CIOs seek returns in non-traditional assets

Chief investment officers (CIOs) in insurers are increasingly shifting portfolio allocations towards non-traditional asset classes as they seek better returns.

That was a key finding of Goldman Sachs Asset Management (GSAM) in its third annual insurance survey, which found that insurers are looking to increase risk to combat low yields.

Unlike the previous year, which indicated that CIOs planned to make substantial allocations to floating-rate bank loans, it seems that the insurance industry now intends to make bigger allocations to less liquid assets including infrastructure debt, private equity, commercial mortgage loans, and real estate equity.

“Insurers remain focused on the search for return, but they view corporate bonds and public equities as either overvalued or fairly valued. This is driving CIOs to explore non-traditional asset classes that can offer higher total return potential and compensation for illiquidity,” said Michael Siegel, GSAM’s global head of insurance asset management.

“Against a backdrop of low yields and growing concern about monetary tightening, CIOs are planning to increase allocations to less liquid assets, alternatives and equities – rather than increase credit risk or lengthen duration – to bolster potential investment yields and returns.”

As CIOs plan to allocate more to non-core asset classes, the survey indicates that CFOs are demonstrating significantly greater comfort with investment risk. Only 6 percent of the CFOs surveyed believe their peer group is taking on too much investment risk, compared to roughly 30 percent in 2013.

They remain concerned about the continuing effect of alternative or third-party capital on pricing with half of the P&C insurers surveyed believing that alternative capital flows will have a negative implication for pricing.

Property and casualty insurance and reinsurance CFOs are particularly worried about the effect of increasing competition from alternative capital providers could have on reinsurance pricing.

CFOs believe the industry is well capitalized, and recognize the need to bolster returns amidst increasing competition from alternative capital providers, particularly in the property/casualty reinsurance space.