opinion, which economy will have the greatest unanticipated impact on global
% Ranked First Choice % Total Ranked (1-3)
2014 Macroeconomic Risks
financial markets in 2015? (%)
Credit and Equity Market Volatility
China
Slower-than-Expected US Economic Growth
Russia
Acceleration of Monetary Tightening
United States
Economic Shock in Emerging Markets and China
6
Greece
Deflation
6
Japan
Inflation
2
Kindgdom
USUnited
Financial
Market Regulatory Change
US Fiscal Venezuela
Issues
19
15
15
15
36
47
24
44
23
41
27
13
28
10
14
6
2
17
5
Slow Growth in Europe
2
European Financial Market Regulatory Change
2
61
9
11
Goldman Sachs Asset Management | 9
GSAM Insurance Asset Management Insurance Survey
MARKET OUTLOOK
Insurers have tempered their rate expectations and approximately one-third believe
we are in the late stage of the credit cycle
• Rates: The majority (52%) believes the 10-Year
US Treasury yield will be between 2.0-2.5% at
year-end, while 31% believe it will be between
2.5-3.0%.
• Currencies: Most insurers believe the US dollar
will appreciate relative to other major currencies
with the exception of the Swiss Franc, which
56% anticipate will strengthen relative to the US
dollar. 87% of insurers believe the Euro will
depreciate relative to the US dollar.
• Equities: There is significant consensus around
return expectations for equities, with 76%
expecting equities to return between 0-10%.
• Oil Prices: Insurers broadly (81%) believe Brent
crude oil will remain within the range of $50-$75
per barrel.
• Oil Market Dislocation: Insurers view distressed debt/ private equity energy funds (37%)
or energy high yield debt (29%) as the best
strategies for capitalizing on the energy market
dislocation. P&C insurers demonstrated a
preference for energy high yield debt (39%),
while Life and Multi-Line companies showed a
preference for distressed debt/private equity
strategies (43% and 49% respectively).
• Credit Cycle: Most insurers believe we are in
the middle of the credit cycle with stable credit
quality (62%), while approximately one-third
believe we are in the late stage of the credit
cycle with deteriorating credit quality (33%).
• Credit Spreads: Most insurers expect a modest
tightening or modest widening (56%), with a large
percentage expecting a moderate widening (43%).
Where do you expect the 10-Year US Treasury yield will be at year-end 2015? (%)
2015
2014
56
52
31
31
13
5
1
2.0% or Less
6
4
> 2.0 to 2.5%
> 2.5 to 3.0%
0
0
> 3.0 to 3.5%
> 3.5 to 4.0%
0
> 4.0%
Do you believe the following currencies will appreciate or depreciate relative to the
US dollar? (%)
Depreciate (%)
10-Year US Treasury Yield 2015 vs. 2014
Chinese Yuan
Euro
32
87
Japanese Yen
Appreciate (%)
68
13
16
84
UK Sterling
64
36
Swiss Franc
44
56
What do you expect the 2015 total return will be for the S&P 500 Index? (%)
76
2015
2014
11
1
0
-20% or Less
2
1
> -20 to -10%
18
10
6
> -10 to 0%
S&P 500 Index Total Return 2015 vs. 2014
10 | Goldman Sachs Asset Management
75
0
> 0 to 10%
> 10 to 20%
0
> 20%
GSAM Insurance Asset Management Insurance Survey
Where do you expect Brent crude oil (USD/bbl) will be at year-end 2015? (%)
81
14
5
1
$25 or Less
> $25 to $50
> $50 to $75
> $75 to $100
0
> $100
Brent
Crude
Oil Price
(USD/bbl)
In
your
opinion,
which
asset class or strategy is the most attractive for capitalizing on the
dislocation in energy markets? (%)
37
29
18
Distressed Debt/
Private Equity
Energy Fund
Energy
High Yield Debt
16
Public Equity/
Master Limited
Partnerships (MLPs)
Commodities
62
Where do you think we are in the credit cycle? (%)
62
33
33
5
Early Stage
5
Improving
Credit Quality
Early Stage Improving
Credit Quality
Middle Stage Stable
Credit Quality
Middle Stage Stable
Credit Quality
Late Stage Deteriorating
Credit Quality
Late Stage Deteriorating
Credit Quality
What do you think will happen to credit spreads in 2015? (%)
56
56
43
43
1
Modestly Tighten
to Modestly
Widen
Modestly Tighten
to Modestly
Widen
Moderately
Widen
Significantly
1
Widen
Moderately
Widen
Significantly
Widen
Goldman Sachs Asset Management | 11
GSAM Insurance Asset Management Insurance Survey
INFLATION/DEFLATION
Deflation concerns have reemerged but expectations are fairly barbelled
• 35% of insurers believe deflation will be a
concern in their domestic market over the next
year, while 43% do not believe deflation will be
a risk within the next five years.
