|
|
Companies have been buying investment-grade Italian and Spanish bonds, and firms with more flexible investment rules are eyeing opportunities in Ireland and Portugal, as these countries emerge from gruelling three-year bailouts.
Relative high yields and a steady reduction in volatility over the past months are driving European insurers to re-examine their investment guidelines on peripheral sovereign debt, to allow for a small increase in their exposures, say asset managers.
Local insurers and subsidiaries of large insurance groups in the eurozone periphery, which rely on sovereign bonds to provide a good match for their liabilities, have been investing heavily in the peripheral bonds. Yield-hunting insurers from core-Europe are also understood to be buying peripheral government debt, as part of a steady widening of the base of investors across the periphery.
Falling volatility in peripheral bond markets goes a long way to explain the return of insurers. Intervention by the European Central Bank during 2012 is seen as a turning point in the eurozone debt crisis, but other factors have played a part in bringing stability to bond markets.
The fact that most insurers had previously cut their holding of peripheral debts means an increase in exposure will bring some diversification benefit with it. Experts highlight that in cross-over credit space – bonds rated junk but close to investment grade – and in the BBB corridor reasonable investment alternatives are fairly limited. Direct lending and investment in illiquid loans, such as infrastructure, real-estate and corporate loans, present challenges for insurers.
The fact that sovereign bonds are treated as risk-free under Solvency II and their long duration relative to other assets add to the investment case.
Many expect insurers will increasingly tap the peripheral bond markets over the course of 2014, even if they are likely to stop short of building-up their exposures to pre-crisis levels. A positive evolution of sovereign ratings – in particular, an upgrade of Ireland's debt – could give this process a boost, as the capital insurers will need to hold against the debt may fall.
Full article (Risk.net subscription required)