Adventures in sovereign bonds, European insurers edition

Posted by Tracy Alloway on Dec 10 09:00
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FT Alphaville readers will remember that some insurers are actually rather terrible bond investors.
Corporates, hybrids, you name it — insurers were usually invested in it. And sovereigns bonds, many of which are now under pressure, are no exception.
To wit, a short piece of research by JP Morgan showing European insurers’ exact exposure to government bonds. The main table is below, click to enlarge:

The table shows government bonds as a percentage of total investment for European insurers. You can see that on that basis Topdanmark, Generali and Munich Re are the biggest investors in sovereign bonds. Unfortunately, what the table does not show is exposure to government bonds by country (that’s in a seperate table, which we are trying to get our hands on.)
Government bonds are typically one of the safest and most liquid investments an insurer can buy — as long as they are bonds in fiscally “safe” countries — of which there seems to be a diminishing number in Europe of late.
However, JPMorgan analysts Michael Huttner, Duncan Russell and Vinit Malhotra do note that:• 1. Direct Greece exposure is relatively modest. The largest is at Allianz, where it is less than 1% of fixed income assets, so less than €3.6bn.
• 2. The largest Southern Europe exposure is Italy for all the companies, due mainly to their large local operations. We note however that Italian government bond yields are down in the past month, meaning the value of the bonds is up.
• 3. Disclosure on government bonds is not as good as for corporate bonds, with large categories just called other Europe at Allianz, Munich and Generali. However, where we could identify the geographies this seemed mainly to reflect the business exposure rather than any significant risk taking for spread.
Certain government bonds — notably those of Greece, Ireland and Spain have been dipping lately — following a raft of sovereign rating changes. That will eventually have an impact on any insurers invested in them, since they will have to mark-to-market and may have to hold additional capital against the bonds after ratings downgrades — and the need for more capital or consolidation.
he JPM analysts, we should note, don’t see this as a particularly problematic issue:
Near term negative but medium term positive offset: Duncan Russell wrote in the 7 Dec Year Ahead 2010 Outlook in the section on insurance: “A bond market correction would be negative near term because of mark to market losses, but positive longer term because earnings power would increase with higher investment income and risk would be reduced (less pressure on guarantees).”
Others might, of course, disagree.

Related links:Greece, the not-so-expected impacts - FT Alphaville
Testing the AAA boundaries - FT Alphaville