• Inflation concerns are muted. Similar to previous
years insurers have pushed out their concerns
to the medium term with 70% indicating they
believe it will be a risk in their domestic market
in the next 2-5 years.
• Americas-based insurers (48%) and P&C
insurers (51%) are less concerned about
deflation and do not view it as a risk over the
next five years.
When do you expect inflation/deflation will be a concern in your domestic market?
Inflation (%)
Deflation (%)
60
47
43
40
35
31
30
26
19
4
21
15
16
7
3
In the
Next Year
2015
2-3
Years
3-5
Years
Will Not Be
a Risk in the
Next 5 Years
2014
Deflation will be a concern in the next year
Year Over Year (%)
35
28
21
10
2012
12 | Goldman Sachs Asset Management
2013
2014
2015
In the
Next Year
2-3
Years
4
3-5
Years
Will Not Be
a Risk in the
Next 5 Years
GSAM Insurance Asset Management Insurance Survey
LIQUIDITY CONDITIONS
• Approximately one-third (34%) of insurers
believe deteriorating liquidity conditions will
impact their investment portfolio, while nearly
half (49%) do not believe it will have an impact.
• More than half (55%) of Pan Asian insurers
believe deteriorating liquidity conditions will
impact their portfolio.
Do you think deteriorating liquidity conditions will have a significant impact on your
investment portfolio?
Global (%)
Region (%)
55
18%
34%
49%
43
Yes
No
Do Not Believe
Liquidity Conditions
Are Deteriorating
59
34
28
24 23
23
14
Yes
Americas
No
EMEA
Do Not Believe
Liquidity Conditions
Are Deteriorating
Pan Asia
V. Asset Returns and Allocation Decisions
Approximately one-third of insurers globally are looking to take on more investment risk, while
the majority intends to maintain current risk levels. EMEA and Pan Asian insurers demonstrated
strong risk appetite this year as they face low to negative sovereign yields. EMEA-based
insurers have increased their risk appetite over the years and are looking to take more liquidity
risk, while Pan Asian insurers are looking to increase both credit and equity risk. Most insurers
believe their industry peer group is taking on the appropriate amount of investment risk.
Similar to 2014, insurers expect equity asset classes to outperform credit asset classes. Insurers
have the lowest return expectations for cash/short-term instruments and government and agency
debt, and intend to decrease allocations accordingly. After months of volatile and declining oil
prices, insurers also expect commodities to be one of the lowest returning asset classes this year.
Insurers globally demonstrated strong demand for less liquid, private assets including
commercial mortgage loans, infrastructure debt, middle market loans, private equity and real
estate equity. There are notable differences by region with regards to asset allocation. Americasbased insurers demonstrated the greatest appetite for commercial mortgage loans, private
equity, middle market loans, US securitized credit and infrastructure debt. EMEA insurers intend
to increase allocations to infrastructure debt, European equities, middle market loans, real
estate equity and US investment grade corporates. Pan Asian insurers intend to make the
greatest net allocations to infrastructure debt and US investment grade corporates, followed by
private equity, European equities and infrastructure equity.
Insurers cited valuations of both commercial mortgage loans and infrastructure debt as reasons
for not executing on their intended allocations from last year. The commercial mortgage loan
market is facing increasing competition from the CMBS market which has recently pressured
yields. Infrastructure debt, while attractive for its long duration, faces strong demand and muted
supply. Insurers also noted that the lack of internal systems or personnel has deterred
investments in both commercial mortgage loans and infrastructure debt.
Goldman Sachs Asset Management | 13
GSAM Insurance Asset Management Insurance Survey
INVESTMENT RISK
Most insurers believe their industry peer group is taking the appropriate amount of
investment risk
(66%), while 21% believe the industry is taking
too much risk, a sentiment that is more concentrated amongst Multi-Line insurers (40%).
