Insurers favor tactical changes in higher-for-longer rate environment

As first seen in Insurance Asset Risk.

Over 220 insurance companies globally (along with nearly 580 other institutional investors) share their views in our latest annual EQuilibrium institutional investor survey. 

From views on the macro environment and asset allocation to sustainability and the energy transition, the survey reveals new insights into how these insurers manage over of $5.7 trillion. 

Three clear trends are evident as we enter 2024: asset allocation changes are tactical rather than strategic; demand for alternatives continues; and action, not talk, is the focus of sustainability investments. 

1. Tactical rather than strategic asset allocation changes

Only one in five insurers (21%) are making foundational changes to strategic asset allocation, which is far lower than the almost one-third (31%) who were doing that in our 2023 study. In 2024, more (32%) are making significant changes to tactical allocations. 

Digging deeper into the data, we see these changes are at the margin. Insurers seem to have adjusted to the higher rate environment with big portfolio shifts in 2023. Now, they’re taking advantage of opportunities to trade up in quality, lock in higher fixed rates, extend duration and add a little more liquidity with public investments. 

Nearly half (47%) are adding public investment-grade bonds, while 30% are reducing public below-investment grade. Corporate and government bonds are the top choice among public investment grade, and private infrastructure debt is top in private fixed income. 

The current environment has many investors adjusting their fixed income allocations. Please indicate the directional changes you plan to make in the next two years. (224 respondents)

2. Alternatives demand continues 

Even after last year’s surge in interest, demand for alternatives remains strong. More insurers are adding rather than reducing allocations across all subsectors, with private infrastructure, private credit and private equity the top choices. 

The survey data indicated a year-over-year decline from 2023’s high demand levels, although importantly the longer-term trend is upwards. 2023 data likely reflected the higher proportion of insurers making significant strategic allocation changes in response to rapidly changing rates. Going into 2024, with a relatively more settled rate environment, the focus is more on the subtle asset allocation tweaks mentioned above. 

Over the course of 2023, some insurers had a hard time deploying as much capital as they wanted within infrastructure. TIAA, Nuveen’s parent, experienced much of the same. The quest for relative value within infrastructure is one of the reasons they are now focusing more on transitional energy infrastructure than they have in the past. 

Please select the alternative investments you are currently allocated to and how you plan to adjust allocations over the next two years. (224 respondents)

3. Action, not talk, is focus of sustainability investing

In 2023, 91% of insurers globally indicated they consider or plan to consider environmental, social and governance (ESG) factors in investment decisions. In 2024, that figure dropped slightly to 86%.

Some North American insurers have pulled back. Europe, however, continues to lead the way in terms of sustainability – acknowledging climate risk, making net zero commitments, investing in impact and energy transition – with Asia Pacific insurers not too far behind. 

Looking at where dollars are being allocated, energy transition investments are attracting interest in all three regions. That tells us that insurers globally are continuing to pursue opportunities in sustainability and the transition to a low carbon economy. This is despite the political narrative around a roll back in ESG commitments and views from a number of institutional investors and policymakers. 

Please indicate the energy transition themes your organization already invest in or plans to invest in over the next five years. (224 respondents)

For further insights into how insurers globally are investing in 2024, download EQuilibrium.