Insurers growing more optimistic about investment opportunities this year

While last year was challenging for the insurance industry in terms of economic uncertainty and persistent low interest rates, insurers are optimistic about investment opportunities and many are willing to take on more portfolio risk, according to a recent survey.

Still, results from the survey by Goldman Sachs Asset Management suggest that chief investment officers (CIOs) and chief financial officers (CFOs) differ in their opinions on investment risk.

More than 40% of insurance CIOs intend to increase overall portfolio risk, while CFOs remain more conservative, according to results from the survey of 252 senior insurance professionals, conducted by an independent research firm.

“Globally, insurance CIOs anticipate equities will outperform fixed income assets in the near term,” according to GSAM. “Insurers intend to increase allocations to assets that offer higher total return potential, interest rate protection, and/or an illiquidity premium, including equities, bank loans, real estate, commercial mortgage loans and private equity.”

Among CIOs included in the survey, 31% said they believe investment opportunities are improving, up from 15% last year. More than half of CIOs also said they expect interest rates to rise “significantly” over the next few years.

Most CFOs view the industry as being adequately or over-capitalized, but views differed on whether excess capital should be retained for growth or a stronger capital base, or returned to shareholders, GSAM noted. The CFOs included in the survey also have return on equity expectations for this year in the range of 5% to 15%, the firm said.

Among their concerns for the year, CIOs in the survey noted the impact of accommodative monetary policy (23%) followed by credit and equity market volatility (18%) and inflation (14%).

“It’s clear that insurers are feeling more optimistic, although there is still a good deal of caution,” Michael Siegel, GSAM’s global head of insurance asset management noted in a statement on the survey findings.

“Insurers recognize the difficulty of generating adequate returns by holding predominantly high grade portfolios,” he added. “Lower investment returns have challenged the industry’s ability to deliver strong financial results which have pressured insurance company equity valuations.”