Inflation May Push Insurers To PE Investments

Inflation May Push Insurers To PE Investments, Survey Shows

Insurers believe inflation will be around for two to five years, eventually tamed by rising interest rates.

By Steven A. Morelli

Insurers are expecting the reappearance over the next few years of two infamous villains, inflation and recession, according to Goldman Sachs’ annual global insurance survey.

Inflation was a clear leader in the top concerns race with 28% of insurance companies globally citing it as the greatest macroeconomic risk to their portfolio for the first time in the 11 years that Goldman has conducted the survey. In fact, 91% of companies in the Americas (79% globally) expect inflation to be a risk this year.

After inflation, it was a tight race for the next three, with 20% citing U.S. monetary tightening, which goes hand in hand with an inflation response. The majority of respondents (87%) said they think the Federal Reserve will raise rates at least three times this year, with 36% in the Americas expecting more than four increases.

Credit and equity volatility are next on the roster of risks at 18%, with the fourth horseman, U.S. recession, closing in at 16%. Sixty-three percent of respondents said they believe an economic recession will hit the United States in the next two to three years, with Asian companies leading the pack with that prediction. On the plus side, the respondents did not expect recession to begin this year, said Michael Siegel, Global Head of Insurance Asset Management for Goldman Sachs Asset Management.

“You could see this year looks like clear sailing,” Siegel said during a media preview

Allocation To Private Assets

Over the next 12 months, are you planning to increase, maintain or decrease your allocation to private assets?

Source: Goldman Sachs Insurance Asset Management’s Insurance Survey 2022

Concerning Cryptocurrencies

What is your company’s position in regard to cryptocurrencies?

Source: Goldman Sachs Insurance Asset Management’s Insurance Survey 2022

of the report, “but planning for a recession down the road.”

Those concerns, particularly on inflation, are expected to accelerate the shift to private asset classes for returns, Siegel said, citing two broad trends in the race for returns.

“One is a continued movement from public assets to private assets. That would be public equity to private equity, that would be public fixed income to private fixed income in order to pick up the illiquidity premium,” Siegel said during a media preview. “And then within asset classes themselves a continued movement toward private equity, green or impact bonds, middle market corporate loans, which are floating rate assets, infrastructure, debt and equity, real estate equity, and US investment grade private placements.”

From Public To Private

One of the major factors pushing an investment shift is the expectation of an aggressive increase in the U.S. 10-year Treasury with 72% of respondents predicting that the bond will be at least 2% this year, putting older bonds at a disadvantage while improving terms for new note purchases.

“If we get a sharp, steep rise in rates, that will end up causing disruptions in markets,” Siegel said. “And volatility tends to be bad.”

Although the 10-year Treasury is the bedrock of insurance investing, it is not the winningest bet. In fact, government and agency debt was listed as the poorest performer by 29% of respondents, with 65% saying it was one of the three worst performers.

By far, companies are looking to private equity to make some bank, with 32% of respondents expecting the asset class to deliver the highest returns this year, with 58% listing it in the top three.

“You see a little bit of a theme here,” Siegel said of the asset leaders, “equity, equity, equity, equity and commodities.”

Although it is second on the list, commodities lagged at 14%, with 34% listing it in their top three. But it is the first time commodities have been in the top three. Its appearance at the top of the returns list might be an aberration because of supply chain issues and concerns about geopolitics and inflation, according to the report.

Even though companies respect the return for commodities at the moment, that does not necessarily mean they will be placing their bets there. Respondents indicate they have little appetite for the asset class this year, likely because of high historical volatility and capital inefficiency, according to the report.

The survey indicated money will accelerate the migration to private assets. Money in investment-grade corporate bonds and government securities is moving to private credit and public equity investments moving to private equity, Siegel said.

“In the area of credit, the covenants tend to be better in the area of private equity,” Siegel said, noting that 70% of companies plan to increase their allocation to private assets. “It’s been shown over the last several decades that private equity returns exceed public equity returns. You give up liquidity, but the industry is awash in liquidity.”

ESG And Crypto

Environmental, social and governmental considerations have been increasing for several years. In the Americas six years ago, 85% of the respondents said ESG was not an important investment consideration, with 15% saying it was one of several considerations. This year, 77% of companies said it’s one of several and 15% said it was not a consideration.

“I suspect next year that this graph will just continue to look the same way, increasing in importance,” Siegel said.

