Insurers in the Asia region are taking on more risk and plan to load up on private equity allocations in the hunt for yield, even as US monetary tightening and inflation weigh on their market sentiment.

According to Goldman Sachs Asset Management’s (GSAM) latest annual global insurance survey released today (April 22) insurance companies are prioritising return-enhancing assets amid a risk-on investment sentiment.

The survey is based on responses from 286 global insurance company participants of which 19% were from Asia. In total, they represent over $13 trillion in global balance sheet assets, or around half the balance sheet assets for the global insurance sector.

In Asia, 46% of the respondent insurers put private equity as their top investment priority in 2021, followed by US investment grade corporates and infrastructure equity, the survey result showed.

Private equity is ranked the third highest investment priority in the Americas and fifth highest in Europe, Middle East and Africa.

Allocation Change over the Next 12 Months (Asia, %) 
Source: GSAM

The asset class is also expected to deliver the highest total returns over the next 12 months, according to 55% of respondents. About 38% said emerging market equities and 37% believed US equities would deliver the second and third best returns.

“Despite the level of uncertainty that we’re still facing, we’re seeing insurers take on more risk and look further out along the risk curve for opportunities as economic conditions improve,” said Michael Siegel, global head of insurance asset management at GSAM.

A spokesman at GSAM also told AsianInvestor that insurers continued to look to growth-sensitive assets such as private equity in 2021 on the hopes of an economic expansion. He declined to give an estimate on the expected return of the asset class.

REGIONAL TREND

Some Asian insurers have already expressed their interest in private equity and other alternatives, as the pressure to raise investment returns grows amid a low interest rate environment.

FWD CIO Jethro Goodchild said in March that the insurer is turning to private equity as part of a search for more investment diversification and yield. DGB Life Insurance, a mid-sized insurer in Korea, said in February that it planned to increase its alternatives allocation up to a range of 8-10% this year from the current 5%, particularly in private equity and private debt in overseas markets.

In Asia, private equity in China accounts for two-thirds of the total investment funds received in the region, according to the Corporate Finance Institute. The renminbi-denominated private equity and venture capital funds are also luring more and more foreign asset owners who seek to access Chinese assets via locally managed investment vehicles.

This appetite is leading foreign fund managers operating in China to request larger quotas under the qualified foreign limited partnership (QFLP) scheme, currently the only investment channel by which foreign investors can access the country’s onshore private equity market.

In the GSAM study, the vast majority of the respondents also said they anticipate maintaining the outsourcing levels of their portfolios in 2021, but Asian insurers are more inclined to outsource their assets.

Insurers globally most often considered third-party asset managers for their private equity investments, followed by US investment grade corporates and emerging market debt, the report found.

GREATEST CONCERNS

According to the study, Asia ranked US monetary tightening as the greatest concern in 2021, although the vast majority of those surveyed expected no hikes or cuts this year as the Federal Reserve has not yet begun tapering bond purchases.

However, that will mean inflation concerns are growing before a hike is substantiated.

Last year, 49% of respondents expressed concern about inflation (in their domestic market) in the next five years. That rose to 79% in this year’s survey.

Effective vaccination programmess and economic reopening signalled to investors that inflation may be probable, which would potentially drive treasury yields higher, according to the report.

Inflation is not just worrying insurers; it is now the uppermost of fund managers’ concerns, according to the monthly BoA Global Fund Manager Survey released last month.

Investors across the world are becoming increasingly positive about the outlook for the global economy and see Covid-19 subsiding as a global concern. It’s now rising prices that worry investors the most, the study showed.