US INSURANCE WATCH: A review of Q1 2024 and investment outlook

Welcome to our inaugural insurance quarterly.

In this publication we will share some of our key insurance investment themes and views, based on our work with clients and other industry stakeholders over the last quarter. We also outline our key fixed income insights and economic views. If you have any feedback, please do not hesitate to get in touch.

• Rate cuts are coming, but there’s no rush: The Fed continued to stand firm in its forecast for three rate cuts by year end, despite significantly increasing its 2024 growth forecast. Although the March inflation data is likely to push back the timing of the first cut, we believe it is a temporary setback and that inflation will ultimately provide the flexibility for the Fed to ease after the summer.
• Three Insurance themes we’re watching: We provide some thoughts on some insurance investment themes we are monitoring: fixed income yields, tax-exempt allocations and regulation.
• Credit: If, as we expect, economic growth starts to accelerate and the Fed starts to cut, this should be a supportive environment for risk assets, and high yield credit is an asset class that can benefit. In a scenario where defaults are close to their historical average level, we believe should provide income well in excess of BBB corporates.
• Investment outlook: Some investors are waiting for spreads to widen before they move more assets into credit markets, but we believe this is the wrong focus. The absolute level of yields is still at pre-financial crisis levels, and waiting could mean missing an opportunity to lock in these yields for the longer-term.
• Key risks: Although there is scope for central banks to ease policy in the short term, we believe central banks will be operating in higher ranges going forward, with the era of low rates at an end. It is unclear if this has been fully priced into asset prices more broadly. The war in Europe continues to be a concern, and there is a risk that events escalate with unexpected consequences. Broader geopolitical tensions are elevated, and tensions between the US and China risk an increasingly polarized world.
• Global macro research: The global hiking cycle has had less of an impact on global housing markets than many would have expected. To the extent strength in the global housing market continues, it bodes well for consumer strength and the economy’s resilience against the global rate hiking cycle. However, there is a risk that it causes central banks to delay or slow down their rate-cutting plans over the next few years, particularly in markets where housing strength has been particularly pronounced like the US.

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