• The majority of insurers surveyed (66%)
consider low yields to be the greatest investment risk to their portfolio, followed by rising
interest rates (12%).
• EMEA-based insurers and P&C insurers
expressed slightly greater concern about rising
interest rates (19% and 20% respectively)
relative to their peer groups.
• EMEA insurers hold dispersed views on
investment risk; 29% believe their peer group
is taking too much risk, 50% believe their risk
level is appropriate and 21% believe their risk
level is insufficient.
• Most insurers believe their industry peer group is
taking the appropriate amount of investment risk
• 70% of P&C insurers believe their peer group is
taking on the appropriate amount of risk.
Please select the investment risk that you are most concerned about. (%)
66
70
Low Yields
57
68
12
10
Rising
Interest Rates
19
7
10
8
Credit Spread
Widening
15
14
6
7
6
Equity Market
Volatility
5
Liquidity Risk
5
5
3
7
Global
Americas
EMEA
Pan Asia
Do you think your industry peer group is currently taking on too much, an appropriate
level of or insufficient investment risk?
Type (%)
Region (%)
19
21
19
Too Much
Investment Risk
13
29
11
13
Insufficient
Investment Risk
40
19
22
8
7
21
20
14
17
13
11
66
72
Appropriate Level of
Investment Risk
50
67
70
53
68
Global
EMEA
14 | Goldman Sachs Asset Management
Americas
Pan Asia
Life
P&C/Non-Life
Reinsurance
Health
69
67
Multi-Line
GSAM Insurance Asset Management Insurance Survey
INVESTMENT PORTFOLIO RISK
Despite the overall bearish sentiment on the investment environment, some insurers
are looking to increase portfolio risk
• Globally, 33% of insurers intend to increase
overall investment risk, while 55% intend to
maintain risk levels.
• Pan Asian (45%) and Multi-Line insurers (40%)
demonstrated the strongest appetite for
increasing equity risk.
• 40% of EMEA insurers and 43% of Pan Asian
insurers plan to increase overall investment risk.
EMEA insurers intend to take on more liquidity
risk, while Pan Asian insurers intend to increase
credit and equity risk.
• 30% of insurers intend to increase credit risk,
and 34% of insurers intend to decrease liquidity
in their portfolio.
• The majority (63%) of Americas-based insurers
intend to maintain overall risk.
• 24% intend to increase duration in their
portfolio, while the majority (61%) intends to
maintain duration, 35% of Life companies are
looking to increase duration, which may be
driven in part by liability matching needs.
Are you planning to increase, decrease or maintain the overall risk in your investment
portfolio in the next 12 months?
Region
Decrease (%)
Global
12
Americas
Increase (%)
33
26
11
EMEA
40
13
Pan Asia
43
14
Year Over Year
2012
14
26
2013
41
7
2014
8
2015
35
12
33
Are you planning to increase, decrease or maintain the equity risk, credit risk, liquidity and
duration in your investment portfolio in the next 12 months?
Decrease (%)
Global
Equity Risk
11
Credit Risk
Liquidity
Increase (%)
28
15
30
34
13
Duration
15
24
Credit Risk by Region
Americas
14
EMEA
17
18
Pan Asia
40
11
57
Liquidity by Region
Americas
EMEA
Pan Asia
30
13
47
12
25
16
Goldman Sachs Asset Management | 15
GSAM Insurance Asset Management Insurance Survey
ASSET CLASS RETURN EXPECTATIONS
Equity asset classes are expected to outperform credit assets
• Insurers have the highest return expectations for
private equity (21%), US equities (18%) and
European equities (15%). European insurers are
more bullish on European equities relative to
other regions (31%).
• Insurers globally have the lowest return
expectations for cash/short-term instruments
(36%), government and agency debt (24%) and
commodities (10%).
• CFOs are more bullish on public equity relative
to CIOs who are more bullish on private equity.
