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Where CIOs are Allocating Capital, According to GSAM’s 2020 Insurance Report

2020-07-21

Mike Siegel of Goldman Sachs Asset Management summarizes key investment trends from GSAM’s 2020 Insurance Report. 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of omens acts when we discuss developments cruelly shaping markets, industries and the girl. we'll economy, objects you comrade of corporate communications. Here, the firm or today, MIKE single global head of the insurance asset management and liquidity solutions, businesses within Goldman Sachs Asset management we're G Sam is we got every year MIKE joins us? Because G salmon, his team there put out an insurance report on how insured companies, are allocating capital in that give us a glimpse into the investing universe. More broadly on this episode, we're gonna talk with MIKE about the findings of this year's report Following conversations he had walked back, The programme might jake good to see you. Thank you wish it was in person,
but don't you see you anywhere near the times? We live in a mention in the report, but gives little background my gun. Why you do the report? How it's different I'll see this year from other years and what you found well shaped. As you know, we ve been doing report the last several years its intended to get a good seal for how the industry he's thinking and where they are going to be investing. This year's report is quite different, as you can imagine from for years. We surveyed our ceos during the January and first week of February of this year, we receive back responses from Tunis. me three scenarios and see our foes representing over thirteen trillion dollars in industry. Assets are close to half of the assets global insurance industry covered the time was something we were hearing about in China. There were few cases in Europe. There was nothing here but, as we now know, the virus spread in the global financial markets began to react with violet sell off, so we
a look at some of the pre covered responses. Such his views on the equity markets, views on rate markets, currencies and we concluded these results are no longer relevant, so instead we turn round and interviewed several of these senior chief investing officers from some of the largest insurance companies around the globe. He's companies covered different geographies into for wines, business we asked the ceos how their institutions are responding today, the outlook for the future and we pump just nab shot of each of these interviews, and we ve also reported on some of the trends that are still quite relevant, such as the adoption of Yes G, the adoption of its short tech, and views on any activity, so this year's report does not look like prior year's report just as this year doesn't like prior year, so too, the key, take ways from these conversations with ceos involve continuation of Trans, namely the move from public private, particularly private equity, private credit.
Given the current market environment today, what do you think continues to drive and even accelerate that trend? Yes, so Jake Weed in this for last several years: movement of assets from public markets to private markets. It's a trend that we and seem globally and much of it is a response to the low rate environment insurance companies have very pay liabilities. They're, not subject to ride, not subject to a flight to quality, should be able to invest in the long term private or a liquid assets cause you don't need to sell these assets a moment's notice in order to get the liquidity of meat claims, payments or redemptions private acids, typically up higher yields, or they have higher expected returns to compensate for the lack of liquidity and given the current low rate environment and now today, even lower rate environment for a lot The period of time we see these trends, accelerating towards private credit and private equity
just about all the ceos noted that their long term acid allocation didn't change. Despite all the volatility we saw into one and key to this year, is it pricing to you that people are rethinking their allocations, while Jake, it's not surprising, but the key to the sentence is long term. So, de there long term allocation their views on long term allocations haven't changed again, which I've seen a lot of this is the fact that the right environment is very low and they need to be reaching into new markets, so private credit, private equity, securitized assets commercial mortgage loans emerging market debt. But let's call these long term trends short What are they doing now and what are they gonna be doing in the near future? Will first have taken a good look at the real estate portfolios, real estate commercial mortgages and user. of real estate, such as the retail industry there.
