How insurers are navigating volatile markets
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As one of the largest investors in the world, insurers can have an outsized impact on markets and investment flows. So how are they approaching today's volatile markets?

I'm Alison Nathan and this is Goldman Sachs Exchanges. For today's episode, I'm sitting down with Goldman Sachs' Mike Siegel, Global Head of the Insurance Asset Management and Liquidity Solutions business, and Matt Armas, Global Head of Insurance Asset Management, to discuss how insurers are managing their portfolios and why it matters for markets and economies. Mike, Matt, welcome back to the program. Thank you. Thank you for having us. This has been an annual event the last few years, so looking forward to the conversation.

So, Mike, this is clearly a very tricky market environment for all kinds of investors. But does this environment pose any particular challenges for insurers?

Alison, this is a tricky environment. We've seen tricky environments before. It does pose challenges for the insurers, but it also poses quite significant opportunities. When you look at the typical insurance company balance sheet, they are underweight relative to others' equities. So the equity market volatility is concerning, but not damaging to their capitalization.

That's number one. Number two, the life companies in particular do offer out equity sensitive products. So that creates more of a hedging need for them. They're very adept at that, but I'm sure with the markets whip sawing around, that's creating a lot of work on the hedging front. With regard to the rest of the balance sheet, which is typically fixed income instruments,

There's two aspects to that. One, what are government rates doing? And to the extent that they are rising, that can be a benefit. But also we see a divergence in government rates around the world, which is also creating some opportunities to maybe sell into this market and buy in that market. But the other thing is the credit spread itself.

And slow increases in credit spreads tend to be a very good thing because insurers always have cash or liquidity to put to work. As they write new premiums, as interest comes in off of bonds, as bonds mature, where do I put that money? And if I'm in a higher rate environment, that tends to be a benefit.

Now, if credit spreads really move out quite substantially, it might be signaling something else, that credit itself is deteriorating. And overall, that's not a good thing. And Mike, you've just published your annual insurance survey. So remind us what that entails.

Thanks, Allison. This is the 14th year that we've published the survey. It's a survey of insurers globally. This year, we had a record turnout. We had over 400 companies respond to our survey, managing over $13 trillion of balance sheet assets, which represents about half of the industry's asset base. We called the survey The Great Pivot, which represents the pivot from public markets, public assets, to private markets, private assets, which I'm sure we're going to discuss further. Right.

Right. So, Matt, let's talk about this a bit more. When we talked last year at this time, insurers were generally feeling much better about the economy. I think we all were feeling pretty good about the economy. And as Mike said, insurers are just this rare asset class that actually likes high interest rates. They were worried about interest rates falling. I imagine the conversation is just very different right now.

It is very different right now than it was last year. And we can start with when we took the survey and we're talking to insurers, that was after the inauguration, but before the first tariff shock in February. And even then, insurers tell us that they were already preparing the portfolios for higher inflation. So they were worried about inflation accelerating. They were worried about a slowdown, particularly in the United States.

And they were worried about volatility. So even before the event really kicked off in February and then accelerated here in March and April, insurers were already preparing for an environment not dissimilar than where we are today.

So versus last year, the concerns around inflation, the concerns around recession were already growing and the insurers were looking for asset allocation choices that would help be defensive in an environment where you start to worry about inflation, you start to worry about recession. So while it's different and it is different versus last year, I do think the industry was already starting to prepare their portfolios for an environment that could be a little bit more tumultuous.

So how are insurers adjusting their asset allocation strategies amid this uncertainty and this volatility in the markets? And this is where the pivot really originates from. When we looked at the survey and they were concerned about inflation, they were concerned about growth. But what we saw was this strong interest towards private assets.

The strong interest in going from public investment grade corporate debt into its private equivalent, investment grade private credit, or going from high yield debt into its private equivalent

And we think that was very much part of this preparing the portfolio for a more defensive position, a more resilient posture by using the liquidity that they have on the balance sheet, using the excess liquidity because the nature of their businesses allows them to be less liquid than other styles of investors, to take advantage of these

additional premiums, what we call the liquidity premium or the complexity premium. So additional returns available to them, but also improve their ability to recover in the event that a company should run into trouble and have additional diversification. And as we all know, diversification is the friend of the portfolio manager.

