00:00Goldman is out with its annual insurance survey. It showed executives expect a U.S. recession in the next three
00:05years.
00:06Respondents cited an economic slowdown and geopolitical tensions as the biggest threat to their portfolios.
00:11This did take place. The survey before the war in Iran, it was through January 11th through Feb 3rd.
00:18Joining us now is Mike Siegel, Global Head of Insurance Asset Management and Liquidity Solutions at Goldman Sachs Asset Management,
00:23who helped conduct this survey. Mike, thanks so much for coming on.
00:26Thank you, Danny. So February 3rd is when you stopped taking the survey results.
00:31Do you think that if you were to do this again today, the results would be drastically different?
00:36I don't think drastically different, Danny. In the survey, we ask about economic outlook,
00:42and we also ask about intentions for asset allocation. I think the intentions would not be changed.
00:48The economic outlook might be so. It's really a question of how long the war persists,
00:53how long high energy prices persist. But the views expressed in the survey were growth will continue,
01:01inflation moderating, equities doing better, rates doing about the same, credit spreads widening.
01:08I think if we go back to normalization in energy, those views will play themselves out.
01:14I would be tempted to guess people would be more concerned about inflation if you did it again now,
01:21obviously, considering the fact that every company that we talk to is raising prices due to the war in Iran,
01:26right?
01:27So even if you think oil prices are going to come back down, Scott Kirby is not going to cut
01:30United Airlines ticket prices back 20 percent.
01:33You know, Dow Chemical is not going to reduce the price it charges for plastics.
01:36And those things go into everything, so those guys are going to have higher input costs as well.
01:40So two different implications about inflation. One, for the property casualty companies, it's going to increase their costs.
01:47It's going to increase damages. That they'll tend to push through over time through higher premiums.
01:52But the other implication is, what do the monetary authorities do?
01:55And if inflation rises and it persists, there's a concern that the monetary authorities will raise short-term rates,
02:02which will slow the economy.
02:04How is that likely to change behavior of the insurance companies and what they want to invest in?
02:09So, Danny, that's a great question. And one thing we're talking about is outlook.
02:13The other is what to do with your cash.
02:16And generally speaking, the insurance companies always have cash coming in.
02:20Premiums being written, interest in dividends, bond maturities.
02:24So the question is not, should I invest? It's where should I invest?
02:28And quite frankly, if we see adverse movements in markets, that tends to be good for the industry because they
02:35always have fresh cash to put to work.
02:37Did the insurance companies you spoke with want to buy any direct lending assets?
02:43Because I know some guys that have loans for sale.
02:47So one of the findings in the survey, which has been true for the last several years, is the ongoing
02:53movement from public markets to private markets.
02:55That would be public equity into private equity.
02:58That would be public investment grade fixed income into private investment grade fixed income.
03:03And then your question, from high yield into direct lending.
03:07I don't see those trends changing.
03:09How does, because you said one of the results you saw was also an expectation of spread starting to widen.
03:14How does that change where they want to be invested in, in terms of the capital stack and credit?
03:19So, generally speaking, you know, given the uncertainties, it would probably mean going up in credit quality.
03:25Having said that, wider spreads throughout the capital stack is a good thing when you have cash to put to
03:30work.
03:31By the way, can we bring that graphic up again? Because I think that was really interesting.
03:34And this shows the results that you got.
03:37So private equity is way up there, right?
03:40But direct lending, senior direct lending is way down there at the bottom.
03:44I guess that's always the case, right?
03:45That equity is going to give you higher returns.
03:48But does this capture it all?
03:50But you're talking about insurance companies, right?
03:51Sure.
03:51They're more concerned about stability than they are about.
03:55But the question here is, what assets will have the highest total return during the course of the year?
04:00And, Danny, you're right, it tends always to be equity-oriented assets, private equity, real estate, commodities.
04:08Then you get into your fixed income assets.
04:10Though, I would say it's interesting to see private equity ahead of public equity,
04:14because it's a point that Bruce Richards made to Matt,
04:17is that private equity is much more exposed to software than public markets are.
04:21Did that factor into thinking at all when you look at some of the private universe,
04:25that they are more exposed to software and there's this big question mark as to what AI does to it?
04:31Yeah, so the question about AI and valuations is absolutely out there.
04:35However, coming into the survey, the view that the public markets were very expensive
04:40and the private markets, particularly in private equity,
04:44have really not shown the appreciation over the last several years.
04:47So maybe this is a catch-up time.
04:50It's really interesting.
04:52I wonder, though, if the shake-up in private credit has made these managers feel differently.
05:02And that's happened also, in a sense, since this survey was taken.
05:05It was ongoing, right?
05:07But it wasn't until after February 3rd that we started to get headlines every day
05:11about redemptions and loan sales.
05:15And how do you, because you have your finger on the pulse,
05:17how do you think that might have changed?
05:19So when we're talking about the quote-unquote shake-up,
05:23we're really talking about retail flows.
05:25And indeed, we're seeing retail flows have reversed.
05:28As far as the industry is concerned, quite frankly,
05:30that's another source of demand that is exiting the market,
05:35leaving them available to be the provider of liquidity into these markets.
05:39They are quite familiar and accustomed to the private markets.
05:43They've been investing for decades in private markets.
05:45So the fact that a bid is vanishing gives them the opportunity
05:49to really be the capital provider at wider spreads.
05:53That's important perspective.
05:54That's really good intel,
05:54because we think about this from kind of an alarmist perspective, right?
06:00And that's because of the retailers that are running for the gate.
06:03But it's these experienced investors that really make up the bulk.
06:07Well, and I guess you don't have the same liquidity mismatch that you would for retail.
06:11But I do wonder, when you're surveying these insurers,
06:14how much of them are insurers that are owned or have close partnerships
06:18with private capital companies, private capital firms?
06:21And do you see any difference in appetite, outlook,
06:24what they want between the ones that are closely tied to private capital firms,
06:27the ones that aren't?
06:28So, Danny, we had about 440 companies respond to the survey.
06:32Their asset base is something on the order of $16 trillion,
06:37about half of the global industry's assets.
06:39The private equity-owned or supported firms are a very small part of the overall pie.
06:45Let's not forget, we have the property casualty industry,
06:48the health care industry, the reinsurers,
06:50and then we have the life companies.
06:53So, it's visible, but it's a very small part of the global industry.
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