EU insurers pile into loans, funds and private equity

European insurance companies’ fund investments topped €1.52 trillion ($1.69 trillion) in Q3 2019, up +61% on three years prior. 

Holdings in collective investment undertakings, the regulatory term for funds, made up 12% of insurers’ asset portfolios in aggregate, up from 8% in Q3 2016, according to balance sheet data compiled by the European Insurance and Occupational Pensions Authority (Eiopa). German insurers had the largest share of their balance sheets allocated to funds, at 26%.

Asset exposure data published by the regulator, which uses a slightly different sample of firms, shows debt funds and equity funds were most favoured by insurers, making up 30% of total fund allocations each. Asset-allocation funds made up 14% and money-market funds 7%.

 

Insurers have also ramped up exposures to private equity. Unlisted equities accounted for €53.7 billion of asset holdings, up +20% on Q3 2016. These investments made up less than 1% of aggregate exposures, however. Unlisted equities made up 3% of Swedish insurers’ balance sheets, the most of any country.

Loans and mortgages have enlarged their share of insurer balance sheets, too. Investments in these are up +20% to €440 billion over the three years to Q3 2019, and make up 3% of total holdings. Dutch insurers had the most allocated to loans, at 17%.

Bonds remain the top investment of insurers, accounting for 38% of exposures in Q3 2019. But this is lower than the 41% reported three years prior. In euro terms, bond holdings have increased 2% since Q3 2016.

What is it?

Eiopa collects and publishes insurance statistics based on Solvency II quantitative reporting templates (QRTs). They contain aggregated country-level information about the balance sheets, asset exposures, own funds, capital requirements, premiums and claims and expenses of insurers covered by the Solvency II framework.

The Q3 2019 balance sheet data was extracted from the S.02.01 QRTs from 2,012 undertakings. The asset exposure data was extracted from S.06.02 QRTs from 1,932 firms.

Why it matters

Insurers are frantically searching for investment returns in a market awash with negative-yielding debt. Private equity and loans, especially leveraged loans, are an attractive option in this environment, as they typically offer far higher rates of return than traditional fixed-income securities.

However, they are also less liquid and carry greater credit risk – two reasons why the European Central Bank says their favour with insurers raises financial stability concerns. In a market downturn, these assets could turn bad, blowing holes in insurers’ own funds.

Funds make popular investments as they are heavily regulated in the EU and allow insurers access to diverse asset classes in a single handy wrapper. They are also increasingly used to underpin popular unit-linked insurance policies, which are being pumped out by EU firms to reduce their investment risk.

But again, some of these funds – such as private equity, alternative and infrastructure funds – hold illiquid assets that may lose their value rapidly in a recession. Insurers must tread a fine line between boosting their investment yields and avoiding risks they may not be prepared for.

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