Most insurance executives expect investment conditions to worsen this year, according to a Goldman Sachs survey.
It comes after a string of Asia-Pacific interest rate reductions which are straining insurance companies’ ability to meet their return targets.
With the low-rate regional environment expected to continue, Australia’s central bank yesterday added to the glut of cuts when it reduced its benchmark interest rate by 25 basis points to 2%, citing weak inflation and moderate global growth.
The majority of the 267 CIO and CFO respondents to the 2015 GSAM Insurance Asset Management survey saw a worsening of investment conditions in 2015. This included 66% of 44 Asia-Pacific respondents to the survey who stated that investment opportunities are now worse than a year ago, while 27% said that they are the same.
Despite this, insurance companies are increasing portfolio risk in a bid to boost returns. “Pan-Asian insurers are looking to increase credit and equity risk,” said Hong Kong-based Juliet Siette, Asia-Pacific insurance executive director at GSAM.
Almost half (43%) of Asia-Pacific insurers said that they planned to increase overall investment portfolio risk over the next 12 months while 14% said that they would reduce risk.
The top five asset classes that Asia-Pacific insurers intend to increase allocations to are infrastructure debt (36% net increase), US investment-grade corporate debt (36%), private equity (32%), European equities (30%) and infrastructure equity (30%).
These preferences contrast with more of a real-estate focus for insurers based in the Americas and EMEA (Europe, the Middle East and Africa) which tilt the overall global results toward commercial mortgage loans seeing the biggest net increase (35%) followed by infrastructure debt (30%), middle market loans (29%), PE (which includes real estate-focused PE funds, 29%) and real estate equity (which refers to direct investment in real estate, 25%).
Meanwhile real estate services firm CBRE’s annual global investor intentions survey – released yesterday and not just limited to insurance firms – reflected a similar trend, with more real estate investors based in both EMEA and the Americas expecting to make property investments outside their home region in 2015 than in 2014. In contrast, fewer Asia-Pacific based investors expected to acquire real estate outside their home region in 2015 than 2014.
The CBRE survey results reflected a slight cooling following very strong cross-border real estate investment by Asia-Pacific investors last year.
Asian investors’ relatively less liquid portfolios contributed to a higher level of concern about deteriorating liquidity conditions. The GSAM Insurance Asset Management survey – which was conducted in February – found that 55% of Asia-Pacific respondents were concerned about deteriorating liquidity conditions having a significant impact on their portfolios compared to only 26% of respondents based in the Americas and 34% in EMEA.
GSAM’s Siette remarked that “negative sovereign yields are leading both pan-Asian and EMEA companies to diversify into US investment-grade corporates, for both duration and yield”. She observed that a significant percentage of EMEA and pan-Asian insurers stated that they were 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 penalised,” Siette said.
“Pan-Asian insurers are experiencing strong premium growth and have demonstrated a strong appetite to outsource more,” she added. A total of 55% of Asia-Pacific respondents said that they anticipated outsourcing more of their investment portfolio management over the next twelve months compared to 18% of EMEA and 15% of Americas respondents.
Hedge funds were the leading asset class that respondents to the GSAM survey overall said they were considering outsourcing to a third-party asset manager over the next twelve months followed by emerging market equities, US investment-grade corporate debt and private equity.