GSAM: 2024 private credit moves follow 2023 fixed income renaissance

2 april 2024

As macroeconomic concerns persist, global insurers are taking advantage of the 'higher for longer' interest rate environment by accelerating asset allocations into high quality and private credit, as well as increasing duration and overall investment risk, according to Risk & Resilience: The 13th Annual Global Insurance Surveyby Goldman Sachs Asset Management.

This year’s survey draws insights from 359 CIOs and CFOs representing more than $13 trillion in balance sheet assets, conducted in January and February 2024. It seeks to identify trends in the global insurance industry and highlight top considerations of insurance investment professionals: credit quality concerns, appetite for high-quality yield and investment-grade (IG) private assets, and enthusiasm for impact-oriented Environmental, Social and Governance (ESG) opportunities.

'After a year of stronger than expected economic returns, insurers are showing signs of cautious optimism about markets and the global economy in 2024,' said Michael Siegel, Global Head of the Insurance Asset Management and Liquidity Solutions businesses, Goldman Sachs Asset Management. 'The weak returns of 2022 remain fresh in their memories, while global inflation has remained elevated.'

Macro concerns: improvement, but not completely confident

The survey data shows the top five macroeconomic risks to insurers’ investment portfolios are:

• Economic slowdown/recession in the US (52%)
• Credit and equity market volatility (48%)
• Geopolitical tensions (46%)
• Inflation (42%)
• Monetary tightening (27%) 

Only 7% of insurers identified economic slowdown/recession in China as a top risk, and 6% cited either deflation or a large-scale cyber event.

Concern over inflation reduced to 42%, from 55% last year. Insurers expectations of a US recession in the current year fell to 16%, down from 44% in 2023. Yet longer term recession fears persist, as 50% of respondents expect a recession in the US within 2-3 years – up from 38% in 2023.

'We expect Central Banks to execute gradual easing strategies later this year which should be supportive of risk assets across both fixed income and equities. However, given increasing macro risks and the upcoming US elections, there is the potential for higher levels of volatility along the way and a wide variety of outcomes for returns by the end of the year,' said Alexandra Wilson-Elizondo, Co-CIO of Multi-Asset Solutions, Goldman Sachs Asset Management.

'Given this backdrop, and current levels of yields, insurers do not have to stretch on the risk spectrum to seek good risk adjusted returns. We like capitalizing on higher rates by locking in yield in duration, diversifying across public spread products into securitized products, creating sector diversification and gaining exposure to emerging macro investing themes through investments in privates.'

Data favors private credit, high quality debt and risk-on appetites

Among survey respondents, 82% expect 10-Year US Treasury yields at year-end 2024 to be at or below where they were at the time of the survey, while 17% expect them to exceed 4.25%.

Insurers selected the top five asset classes they expect to have the highest total return over the next 12 months. Four of the top five relate to private credit and high-quality credit:

• Private credit (53%)
• US equities (46%)
• Government and agency debt (34%)
• Investment grade private debt (33%)
• Developed markets investment grade corporate debt, and private equity (31% each)

Conversely, just 5% of insurers expect to see the highest returns in commercial mortgage-backed securities, and 6% to commercial mortgage loans.

Despite economic uncertainty, 27% of insurers plan to add risk to their overall portfolios.

'Last year became a fixed income renaissance as insurers renewed interest in the asset class,' said Matt Armas, Global Head of Insurance at Goldmans Sachs Asset Management. 'This year they report taking a risk-on approach and favoring high quality fixed income assets and private credit, which can offer incremental income enhancement, diversification benefits, downside risk mitigation, and resilient returns. This has led insurers into an asset allocation sweet spot, but they recognize that they cannot settle into complacency.' 

To lock in higher yields, 42% intend to increase duration risk in 2024. This is the highest level in the survey’s history, up from 38% in 2023. Only 5% plan to decrease duration.

Over the next year, 35% of insurers expect to increase credit risk in their portfolios, despite 59% of insurers expressing concern that the credit cycle is entering a late stage.

'As we near a new rate environment, we expect investment grade corporate credit fundamentals to remain attractive for Insurers looking to lock in higher yields,' said Neil Moge, Global Co-Head of Insurance Portfolio Management at Goldman Sachs Asset Management. 'However, tighter spreads create little room for error. Higher-quality, active security selection will be imperative for portfolios looking to find pockets of relative value and manage tail risk appropriately.'

Performance expectations: for the first time, private credit beats private equity

Insurers expect US equities and private credit to deliver the highest total returns in 2024, each named first choice by 15% of respondents. Private equity (PE) tied for third at 10% with government and agency debt. For the first time, the private equity asset class did not top the list.

'Private credit’s appeal to insurers will endure even as interest rates begin to move lower. Insurance CIOs appreciate the attractive risk-return profile in private credit and the ability of leading managers to source differentiated, risk-mitigated opportunities that can complement their public fixed income exposures,' said Stephanie Rader, Co-Head of Alternatives Capital Formation, Goldman Sachs Asset Management. 'We expect to see continued growth in allocations to private credit from insurers globally.'

For 2024, insurers expect cryptocurrencies, real estate equity, and commercial mortgage loans to deliver the lowest returns.

Forecasting the total return of the S&P 500 Index by year end, 10% expect high returns of 10-20%; 52% expect 5-10% (versus 38% in 2023); 22% expect modestly positive returns of 0-5%; and only 16% expect the S&P 500 to be flat or down this year (compared to 25% in 2023).

Other key findings: artificial intelligence, consolidation, environmental, governance and social factors (ESG)

Enter AI: 29% of insurers report currently using AI, and 51% are considering it; 20% are not currently considering using AI. Reported uses include reducing operational costs (73%), insurance risk underwriting (39%), and evaluating investments (20%). Other potential uses include claims management, and more efficient client service functions.

Industry consolidation: 45% of global insurers anticipate an increase in transaction volumes within the insurance sector over the next few years, up from last year’s report of 37%.

ESG and Impact Investing: Among respondents for whom ESG and/or impact investing is a consideration, 86% prioritize environmental factors, while 35% emphasize social factors, and 33% prioritize governance.