Please rank the 3 asset classes that you expect to deliver the highest and lowest total
returns in the next 12 months. (% Ranked First Choice)
Highest
Total Return (%)
Lowest
Total Return (%)
21
Private Equity
1
18
US Equities
2
15
European Equities
7
Real Estate Equity
4
1
6
High Yield Debt
US Investment Grade Corporates
4
Emerging Market Equities
4
Hedge Funds
4
6
0
6
2
Emerging Market Sovereign Debt
3
Middle Market Corporate Loans
3
Commodities
3
US Securitized Credit
2
0
Mezzanine Debt
2
1
Infrastructure Equity
2
1
2
0
10
24
Government and Agency Debt
1
European Investment Grade Corporates
1
Emerging Market Corporate Debt
1
Commercial Mortgage Loans
1
0
Infrastructure Debt
1
0
Cash and Short-Term Instruments
0
Large Market Corporate Loans
0
2
3
36
0
CIO vs. CFO Highest Total Return Expectations
CIO
CFO
Private Equity
23
US Equities
16
European Equities
Real Estate Equity
16 | Goldman Sachs Asset Management
15
7
US Equities
European Equities
24
14
High Yield Debt
12
Private Equity
12
25
34
32
9
High Yield Debt
24
46
25 5
European Equities
GSAM Insurance
Asset Management
Insurance
Survey
23
29
US Equities
9
39
21
47
27 4
Emerging Market Corporate Debt
19
49
Emerging Market Sovereign Debt
28 5
18
48
Large Market Corporate Loans
31 3
ASSET
ALLOCATION DECISIONS 18
56
Hedge
Funds
17
9
16
27
European Investment Grade Corporates
44
13
Insurers intend to allocate to less liquid, private
asset classes as opposed to
16
60
Mezzanine Debt
22 2
opportunistic, liquid credit as they indicated in previous years
16
54
Emerging Market Equities
27 3
•
The
top
four
asset
classes
that
insurers
intend
•
Pan
Asian
and
EMEA-based
insurers
also
intend
15
71
Infrastructure Equity
13 1
to allocate to are all private: commercial
to increase allocations to US investment grade
10
Government and Agency Debt
60
27 3
mortgage loans (35%), infrastructure debt
corporates and European equities.
7
Cash
and
Short-Term
Instruments
61
27 4
(30%), middle market corporate loans (29%) and
• Insurers intend to decrease allocations to cash/ 85
Commodities
2
10 3
private equity (29%).
short-term instruments (20%) and government
and agency debt (17%).
Increase
Maintain
Decrease
Do Not Invest
Are you planning to increase, decrease or maintain your allocation to the following asset
classes in the next 12 months?
Net (% Increase - % Decrease)
Commercial Mortgage Loans
Infrastructure Debt
Middle Market Corporate Loans
Private Equity
Real Estate Equity
US Securitized Credit
European Equities
Emerging Market Corporate Debt
High Yield Debt
US Investment Grade Corporates
Large Market Corporate Loans
US Equities
Emerging Market Sovereign Debt
Mezzanine Debt
Infrastructure Equity
Emerging Market Equities
Hedge Funds
European Investment Grade Corporates
Commodities
Government and Agency Debt
-17
Cash and Short-Term Instruments
-20
+35
+30
+29
+29
+25
+23
+19
+16
+16
+15
+15
+15
+14
+14
+14
+13
+10
+4
0
2015 vs. 2012 Highest Net Asset Allocation Changes (% Increase - % Decrease)
2015
2012
Commercial
Mortgage Loans
Infrastructure Debt
Middle Market
Corporate Loans
29
Real Estate
29
30
Private Equity
Real Estate Equity
30
29
High Yield Debt
US Investment
Grade Corporates
Emerging Market Debt
35
25
Bank Loans
33
30
24
Goldman Sachs Asset Management | 17
GSAM Insurance Asset Management Insurance Survey
Net Asset Allocation Changes
Net (% Increase - % Decrease)
Americas Top 5
Commercial Mortgage Loans
48
Private Equity
34
Middle Market Corporate Loans
30
US Securitized Credit
30
Infrastructure Debt
26
EMEA Top 5
Infrastructure Debt
34
European Equities
31
Middle Market Corporate Loans
28
Real Estate Equity
25
US Investment Grade Corporates
24
Pan Asia Top 5
Infrastructure Debt
36
US Investment Grade Corporates
36
Private Equity
32
European Equities
30
Infrastructure Equity
30
Gross Asset Allocation Changes
Gross (%)
Commercial Mortgage Loans
Private Equity
Infrastructure Debt
Middle Market Corporate Loans
US Investment Grade Corporates
US Securitized Credit
Real Estate Equity
High Yield Debt
European Equities
US Equities
Emerging Market Corporate Debt
Emerging Market Sovereign Debt
Large Market Corporate Loans
Hedge Funds
