(Repeat for additional subscribers)
Jan 20 (The following statement was released by the rating agency)
Fitch Ratings says in a new report that European insurers' investments are becoming riskier
and that although the increase in risk is small and likely to remain so, it could ultimately
have negative rating implications.
Fitch believes that generating sufficient investment yield in the current low
interest rate environment is the biggest challenge currently facing the European
insurance sector. One possible way for insurers to compensate this is to shift
asset allocations out of bonds and into asset classes with potentially higher
investment returns; ie, equities, real estate or alternative assets. However,
most European insurance companies have not adopted this strategy. Exposure to
equities and real estate has actually declined on average in the European
insurance sector over the past five years, and alternative assets still play
only a minor role.
While there has not been a huge shift by insurers from bonds into riskier asset
classes, credit risk exposure within bond portfolios has materially increased.
There has also been a tendency for insurers to invest for longer durations.
Although the increase in risk within bond portfolios has not reached a level
that would result in downgrades, Fitch views this development as potentially
Fitch believes bond prices look high across the entire risk and duration
spectrum. If interest rates rise, credit spreads would likely also rise. Thus,
the value of higher-risk bonds would suffer more than low-risk bonds, and that
of longer-duration bonds would suffer more than shorter-duration bonds. Overall,
the value of insurers' bond portfolios is now more vulnerable to interest rate
Although insurers' focus on alternative assets has increased over recent years,
actual investment allocation in this asset class represents only a small
proportion of total invested assets. Limited investment opportunities and
complex due-diligence processes are partly responsible, with investment in these
asset classes generally limited to large insurance companies with the necessary
skills and resources. Unfavourable treatment under Solvency II is also an
However, Fitch expects the situation to change. There is a clear need for more
investment in infrastructure and alternative energy projects, and governments
are limited by budgetary constraints. Consequently, alternative investment
opportunities will increase over the next few years, and some insurance
companies may be suitable investors given their need to match long-term,
The report, entitled 'European Insurance: The Search for Investment Yield' is
available at www.fitchratings.com or by clicking the link below.
Link to Fitch Ratings' Report: European Insurance: The Search for Investment