Record-low European interest rates are driving insurers and reinsurers from Axa SA to Munich Re toward corporate and infrastructure debt for better returns.
France’s three largest life insurers—Axa, CNP Assurances SA and Credit Agricole SA—shifted about 25 billion euros ($33 billion) into non-financial corporate bonds last year, according to data compiled by Bloomberg. Yield-hungry Munich Re and Swiss Re Ltd., the world’s largest reinsurers, also are plowing funds into such investments.
“This trend is accelerating,” said Eric Vanpoucke, a fund manager at Financiere Meeschaert in Paris, which holds shares of Axa, Allianz and Swiss Re. Solvency rules for insurers favor bond investments over equities, he said.
Insurers, who invest policy premiums to help pay for claims, are traditionally big holders of government debt. With sovereign yields tumbling to all-time lows, they have been moving funds toward corporate bonds and infrastructure loans.
French 10-year government bonds yielded a record low 1.659 percent last month, while the German rate tumbled to 1.165 percent, shy of its July record of 1.127 percent. Although the yields have since risen and were 2.381 percent and 1.773 percent respectively at 11:35 a.m. in Paris, they’re still less than half their euro-era highs. The European Central Bank last month cut its benchmark rate to an all-time low of 0.5 percent.
Low interest rates are the biggest risk for insurers, followed by the debt of governments and financial institutions, the European Insurance and Occupational Pensions Authority, the European Union’s insurance watchdog, said June 12.
Most insurance markets show “increased search-for-yield behavior,” it said in its mid-year financial stability report, adding that “it is clear that with the deteriorating macroeconomic environment, the likelihood of a prolonged period of low interest rates increases.”
The euro-area economy has been in a recession for well over a year, and unemployment in the region rose to a record 12.2 percent in April. Gross domestic product in the 17-nation bloc will probably fall 0.4 percent this year, the second consecutive annual decline, the European Commission said May 3.
Munich Re, the world’s largest reinsurer, said during its full-year results presentation in March that falling interest rates are “leaving their mark” on the reinvestment yield. To mitigate the trend, the company said it’s seeking out company debt and structured credit.
“For insurers with a traditional investment priority for government bonds and covered bonds, it’s sensible, already for reasons of risk diversification, to invest more strongly in corporate bonds,” said Josef Wild, a spokesman for MEAG Munich Ergo Asset Management GmbH, Munich Re’s investment arm.
Munich Re said in a presentation on its website that the company will increase investments in corporate and emerging market bonds, after gradually raising corporate debt to 11 percent of its total 196 billion-euro fixed-income portfolio in the first quarter, from 9 percent at the end of June 2012.
Axa, Europe’s second-largest insurer, is putting 40 percent of its new fixed-income investments in corporate bonds, 30 percent into government bonds and 7 percent in loans, according to a presentation by the Paris-based company in February.
“We are strongly diversifying our credit portfolio beyond corporate bonds,” Laurent Clamagirand, Axa’s chief investment officer, said in a phone interview. “We are investing in a significant way on different types of loans in the U.S.”
Credit Agricole’s insurance arm in 2012 invested about 8.5 billion euros in corporate bonds including that of dairy company Groupe Lactalis SA. CNP Assurances, France’s largest life insurer, invested 9.7 billion euros in corporate credit in 2012.
Since the end of 2011, “we’ve increased investments in corporate debt relative to sovereigns because returns from core- country debt was too weak and debt from peripheral was considered too risky, and we were too exposed,” said Mikael Cohen, CNP’s chief investment officer.
Swiss Re plans to buy $5 billion of corporate debt this year as well as about $2 billion of equities while reducing government-bond holdings. The Zurich-based company said it’ll move toward “high-quality” credit such as investment-grade corporate bonds through third-party asset managers.
“You will also see us invest more in securitized products and see other items such as infrastructure, commercial mortgages and other elements in the portfolio,” Chief Financial Officer George Quinn said during a conference call this week.
“From a relative perspective, credit offers more attractive returns than government bonds if we look it over the course of the last two or three months,” Quinn said in an interview. “Government bonds until very recently have been offering negative real returns.”
For corporate borrowers, the flood of funds from insurance companies has helped lower borrowing costs.
French industrial gases maker Air Liquide SA sold 250 million euros of senior unsecured six-year notes on June 10 at a coupon of 1.5 percent, according to data compiled by Bloomberg. That compares with interest payments of 4.375 percent it offered on similar maturity notes in May 2009.
Danone, the maker of Activia yogurts and Evian water, sold 500 million euros of 2.6 percent 10-year notes on June 21, according to data compiled by Bloomberg. The Paris-based company offered 3.6 percent for similar maturity bonds in November 2010.
The average yield investors demand to hold investment-grade corporate debt in euros fell to a record low of 1.72 percent on May 17, according to Bank of America Merrill Lynch’s Euro Corporate Index. While it climbed to 2.38 percent after the U.S. Federal Reserve signaled it may slow asset purchases later this year, it’s far below the peak of 7.6 percent in October 2008 as the European debt crisis roiled markets.
“It’s big money for the borrowers even if it remains small compared to insurers’ assets,” said Thomas Jacquet, an analyst at Exane BNP Paribas in Paris.
French insurers and Europe’s largest reinsurers are also pushing into infrastructure lending, plugging a hole left by banks confronted by stricter capital rules.
CNP Assurances pledged this month to invest as much as 2 billion euros in infrastructure loans, working with Natixis SA to fund the building of bridges, roads and hospitals.
Axa said it plans to start to fund corporate lending in Germany, Switzerland and Austria with Commerzbank AG. That mirrors its French partnerships with Societe Generale SA and Credit Agricole’s corporate and investment bank.
This month, Axa said it plans to invest 10 billion euros in infrastructure debt over the next five years through the real- estate business of its Axa Investment Managers unit.
Munich Re is also looking to expand its investments in renewable energies and infrastructure, where it sees “attractive long-term cash flows,” according to an analyst presentation it held in March in London.
“Investments in infrastructure make sense by providing cover for long-term liabilities where the bond market remains limited,” said Stefan Schuermann, a Zurich-based analyst at Vontobel Securities Ltd.
With assistance from Jennifer Joan Lee in London. Editors: Vidya Root, Tim Quinson