So, are private markets really then a safer investment in this environment? I mean, it's interesting to see that shift to private assets. But by the way, that shift had been ongoing for many years, gaining momentum over many years. But we're saying is you saw increased momentum in this recent period. We have seen it and we've seen it in a couple of different ways. I would say the first way we've seen it is this growth of the investment grade alternatives.

allocating more to higher quality private assets. We've seen this in the form of investment grade corporates and infrastructure, which is a market that insurers have invested in for an extremely long time. They continue to increase their allocations to this market, but also the growth of

private asset backed style markets, or what we call asset based lending, which is a market being driven in part by banks and particularly regional banks shrinking and the insurance industry now providing the lending in some of these markets that the banks used to be able to provide. And that gives

access to the insurers, to high quality assets that are substitutes for investment grade assets that you would normally get in the public markets. So in that way, you're able to put additional quality, you're able to have additional diversification, and all of this at spreads which are generally higher than in publics. And that's one way to build resilience in your portfolio. The second is when you have

private credit, and other types of private corporates, you typically have covenants inside those lending facilities. And covenants allow you to work with companies before they run into an issue. So these covenants provide investors a certain degree of protection, allows them a certain degree of control to be able to work with companies as they experience issues, which helps mitigate defaults and helps improve recoveries.

Talk to us a little bit about the context of this, though, when we think about that shift towards private. Give us some numbers. I mean, if it was X percent of a general insurer portfolio, how much is it now? What's the delta? Sure. So we're seeing insurers, and let's look at life insurers in particular, and why life insurers, because life insurers write savings products, give opportunities for people to buy things like annuities in which they save for a period of time, five years or 10 years.

and then they get a return on that. And we're seeing annuity providers increase their private allocations from 35 to 37% up into the 45% range. So you're seeing reasonably sizable changes in the portfolio allocations into private assets, which still allows them quite a bit of

liquid assets in case they would need it, but allows them to earn the incremental returns available in private assets. Well, that is pretty striking though, that almost half of the assets now are on the private side, which is a big shift from what we saw 10, 15, 20 years ago. It's a shift. It's a 10 or 15 point shift, which is sizable. But one thing that's notable or that we should note is that insurers have always owned

private assets. I started my career over 20 years ago buying private credit for an insurance company. So this is something that these companies have long done and they've done it not just in the form of investment grade corporate privates, which is where I started, but they also have a commercial mortgage loan origination engines where they were buying commercial mortgage loans for their portfolios. And what we're seeing is that insurance companies

are increasing the diversification, so the types of things they are buying. So it's not just commercial mortgage loans, but residential mortgage loans.

loans. It's not just corporate privates, it's now infrastructure privates, it's now asset-based lending. So the opportunities to lend private are growing and that's also driving the increased opportunity to allocate. Yeah, Allison, the shift that's taking place, which has been gradual but quite consistent, also mirrors, as Matt said, the growth in the private markets themselves. If we go back to 1997, there was a small company, Amazon,

that did a IPO for $50 million, giving it a market capitalization of $450 million. Now you have companies, private companies, that have capitalizations that are in the billions, the tens of billions, the hundreds of billions. And how do they finance themselves? They come into the private markets. So the private markets themselves have been growing. They've been growing also in a percentage terms relative to the total market. And then the other major point that Matt made was diversification.

And a lot of the credits in the public markets now, particularly that the insurers like, are more risky than they used to be. A typical insurance company, particularly a life company with long-dated liabilities and assets, might look at utilities. Utilities aren't as secure as they used to be. Telecommunications, energy companies, all of these industries are just more volatile. And when you're thinking about investing out 10 to 30 years,

It's just riskier. And so how do I overcome some of that risk? Diversification. And you see more names, more obligors in the private markets now. Interesting. And of course, the long duration of the assets that insurers want to hold fits nicely with the private market opportunities. You mentioned utilities. They've been in focus in part because of all the developments we've been seeing in AI. I feel like AI has

gotten just modestly out of focus over the last few weeks as tariffs have been front and center. Yet, of course, it remains a tremendous theme and it's an area that could be changing in some ways the insurance landscape. What are you observing on the ground in terms of how insurers are using AI in their daily business?

