The reallocation is being driven by a perceived worsening of the prospects for bond markets, with increased expectations of rising interest rates. Rate hikes depress bond prices, which can in turn hit the solvency levels of insurers. But there is also a growing investor appetite for equities, with fund managers now more bullish on stocks than they have been in a decade, according to a recent Bank of America Merrill Lynch survey covering managers responsible for $569bn.
David Lomas, the managing director of BlackRock’s financial institutions group in Europe, said his firm has received £1.2bn of new investments from insurance clients in equity funds since November – an unusually short space of time.
Solvency II is a wide-ranging piece of European legislation expected to come into force next year. It imposes new funding standards on insurance firms, and many expect it to discourage investment in equities as they are viewed as higher risk.
But the head of equity research at one large investment bank said: “There has been a steepening of the yield curve, and that sets off insurers’ asset liability models and forces them to allocate more to equities. However, Solvency II may impair their ability to invest a large amount into equities through the cycle.”
Solvency II may have less of an effect than some fear. Lomas of BlackRock said his firm had researched the likely impact, and it was not necessarily the case that equities would be less attractive, because the new rules also recognise the benefits of diversification. He said: “Introducing an equity element may therefore improve the efficiency of the portfolio.”
Lomas also said insurers were likely to favour stocks that pay high and dependable dividends to their shareholders. This is because they prefer to own stocks that generate an income stream, as bonds do.
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