Shifting Focus: 2024 Insurance Investment Outlook

What You Need to Know

As US insurance investors turn their eyes toward 2024, they’ll face a macroeconomic backdrop in transition. With this in mind, their efforts should include maintaining duration positioning, diversifying risks, emphasizing quality as credit conditions begin to soften, identifying relative value opportunities and balancing private allocations with liquidity considerations.

The Federal Reserve responded forcefully to surging inflation during 2023, but worries of a hard economic landing have mostly faded. Consumers’ strong balance sheets have been a key factor, supported by a robust labor market and savings accumulated during the COVID-19 pandemic. Given that inflation has already fallen significantly, we expect benefits to consumers to decline.

The focus now turns from how high rates can go to how long they’ll stay up—a more significant economic aspect. We believe they’ll stay elevated for several quarters, with higher energy prices keeping inflation up and rising longer-term interest rates slowing growth. A potential stagflation shock against this backdrop would be unwelcome. And while we don’t expect the upcoming US election cycle to disrupt the economy, we’re keeping an eye on developments.

With this environment in mind, how should insurers think about navigating markets as the calendar turns to 2024? From our perspective, their efforts should be organized along these key themes:

• Maintain portfolio duration positioning and balance risks
• Emphasize quality and diversification as the credit environment softens
• Rely on relative value tools to navigate a complex environment
• Balance allocations to private market opportunities with liquidity considerations

Let’s take a closer look at each of these themes, with an eye toward presenting actionable opportunities for insurance investors.

Maintain Duration Positioning; Balance Across Risk Types

Rates have climbed to their highest levels since before the global financial crisis, and central banks are sending guidance that they’ll stay higher for longer. Inflation is decelerating, but it’s less clear that it will fall back to central bank targets. So even if the economy continues to slow, we expect to see a sustained period of higher policy rates (Display 1). We’re maintaining the view we’ve had throughout 2023: insurers should stay closer to home when it comes to overall duration positioning, gradually locking in higher yields by swapping out longer, floating-rate issues and minimizing duration mismatches with liabilities where possible.

We also think insurers should be looking closely at reinvestment risk in light of their approach. For example, insurers with a five-year investment horizon that are more spread-focused investors might benefit from leaning into short-term asset-backed securities (ABS) instead of five-year investment-grade corporates, because the spread they receive compensates them enough for taking on investments with a shorter maturity than their investment horizon.