European Investment Grade Corporates
Mezzanine Debt
Emerging Market Equities
Infrastructure Equity
Government and Agency Debt
Cash and Short-Term Instruments
Commodities
Increase
Maintain
Decrease
22 2
37
38
19 4
33
30
43
54
17 0
29
48
22 0
28
51
27
27
49
22 2
32
24
34
9
46
25 5
23
29
9
39
21
47
27 4
19
5
49
31 3
48
28
18
18
17
56
9
16
44
16
27
13
60
22 2
16
54
27 3
71
13 1
10
7
2
27
42 4
25
15
8
13
27 3
60
61
27
10 3
4
85
Do Not Invest
Net (% Increase - % Decrease)
Commercial Mortgage Loans
Infrastructure Debt
Middle Market Corporate Loans
18 | Goldman Sachs Asset Management
Private Equity
+35
+30
+29
+29
GSAM Insurance Asset Management Insurance Survey
• Some insurers indicated that while they intended to allocate to infrastructure debt, commercial
mortgage loans and private equity last year, they did not execute on these allocations primarily due to
valuations (26%) and insufficient internal infrastructure or personnel (22%).
Which of the following asset classes did you intend to increase your allocation to in 2014
but did not? (%)
11
Infrastructure Debt
10
Commercial Mortgage Loans
9
Private Equity
Middle Market Corporate Loans
7
6
Real Estate Equity
High Yield Debt
4
Public Equity
3
Mezzanine Debt
3
ALTERNATIVE AND EQUITY ASSETS
• Insurers typically make public equity (47%),
private equity (47%) and hedge fund (42%)
allocations with their surplus.
• Insurers are more likely to use public equity
(28%) for both long-tail lines and surplus assets
relative to private equity or hedge funds.
• More than half of P&C insurers (56%) allocate to
private and public equity with surplus assets.
Where would you place the following asset classes?
Public Equity (%)
18%
Private Equity (%)
7%
21%
Hedge Funds (%)
5%
10%
40%
42%
28%
21%
47%
47%
13%
Long-Tail Liabilities
Surplus
Both
Neither
Goldman Sachs Asset Management | 19
GSAM Insurance Asset Management Insurance Survey
VI. Capitalization and Regulatory Capital
Capitalization remains strong. P&C insurers generally believe their industry is adequately or
over-capitalized following several years of modest catastrophe losses as well as positive
earnings and investment performance. In addition to having well-capitalized balance-sheets, the
significant growth in alternative capital has impacted Reinsurers, who are experiencing pricing
pressure as a result of the influx in new capital. Approximately half of Reinsurers believe the
industry is over-capitalized. EMEA-based insurers expressed slightly higher concerns of undercapitalization relative to other regions.
While the majority of Americas-based insurers believes regulatory capital will not impact their
investment decisions this year, EMEA and Pan Asian insurers are more likely to take regulatory
capital treatment into consideration when making investment decisions. A significant percentage
of insurers indicated that regulatory capital charges for hedge funds and equity asset classes
impact their investment decisions, as these assets face some of the highest capital charges.
EMEA and Pan Asian insurers are more likely to increase their allocations to long duration bonds
based on regulatory capital treatment, which may be due to duration matching needs. Insurers
face significant capital charges for duration mismatches under Solvency II.
CAPITALIZATION
Most insurers believe they are either adequately or over-capitalized
• Approximately half of Reinsurers (50%) and
P&C insurers (45%) believe their industry is
over-capitalized.
• Some EMEA-based insurers (21%) indicated
their industry is under-capitalized.
• 66% of Life insurers and 69% of Multi-Line
insurers believe their industry is adequately
capitalized.
Do you believe your industry peer group is currently over-, adequately, or undercapitalized? (%)
22
45
20
Over-capitalized
50
33
66
49
69
Adequately Capitalized
44
67
12
6
Under-capitalized
11
6
0
Life
P&C/Non-Life
Reinsurance
Health
20 | Goldman Sachs Asset Management
Multi-Line
GSAM Insurance Asset Management Insurance Survey
IMPACT OF REGULATORY CAPITAL ON ASSET ALLOCATION
• EMEA (37%) and Pan Asian insurers (34%) are
more likely to allocate to long duration bonds
due to regulatory capital treatment.
