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Asset Allocation Alternatives Fixed Income Article

Shifting Focus: 2024 Insurance Investment Outlook

13 December 2023
2 min read

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.

50%+
corporate credit exposure for most insurers, highlighting the need for more diversified allocations.
Securitized
assets like Agency MBS continue to show strong relative value versus corporate credit markets
$5 Trillion
addressable market of specialty finance, or private ABS, consisting of senior secured loans.
Authors
Gary Zhu, CFA| Deputy Chief Investment Officer—Insurance
Meghan McNally| Portfolio Manager—Multi-Sector Insurance Portfolio Management
Deanna Leighton, CFA| Lead Portfolio Manager—Insurance Portfolio Management

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.

Display 1: Stay Close to Home While Rates Are Elevated
Percent
Display 1: Stay Close to Home While Rates Are Elevated

Current analysis and forecasts do not guarantee future results.
As of September 30, 2023
Source: Bloomberg, US Federal Reserve and AllianceBernstein (AB)

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.

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Past performance, historical and current analyses, and expectations do not guarantee future results.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Gary Zhu is a Senior Vice President and Deputy Chief Investment Officer of Insurance, where he is responsible for portfolio performance, strategic positioning and customized investment solutions for AB’s Insurance platform. Zhu joined AB in 2020 as the global head of Multi-Sector Insurance on the Fixed Income team, primarily focusing on developing and implementing multi-sector income portfolio strategies. In 2021, he was named director of Insurance Portfolio Management, where he led AB Fixed Income’s insurance business. Under Zhu’s leadership, the Multi-Sector Insurance team was named Investment Team of the Year in 2022 and 2023 by Insurance Asset Risk. He is also a portfolio manager in the US Investment Grade Credit and Sustainable Thematic Credit teams. Prior to AB, Zhu was a senior publishing research analyst and the head of cross-sector research at Wells Fargo Securities. He ranked first for cross-asset strategy in the 2019 Institutional Investor survey and earned the title of Best Cross-Asset Analyst in Global Fixed Income Strategy. Before joining Wells Fargo, Zhu was a senior securitized assets trader and portfolio manager at Genworth, where he managed ~$10 billion of fixed-income investments. Prior to his portfolio-management role, Zhu helped manage Genworth’s $70 billion general account, with a focus on US and European banking exposures during the 2008 financial crisis, and held various roles across the company. He holds a BS (summa cum laude) in finance and economics from Virginia Commonwealth University and an executive MBA (with Dean’s Honors) from Columbia Business School. Zhu is a CFA charterholder and holds the Fellow, Life Management Institute designation. Location: New York

Meghan McNally is a Vice President on the Multi-Sector Insurance Portfolio Management team within AB's Fixed Income department. She joined the firm in 2015. McNally partners with the head of Insurance Portfolio Management in implementing strategies for insurers and oversees the day-to-day communication efforts between her team and insurance clients. She leads responsible investing initiatives and coordinates with insurers on matters related to ESG, including formulating policy, monitoring exposures and setting ESG-related goals. McNally is also a key contributor to AB's thought pieces on topics affecting the insurance asset management industry. Prior to being promoted into her current role, she was an associate portfolio manager managing the day-to-day activities for insurance portfolios. Previously, she was an associate at GE Capital Healthcare Financial Services, focusing on underwriting and portfolio management of middle market loans. McNally started her career at GE Capital in a two-year risk management leadership program. She holds a BS in business administration from Bucknell University. Location: New York

Deanna Leighton is a Vice President and Lead Portfolio Manager on the Multi-Sector Insurance Portfolio Management team, where she is responsible for formulating insurance portfolio allocation strategies, overseeing daily portfolio-management activities and leading insurance-specific cross-sector, relative-value discussions. Leighton leads the Macro Allocation and Strategy team that interfaces with AB Insurance’s strategic clients in building tailored liability-driven and asset-focused solutions. She uses her deep understanding of both cross-asset investments and insurance company needs to construct tactical and dynamic investment portfolios and co-leads AB’s biggest insurance client’s spread-lending strategies. Leighton is a frequent speaker at industry conferences, and she moderated the inaugural Private Credit panel at ABS East in 2023. Prior to joining AB in 2022, Leighton was a fixed-income portfolio manager at AIG Asset Management, where she oversaw around US$5 billion of high-yield bond investments and helped build AIG’s third-party asset-management business, contributing to its strong commercial success. Before this role, she was an associate portfolio manager for AIG Asset Management’s high-yield bond portfolio. Leighton holds a BA with a concentration in economics from the University of Michigan and is a CFA charterholder. Location: New York

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