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European insurers' quest for higher yield via illiquid asset acquisitions set to continue

Publication Date: 28 May 2019 - By ReachX Team By ReachX Team
Actionable
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Equity Fundamental Equity EU ex-UK UK Financial Services

In their search for higher yields, European insurers are set to buy more illiquid assets over the next 12-18 months, according to a leading rating agency. 

The allocation trend has been predicted by Moody’s in a note to clients, but the agency also adds that the increase will coincide with a deterioration in the credit quality of some illiquid assets, including European corporate debt.

"Illiquid assets such as real estate, loans, mortgages and private debt, account for 15% of Moody's-rated insurers' portfolios, but we expect this share to increase as persistently low interest rates push insurers to seek out higher-yielding assets," says Benjamin Serra, Senior Vice President at Moody's. 

"Dutch and UK insurers are the most exposed amongst the largest European markets, and illiquid assets are now a 'must have' for UK annuity writers which rely on the illiquidity spread they can earn on these assets to meet their profitability targets."

Europe's Solvency II capital regime also encourages insurers to invest in certain types of illiquid asset, either through lower capital charges or diversification benefits.

While illiquid assets provide higher returns and are a good match for insurers' illiquid liabilities, they tend to replace less risky sovereign or corporate bonds, and therefore tend to reduce insurers' overall asset quality. 

Moody's also takes a negative view of high exposure to single asset classes or geographies, and of high indirect concentrations to specific corporate sectors through investments in illiquid assets.

The outlook for illiquid asset classes is variable, the agency noted. While some, such as Dutch mortgages, continue to perform well, Moody's expects an increase in the overall corporate default rate in Europe, albeit from a historical low level. Brexit uncertainties are also increasing the risk of various UK asset classes.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX Team

 

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