• 22% of Life companies stated they are more
likely to invest in securitized credit due to
favorable regulatory capital treatment in the US.
• Most Americas-based insurers do not believe
regulatory capital will impact their investment
decisions particularly in long duration bonds
(85%), corporate credit (72%) and securitized
credit (79%).
• In EMEA, approximately half of insurers said
they are less likely to allocate to hedge funds
and high yield debt.
• 38% of insurers globally indicated they are less
likely to allocate to equity asset classes due to
regulatory capital treatment.
Do regulatory capital concerns influence your likelihood of investing in the following
asset classes?
Decrease Increase
Likelihood (%) Likelihood (%)
Hedge Funds
42
Equity Assets
10
38
High Yield Debt
10
33
Real Estate Equity
12
30
Securitized Credit
14
24
Corporate Loans
14
14
22
Long Duration Bonds
12
19
Decrease Increase
Likelihood (%) Likelihood (%)
Long Duration Bonds by Region
Americas
8
7
EMEA
24
Pan Asia
37
14
34
Securitized Credit by Region
Americas
8
13
EMEA
46
19
Pan Asia
32
25
High Yield Debt by Region
Americas
EMEA
25
49
Pan Asia
12
7
36
23
Equity Assets by Region
Americas
EMEA
Pan Asia
34
47
6
7
36
27
Goldman Sachs Asset Management | 21
GSAM Insurance Asset Management Insurance Survey
VII.Outsourcing
The demand for outsourcing to third party asset managers remains strong. Pan Asian insurers
plan to outsource more of their portfolio this year. Given the need for significant infrastructure
and resources, insurers intend to outsource investments in alternatives such as hedge funds
and private equity and niche strategies such as emerging market equities.
• Insurers globally intend to outsource more of
their portfolio (22%) or the same amount (58%).
• 55% of Pan Asian insurers intend to outsource
more of their portfolio.
• Insurers are looking to outsource hedge funds
(26%), emerging market equities (23%), US
investment grade corporates (23%), private
equity (22%) and middle market loans (20%).
Do you anticipate outsourcing more, the same amount or less of your investment
portfolio in the next 12 months?
Region (%)
58
55
61
60
45
22
15
18
9
10
13
10
14
9
0
More
Global
Same Amount
Americas
EMEA
Less
0
Do Not Outsource
Pan Asia
Total Assets (%)
72
50
26
52
26
15
More
$5bn or Less
22 | Goldman Sachs Asset Management
16
14
6
Same Amount
$5-$50bn
More than $50bn
5
Less
7
10
Do Not Outsource
GSAM Insurance Asset Management Insurance Survey
Which of the following asset classes are you considering outsourcing to a third party asset
manager in the next 12 months? Please select all that apply. (%)
Hedge Funds
26
Emerging Market Equities
23
US Investment Grade Corporates
23
Private Equity
22
High Yield Debt
20
Middle Market Corporate Loans
20
Real Estate Equity
20
Emerging Market Sovereign Debt
17
Government and Agency Debt
17
Infrastructure Debt
16
Commercial Mortgage Loans
15
Emerging Market Corporate Debt
15
European Investment Grade Corporates
15
US Securitized Credit
15
Cash and Short-Term Instruments
13
European Equities
13
Large Market Corporate Loans
13
Mezzanine Debt
13
Commodities
12
US Equities
12
Infrastructure Equity
3
VIII. Conclusion
As easy global monetary policies have pushed yields to ultra-low to negative levels, insurers are
finding it more difficult to find attractive investment opportunities. Despite this pessimistic view,
approximately one-third of insurers globally intend to increase overall portfolio risk, with the
most significant risk appetite stemming from EMEA and Pan Asia. Insurers are anxious about
the growth trajectory of the largest economies, particularly the US, and they are concerned
about higher levels of volatility and deflation. Insurers believe equity asset classes will
outperform credit assets this year and are looking to increase allocations to less liquid, private
asset classes. Overall the industry is well-capitalized and insurers are generally comfortable with
the level of risk their peers are taking.
Goldman Sachs Asset Management | 23
General Disclosures
Survey information as of February 25, 2015.
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