Moody’s expects European insurers to continue allocating more of their investment portfolios to illiquid assets over the next 12-18 months as they seek higher yields.
However, the rating agency notes that the outlook for illiquid asset classes is variable, and predicts a deterioration in the credit quality of some illiquid assets, including European corporate debt.
Additionally, while illiquid assets provide higher returns and are a good match for insurers’ illiquid liabilities, they tend to replace less risky sovereign or corporate bonds, and therefore tend to reduce insurers’ overall asset quality, analysts said.
Moody’s also takes a negative view of high exposure to single asset classes or geographies, and of high indirect concentrations to specific corporate sectors through investments in illiquid assets.
“Illiquid assets account for 15% of Moody’s-rated insurers’ portfolios, but we expect this share to increase as persistently low interest rates push insurers to seek out higher-yielding assets,” said Benjamin Serra, Senior Vice President at Moody’s.
“Dutch and UK insurers are the most exposed amongst the largest European markets, and illiquid assets are now a ‘must have’ for UK annuity writers which rely on the illiquidity spread they can earn on these assets to meet their profitability targets,” he continued.
Dutch insurers have Europe’s highest average exposure to illiquid assets, according to Moody’s, with illiquid investments accounting for around 37% of their investment portfolios.
Brexit uncertainty is also expected to impact several UK illiquid asset classes linked to the country’s prospects, such as commercial real estate, where it may dampen sentiment, investment volumes and occupational demand.
Non-prime commercial properties will be most affected by weaker demand and reduced investor interest, while foreign investment, attracted by a weaker pound, would probably focus on the prime market segment.
The central London office market also remains vulnerable to a no-deal Brexit, with many financial institutions likely to move part of their operations to the EU.