President & CEO
Strategic Asset Alliance
Strategic Asset Alliance
With the current expansion moving towards the longest in US history, one might begin to wonder if the business cycle has been repealed. At this year’s Insurer Investment Forum XIX, SAA looked at where we are in the business cycle by considering more than just GDP. What might this mean for insurer investments in the medium and long term?
You can learn more about the Forum here.
- Looking at the last four economic cycles, there is no indication of any correlation between key metrics (i.e. S&P 500, CPI, BBB spreads, 10-Year US Treasury, etc.) and real GDP.
- Traditional economic thought is flawed as it did not predict the last recession, assumes rational behavior and does not fully account for the continuous technological revolution.
- While the federal debt and budget continue to grow, the US economy still has the US dollar being the Reserve Currency going for it.
- No certain replacement for traditional economic thought can answer, “what is the correct size for central bank balance sheets?”
- What are the first and second order impacts of the tech revolution? For example, with more autonomous cars, what happens to parking spaces and unneeded cars? What happens to untrained workers whose jobs have become obsolete?
- The U.S. is becoming a smaller portion of global GDP, however it is unlikely the reserve currency status of the U.S. falters in the near-term.
- Per a recent industry survey, most insurers view the risk of an economic slowdown/recession as their biggest concern; with more than half of insurers seeing investment opportunities worsen.
- In the next 12 months, most insurers will decrease equity and credit risk, reduce duration and increase liquidity. Of course, these adjustments are at the margin.
- While insurers have continued confidence in alternatives, for a majority of small-to-medium sized insurers alternatives are not cost-effective (and potentially dangerous).
- With small- and medium-sized insurers, it can make sense to get involved with Commercial Mortgage Loans as part of a program sponsored by a larger investment manager.
- Expect ESG (Environmental, Social, Governance) investing to be something that’s talked about more and more across small- and medium-sized insurers. There are beginnings of studies showing that perhaps investing in ESG is an advantage over the overall market, but it’s not definitive based on historical data thus far.
- Insurance companies need to understand their manager’s opinions on investment opportunities (given their thoughts on the economy) and compare those opinions to other managers.