The quantitative easing (QE) programme announced last week by the European Central Bank (ECB) (see IAR, 23 January, QE to accelerate shift into illiquid assets) will be credit negative for European insurers, according to rating agency Moody's.
Benjamin Serra, senior credit officer at Moody's, said that: "The QE will maintain interest rates at a depressed level for a prolonged period of time. This is credit negative for insurers, particularly for life insurers operating in Germany and in the Netherlands, where insurers offered relatively high guarantees on life insurance contracts. We expect insurers to increasingly invest in lower quality and/or less liquid assets to chase yield, another credit negative."
Serra noted that insurance companies invest predominantly in fixed-income securities, including sovereign bonds, and that declining interest rates squeeze their investment margins. Life insurers in particular have longer-duration liabilities than assets. According to Serra, in a low-yield environment insurers may be forced to reinvest assets at a lower yield than their guaranteed rate on liabilities, which would create negative results and a decline in economic solvency.
"Moreover, insurers will increasingly opt for riskier higher-yielding securities in order to boost or maintain returns," said Serra. "Encouraging investors to take on more risk in this manner is one of the stated transmission channels of QE, but it would have a negative impact on insurers' asset quality. Insurers are also likely to continue to increase their investments in illiquid asset classes, in order to capture illiquidity premiums as a way to boost their investment returns. A lower proportion of liquid assets in investments portfolio is also credit negative for insurers."