Viewpoint: The Long Game of Inflation – Dynamic Portfolio Strategies
In Short
By Yazeed Abu-Sa’a, FCAS, MAAA, Managing Director, Insurance Solutions at Conning
Inflation is a complex phenomenon, its roots intertwined in various economic, political, and global factors. This presents unique challenges and opportunities for the investment strategies of insurance companies.
Insurers are still navigating from a terrain marked by prolonged low investment rates and squeezed margins to an unpredictable inflationary environment and balance sheets holding large unrealized losses. This paper explores how insurers can adapt their investment strategies to hedge against uncertainties caused by inflation and extended periods of higher interest rates, explor- ing avenues such as real estate, equities and specialty products, while also incorporating strategic asset allocation and risk management best practices. Conning believes applying more dynamic investment strategies may also benefit insurers over the long term for most economic conditions.
The Impact of Inflation and the Outlook for Interest Rates
Our March 2022 Viewpoint studied the impact of inflation on insurance companies’ financial statements, observing deviations between actual results and projections due to deteriorations in assets and liabilities. We highlighted the extended influence of inflation and some companies’ constraints in implementing protective measures. We also discussed the limited flexibility that many investment portfolios have in dealing with these challenges amid regulatory and rating agency scrutiny. Ultimately, we determined that a thorough portfolio assessment and strategic planning can significantly mitigate these concerns.
Reflecting on 2023, the Federal funds rate ended the year at 5.33%. Despite the U.S. Federal Reserve’s declaration to halt the cycle of increases, the outlook for the next two years remains uncertain (see Figure 1) but there is a strong inclination toward keeping rates higher for an extended period.
Figure 1 - The Fed’s Outlook: Higher Interest Rates for Longer but an Unclear Path