So, Allison, in our survey, we asked questions about, are you using AI? Are you intending to use AI? Are you looking to invest in AI? And we were quite frankly surprised at the strength of the reads on both those fronts. So, you know, first, if you think about the typical insurance company, it is a very large operating organization with a tremendous amount of data.

claims data, historical information. So first, large databases naturally lends itself to the use of AI. So can I use it in underwriting to better price policies that I'm offering? The answer is yes. Secondly, there's a lot of operations that take place in the insurance company. Claims come in, claims payments go out, premiums come in.

So, it's a large operating organization. Again, AI can bring efficiency to that entire operational process. But the other part is, rather than using or instead of using AI to improve my operations, to make me more efficient, to make me a better underwriter, should I be investing? And a lot of AI looks very similar to infrastructure, long dated.

Again, utilities that need to provide power, data centers that need to provide the information, software. So companies are also investing in AI in the investment portfolio for the returns. And I was surprised by that. I was surprised by the strength of that response. So we'd asked-

about investing in AI and we asked about investing in four key areas. We asked about investing in hardware, software, data centers and infrastructure as a thing, and then in utilities. And the strength of the responses was quite concentrated in data centers and infrastructure and in utilities.

And this was even after the announcement of DeepSeek, which came in early January. So even after the DeepSeek announcement, very strong interest in generating investment returns from data centers, infrastructure, and utilities. And it was pretty much a global response.

I wonder if that's because they feel like that is a bit more of a defensive strategy in terms of investing in AI because those sectors have traditionally been defensive. Do you have a theory on why that is? I think it's because the investment in AI is largely being driven by a very high quality group of companies, the hyperscalers who are really making these significant investments in the infrastructure themselves. So if you're investing in the data center or you're investing in the power to the data center,

having the opportunity to lend to or invest alongside these super high quality companies is something that people find quite attractive.

When you look back in the early 2000s, when you look at all of the fiber that was laid as part of the rollout of the internet and people sometimes compare, why is this different than then? How is this different structurally? It's who's financing it. And when you look at how the internet rollout and the fiber rollout was financed, it was financed largely in high yield market and smaller companies and startups.

where the data center and infrastructure projects that are being financed are being financed by some of the most creditworthy companies in the world. Interesting. So Mike, if we think about all these changes that we observed over the last year and that became apparent in the survey, how will they ultimately affect the actual owners of insurance policies?

So anything that improves the investment returns for the insurer, anything that lowers their costs ultimately will translate back into the cost of the policies that policyholders were bare. So let's split that into two parts. One is the life products. And as Matt said, these are typically savings or accumulation products.

Well, if I can offer out a higher return, that's to the benefit of the consumer. And how do I get that higher return? Again, either I invest for better returns in the investment portfolio and/or I reduce my operating expenses. On the property casualty side, the investment returns are important but not as critical. It's the underwriting returns that are important. And again, if I can become more efficient in my operations and be a better underwriter,

I could charge less for my policies. And when you take a look at the industry globally, but also here in the United States, thousands of companies. It's a very, very competitive industry. So anybody that gets an advantage is going to try to push that advantage through their policy pricing, and that's going to force others to follow.

Our clients are telling us that the end sales of their products, so the sales of annuities to consumers, are very strong. And we went through a period post global financial crisis, really through the COVID time where interest rates were very low. And as a result,

fixed return products like annuities and sales of those types of savings instruments were very low because the returns weren't that attractive. Now that interest rates are higher, that investors and consumers are looking for places to protect their capital, generate return, build long-term retirement savings and retirement income, the sale of these products is very strong.

So, our clients are looking for investment styles in order to be able to meet this client demand. They're looking for the ability to continue to grow and they need additional capital to be able to write new products to meet this demand. So, there really is a lot of activity which really feeds into the consumer health and the consumer wellbeing, particularly in retirement.

Right. So the insurance business is booming. That's what I'm hearing. The insurance business is healthy and it's healthy across the life sector. The property and casualty sector, after a few years of inflation and their liabilities, is returning to health. And we're seeing quite a bit of activity in the property and casualty. So I would say the industry is looking reasonably healthy. Matt, Mike, thanks so much for joining us again. Thank you for having us. Thanks for your time.

This episode of Goldman Sachs Exchanges was recorded on Tuesday, April 15th. A link to the insurance survey can be found in the show notes. I'm Alison Nathan. Thanks for listening.

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