Goldman Sachs: U.S. Life Insurers Enjoy Improved Capital Positions

To deploy excess capital, the white proposes that life insurers adopt a multi-asset class investment strategy that allocates funds according to a 3:1:1 formula of high yield bonds, hedge funds and private equity. The paper concludes this investment strategy will provide a 17.9% annualized return on shareholders’ committed capital over a 30-year period.

“For the private equity investment strategy, we finding that whenever the private equity net IRR [internal rate of return] exceeds 5.4%, the strategy outperforms a share buyback program in the long-term,” the paper states. “Similarly, within the context of the multi-asset class investment strategy, if the private equity net IRR exceeds 5.4%, the hedge fund return exceeds 3.6% and the high-yield return exceeds 2.8%, the strategy outperforms a share buyback program.

“This provides the insurer with a context around which to make a decision,” the paper adds. “If these levels of returns are deemed conservative, then the multi-asset class investment may be a more attractive ‘excess capital strategy’ than a share-buyback.”