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Reinsurers’ plunging yields are GFC ‘collateral damage’

The net investment yield for reinsurers has fallen 30% over the past four years, a report by Standard & Poor’s reveals.

The paper, based on a “peer group” of 24 global reinsurers, argues low yields are the “collateral damage” of central bank monetary policies and “ultra-low” interest rates since the global financial crisis.

Reinsurers are seeking ways to halt the decline and bolster investment income, but this search for yield “comes at the expense of deploying greater amounts of risk capital to mitigate potential volatility in asset values”.

“Reinsurers are more dependent than ever on generating profits from their insurance underwriting to deliver their targeted return on equity,” the ratings agency says.

Most reinsurers “have a robust investment framework”, with close matching of assets and liabilities, particularly for the core portfolio of assets backing their insurance liabilities.

Assessing credit risk exposure as stable, S&P says reinsurers’ portfolios are positioned “relatively prudently”, with 72% of their assets held in fixed-income instruments at the close of last year.

Equity exposure underwent a “material increase” as the proportion of equity holdings in reinsurers’ asset portfolios increased to 10% last year from 7% in 2013.

“Although equity appreciation accounts for some of the increase, most comes from reinsurers reallocating funds into equities from other asset classes,” S&P says.

“That said, we believe overall investment leverage has remained moderate.

“We found the proportion of higher-risk assets – equities, real estate and speculative-grade fixed-income exposure – stayed at less than 30% of capital for the global reinsurance peer group [last year].”

S&P does not expect a material recovery in investment income. Interest rates are forecast to remain low at least until 2017. Net investment yields for reinsurers are expected to improve marginally – by just 50 basis points – up to 2017.

“Continued external risks, such as geopolitical tensions and central bank monetary policy, add to the potential for volatility in returns, and hence investment losses, as evidenced by the recent sell-off in the global equity markets,” S&P says.

“We therefore believe reinsurers need to maintain their current capital strength to absorb potential volatility.”