ESG is already more important in other regions, with 37% of European companies saying it’s a primary consideration, and only 2% saying it’s not a consideration at all. In Asia, 16% said it is primary, 84% said it is one of several, and no one said it was not a consideration.

This is the first time the survey asked about cryptocurrency.

“We did this because every time we meet with companies, they ask us about cryptocurrencies,” Siegel said.

Although the survey found that 94% of companies were not invested or planning to invest in crypto, Siegel was surprised because 2% of the companies were invested in crypto and 4% were considering it.

“In our dialogues with the companies that are invested or considering, their primary motivation is to understand the instrument, to understand the market, and in particular to be prepared if it becomes a more dominant market,” Siegel said. “And maybe at some point premiums are denominated in crypto.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at stevenamorelli@gmail.com.

Fixed Annuity Sales Take Off In First Quarter

Fixed annuities captured buyers’ attention early in 2022, with rising interest rates fueling a product sales shift.

Total fixed annuity sales were $35.2 billion, up 14% over first quarter 2021. Doubledigit growth for fixed indexed annuities and fixed-rate deferred annuities drove

the overall fixed annuity sales to pre-pandemic levels.

Fixed indexed annuity sales were $16.3 billion, 21% higher than prior year. Fixed-rate deferred annuity sales increased 10% in the first quarter, year over year to $16 billion.

Total U.S. annuity sales increased 4% to $63.6 billion, according to preliminary results from the Secure Retirement Institute U.S. Individual Annuity Sales Survey.

Traditional variable annuity sales were $19.1 billion in the first quarter, down 8% year over year. Registered index-linked annuity sales were $9.3 billion. While this is 2% higher than first quarter 2021, it reflects a 10% drop from prior quarter.

FORMER CALIFORNIA AGENT ALLEGEDLY STEALS $48,000

Former insurance agent Alan Douglas Armstrong, 56, of Lake Forest, Calif., was arraigned recently on five felony counts of theft from an elder. This comes after Armstrong allegedly acted as a financial advisor and licensed insurance agent to steal over $47,950 from elderly clients.

The California Department of Insurance began an investigation after being contacted by a family member of one of Armstrong’s clients when they learned

their elderly parents had withdrawn cash on 12 separate occasions from several annuities to personally loan Armstrong more than $47,950.

The investigation also found Armstrong convinced his clients to withdraw funds from one annuity and then months later purchase a new annuity, hiding that the source of funds was from a terminated annuity, resulting in his clients incurring more than $24,000 in surrender charges.

WISCONSIN THE LATEST STATE TO ADOPT NEW ANNUITY SALES REGS

Wisconsin became the 23rd state to adopt best-interest annuity sales rules favored by the industry.

In February 2020, the National Association of Insurance Commissioners adopted a model law that articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation. With the outbreak of COVID-19, states were slow to adopt the model in the months that followed. Activity began to pick up in late 2021 and has continued in 2022.

Supporters hope to finish the year with a strong majority of states having the rules in place.

“Unlike a fiduciary-only approach that limits choices for consumers, the bill signed into law today offers strong protections while making sure savers, particularly financially vulnerable middle-income Americans, can access information about options for long-term security throughout re-

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Rising interest rates and increased market volatility shifted the product mix this quarter with fixed annuity products driving the overall growth.

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tirement,” said National Association of Insurance and Financial Advisors Wisconsin Grassroots Chair Laura P. DeGolier.

PRIVATE EQUITY INTEREST IN LIFE/ ANNUITY INSURERS EXPECTED TO CONTINUE

Private equity firms will continue to hunt out life/annuity company acquisitions despite growing regulator concerns, according to experts.

The reasons are obvious, said Rosemarie Mirabella, director, rating analytics, for AM Best Research: There’s plenty of money to be made. Rosemarie Mirabella

Private equity firms are seeing a nice return on insurance investments, Mirabella noted, and are nicely positioned to take advantage of the gradual uptick in interest rates expected this year and next.

Director for AM Best

Private equity firms have helped large legacy companies by buying their closed blocks of business, such as Principal Financial selling its fixed annuity and universal life business to the investor Sixth Street in a recent $25 billion deal.

The main benefit for PE firms is the capital that it can invest more freely without the oversight and complications that public companies endure. Even without pushing the investment envelope, the blocks of business come with a decent spread between revenue and cost, said McKinsey in a recent article, “Why Private Equity Sees Life and Annuities as an Enticing Form of Permanent Capital.”

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