Cash-rich insurers eye loan books of de-leveraging European banks

High-quality portfolios could provide attractive long-duration assets, say bankers

The de-leveraging of European banks will provide opportunities for insurers to buy assets, but the market is likely to develop slowly, bankers say.

Europe’s banks are set to dramatically shrink their balance sheets in the coming years as they look to raise capital and plug the holes created by the eurozone debt crisis. KPMG suggests that about €1.5 trillion–2.5 trillion (£1.2 trillion–2 trillion) of bank de-leveraging is required over the next two years.

Bankers say assets such as higher-quality loan portfolios could be attractive to insurers, which have built up significant cash reserves over recent months. Some insurers have already started to make acquisitions.

The current low interest rate environment and the proposed high capital loadings on assets such as equities and direct property investments under Solvency II are prompting insurers to look at their asset allocations.

“Insurers are cash-rich at the moment and looking for ways to apply that cash. A lot of these [bank] assets would naturally sit on insurers’ balance sheets. Deeply illiquid credits, which ideally have the right features for the regulatory regime, are incredibly attractive,” says Andrew Berman, co-head of European insurance and pensions solutions at Deutsche Bank in London.

“It will be helpful when there is greater clarity on the Solvency II regime. Insurers are in risk minimisation mode, not risk optimisation. Transactions with minimal capital requirements are gaining a lot of attention.”

Bank assets that provide stable long-term cashflows to back their liabilities, such as mortgages and other loans, will be attractive. “There are such a range of potential assets at the moment – shipping, aircraft, commercial real estate debt,” says Berman. 

But insurers are likely to be very selective. Insurers are concerned that the first assets to come to the market may be of low quality.

Munich-based insurance group Allianz has been approached by banks seeking to sell assets, its chief financial officer Oliver Baete said in a presentation to investors last year. Baete said while the first wave of assets would be ones that the banks “don’t like”, over time more attractive assets would come to market.

Simon Hotchin, co-head of insurance clients, Europe, at HSBC in London, says: “[Insurers’ appetites] will depend on what the banks are looking to offload and whether it fits what insurers want. Non-sovereign debt in peripheral eurozone countries would not be attractive.

“Insurers are not as stressed as banks, but the sector’s solvency ratios took a significant hit in the third quarter and risk appetites have come down. They are generally not looking to add risk in the current environment.”

German insurance group Talanx says any bank assets would need to be carefully analysed. “The ability to take those assets does not necessarily mean this would be in line with the risk management of an insurer. However, the current situation may offer interesting opportunities for insurance companies – as our latest acquisition in Poland shows. The prerequisite, in any case, is to carefully evaluate the potential bank assets from a risk management point of view," a spokesman for the insurer says.

In January, Talanx agreed to acquire Tuir Warta, Poland’s second largest insurer, from the Belgian bancassurer KBC Group. The transaction is expected to be complete in the second half of 2012.

It may take some time for a significant number of transactions to take place, as insurers take time to select the right assets. Deutsche Bank’s Berman comments: “Where is the sweet spot in terms of what assets to take and at what price? Everyone is trying to jostle for position and is working out when to enter the market. It is early days and it might be another year before there is real momentum.”

He adds: “But it is worth noting that the first movers have already been buying.”

Banks, such as Germany’s Commerzbank and Lloyds Banking Group in the UK, have already begun selling assets. In December, Lloyds Banking Group entered exclusive talks with US private equity firm Lone Star to sell £900 million of distressed property loans.