It's either a pause or a look to de risk, because industries have been affected by the virus, and that will continue for quite a while. But getting back to your question the longer term allocations, no companies don't for changing that once this situation, ass is the trends will continue to work. We ve been seen before Allow this year was also noted that they had been working on. It already done some work to de risk, their portfolios assets before the pandemic, really to call as this report Compare with the results you publishing, priors Jake, you We have to recognise that we were coming into the eleventh year of a recovery from the two thousand and eight thousand nine financial crisis at this point when we work we need to be sheer equity evaluations were high rates, were low, spreads were tight, so many cheap, invest more officers conclude that there was very limited value in the financial markets and, at the same time
I'm being in the eleventh year of a recovery at some point in the near You sure we are likely to see a recession and then an opportunity to re risk. So no, it's not anybody foresaw the global pandemic, but indeed the markets have set themselves up such that they thought D. Risking was the more prudent move. So on every podcast they weave hosted recently. I think we ve talked about yes, she, your report, that ninety five percent of insurers, fine hurdles as realistic implementing history in their investment strategies. For the conversations around he asked you look like with insurance companies today will shake I'll say a few things one is we're having many more conversations and we're having them very broadly across all of the industries within the insurance industry and all the geographies and beyond that, we're having it multiple levels within the companies, so it
at the ceo that needs to respond to the communities that the ceo is serving the CFO be cheap risk officer, the chief investment officer. So, for example, probably casualty companies are very subject to climate change their seeing an increase in hurricanes and soon armies and flooding activity in wildfires. They need to assess the impact of the environment or climate change on their operations. They also asked the question. Well, that's what's happening my operations, but what about them? assessments of the company is making? Are they also subject to the same environmental trends? So that's what we're seeing with probably council to companies Overall, the entire industry is taking. Yes, she very seriously where Seen this in terms of companies driving force more diversity and good governance on companies boards, a more diverse board makes first
wonder, company and more resilient investment, obviously, but lack of diversity or poor governance makes for weaker or more risky investment. So Companies want to be responsible to the communities they serve their clients, their police, their governments, it's good business. So, yes, she has come to the fore affronted. is the implementation, though, becomes tricky? What is that really need, and it breaks into tutor things. One is just to assess, assess your exposure to these factors. and then to make decisions on how to move forward and that could be in terms of the company from their policies and work could be it. way they invest in their portfolios? We'll do that point. The report shows that he has G continues to serve climb is a consideration for the investment portfolio, but have you seen that conversation and interest from neutral companies involved and what do you think it's headed when we first started surveying. It was the topic of yes. She was important in northern Europe, and that was it. Anna was more.
pension world than it was in the insurance world when it started to spread a bit it spread through much of continental. Europe, and then we saw an interest in Asia both in Japan. and in South Asia finally start to see the interest of all appear in the states, and I think at this point in almost every annual report that you read for our clients, there is some mention of E S, chief or societal interests or environmental interests. So it's coming from the top and it's getting pushed down from these organizations each year, weapon You're, being we ve seen an increased interest globally in energy as a consideration in the investment process designs, been a fair amount of feminine in the insurance space, some big headlines recently, companies typically will say those opted for synergy, operational efficiency, man, that's driving the activity, has the level activity, surprised you at all is a kind of expected, or what do you think is accounting for Jake, unethical,
The at all this industry Like many, others is under tremendous margin pressure and in particular for the sure it's industry pursuing seeing their costs go up and I just referenced. Wild I soon armies flooding me that becomes claims costs at the same time there revenue is falling because the returns that getting on their investment portfolios falling that's an important component of their revenue stream. So we see margin compression then in it Technology is beginning to play a very important role in the industry. It's an offensive weapon they're using it in order to reduce the cost of acquisition for clients therapy. Using it to better assess data, which requires a lot of computing power they're using it to make their operations more efficient. This technology is very costly. requires scale. So all of these factors- increased operation costs need to make deeper investments in technology.
Reduced return on the investment portfolio, is pushing margins tighter and it's making these companies look at other is to restore margin. Consolidation is one of those things bringing to organisations together can help them make. Organizations more efficient and it's one of the ways to forestall this pressure on margins. You also In the report. The fifty eight percent of insurance companies are using E g ups in their investment portfolios similar last year. The statistics show that the lead on that's been taken by insurers in Asia, Pacific region. What drives the outsize interest in that product from that region? Much of e ass investing is in what is so still in the area of fixed income. Most the time companies create their own portfolios with their own customization, but in terms of equities public equities. Quite often they are indexes, and in Asia in particular, there has been an interest in equity ts, particularly to the broad
indices like the ESA. Ninety five hundred, the NASDAQ, the rustle indices, Anita a very low cost and efficient way to get index exposure. You also know that sixty percent of global insurance companies reportedly invest or evaluate insure tech investments. That's a heart phrased, pronounced by I had a G Sam Insurance asset management. Continued engage with this up and coming field insure tat would keep him very close eye on it, as I mentioned before, technology is helping to bring down costs for the industry and many start up. Companies are starting up. Just technology based are banned in team investment, banking team, has been bringing a number these companies to the public markets, including very recently, and our merchant bank has been investors in these companies. In early stage we become the fishery when they come public and they start to write business and we are managing the assets of a number of these started- ensure check companies in our insurance acid,
judgment business, will my thanks for the update. what's going on in the minds of the ceos and thanks for joining us again this year, shape good to see you and again, I hope to see you in person next time hurry that conclude. This episode of exchanges of Goldman Sachs thanks for listening and a future, the show we hope you subscribe and Apple part gas and leave a rating or comment in two later in the week for a weekly markets, update where we talk to leaders round the firm for their quick take on the latest in markets. This podcast was courted on Monday to light thirteen two thousand and twenty thanks for us
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Transcript generated on 2021-07-03.