Mortgage-backed loans and infrastructure debt are overpriced and deterring insurers from investing in both asset classes, a survey of CIOs has found.
The strong demand and “muted” supply for infrastructure debt – coupled with an absence of in-house staff to oversee any such deals, was also a factor for insurers failing to live up to their intended asset allocations – according to Goldman Sachs Asset Management (GSAM).
The firm’s annual survey of insurers also found that one-third of insurers also believed they were now approaching the end of the credit cycle, with a deteriorating credit quality affecting the market.
Respondents were also not terribly positive about the overall quality of investment opportunities.
Nearly 75% of insurers from the EMEA felt investment opportunities were getting worse compared with the previous financial year, while only 3% of insurers from the region felt the situation was improving.
While the pessimism was most pronounced among EMEA respondents, there was a marked increase among insurers predicting the investment environment would worsen over the coming year.
More than 60% of all respondents believe the situation would deteriorate, compared with only 39% in the previous survey.
Despite the pessimism among EMEA respondents, Greece was identified as offering the greatest unanticipated impact on financial markets by just 6% of respondents, compared with 36% who viewed China as a risk.
The survey found that asset allocation decisions favoured illiquid assets, such as commercial mortgage-backed securities (CMBS), middle-market loans and infrastructure debt.
“The commercial mortgage loan market is facing increasing competition from the CMBS market, which has recently pressured yields,” the survey noted.
“Infrastructure debt, while attractive for its long duration, faces strong demand and muted supply.
“Insurers also noted that the lack of internal systems or personnel has deterred investments in both commercial mortgage loans and infrastructure debt.”
The interest in illiquid assets was likely driven by interest in higher-yielding assets.
Globally, only 5% viewed liquidity risk as a problem, while 66% were concerned with prevailing low yields.