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Now, four years after the Basel III agreement that prompted banks to de-leverage, the ground is shifting, as insurers begin to find ways around the obstacles. They are revamping their asset management arms, pooling resources with other institutional investors and partnering with banks. "Lending was traditionally the job of banks and it is very rare for an insurance company to be able to invest in this asset class on its own", says Shazia Azim, partner at PwC in London.
It is hard to provide exact figures on the size of the market for illiquid loans in Europe, as the transactions can take different formats - notably bilateral loans and private placements (PP) - and information may not be made public. But evidence that insurers are dipping their toes in the water and ramping up their private debt portfolios is abundant.
While some insurance groups are pooling resources and taking the investment process largely in their hands, others are working closely with banks. Axa is a case in point. Over the over the past couple of years, Axa Investment Managers has built a portfolio of mid-market company debt on behalf of its insurance arm. It has invested in both French PP bonds and the Schuldshein, the German equivalent, but also in loans originated by banks.
In a report published in July, rating agency Moody's estimated that corporate loans and other types of illiquid loans would in the long term come to represent between 5% and 10% of European insurers' asset portfolios - from an insignificant percentage today. Yet this is far less than the fraction of corporate loans on the balance sheets of US and Japanese insurers, where according to Moody's, they account for 16% and 13%, respectively.
Diversifying their investments is another element pushing insurers into illiquid corporate loans and bonds. The financial crisis and the subsequent sovereign crisis in the eurozone changed the perception of the risk of sovereign bonds and corporate bonds issued by financial institutions: they are no longer seen as risk-free and are deemed to be correlated.
Insurers have been keen to reduce their exposure to risky sovereigns and financials, in particular to unsecured bank debts. This is an element of their investment strategies. To a lesser extent, it also contributes to bringing down their regulatory capital by reducing asset correlation under Solvency II.
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