Low yields may lead insurers to higher-risk investments: Goldman Sachs

Sluggishly low interest rates and the ongoing European debt crisis have prompted more insurance companies to look at boosting their returns through potentially riskier investment vehicles, says a survey of chief investment officers (CIOs) by Goldman Sachs Asset Management (GSAM).

The poll of CIOs of 152 global insurers representing $3.8 trillion in assets found that the current environment is “challenging,“ with current yields resulting in lower investment returns. GSAM calls the near-term outlook “bleak” as insurers expect investment opportunities to deteriorate or hold steady.

“The results of our survey suggest that while insurers are concerned about the environment, they are seeking to enhance returns,” GSAM notes in the recent report Seeking Return in an Adverse Environment. “Insurers are migrating down the corporate credit quality spectrum via increasing allocations to high yield, bank loans and mezzanine debt. In addition, insurers intend to increase their allocations to such asset classes as real estate, emerging market debt and private equity.”

In the survey, 26% of insurers expect to increase overall investment risk, while 14% expect to decrease risk. Respondents cited the sovereign debt crisis in Europe as the main macroeconomic risk, while the prolonged low-yield environment posed the greatest investment risk to their portfolios.

GSAM also notes that more than a quarter of respondents anticipate deflation to be a concern in the next year. The vast majority of insurers surveyed said they intend to invest more resources into their risk management infrastructure.

“In our view, insurers are now better positioned to add risk incrementally to portfolios, as they are well capitalized, continue to invest in their risk management infrastructure and are seeking return through prudent diversification,” the report states.