71% of insurers have some exposure to EMD; higher returns favoured over diversification

Written by Adam Cadle

18/05/2020

Seventy-one per cent of insurers now have some exposure to emerging market debt (EMD), with the prospect of higher returns a particularly attractive element to them.

According to Invesco’s Global Fixed Income Study 2020, insurers favoured higher returns of this asset class as opposed to diversification.

“For many insurance companies struggling to generate returns in the context of solvency regulation, hard currency EM debt is an obvious choice,” the report stated. “Hard currency corporate EM debt frequently offers enhanced yields compared to domestic bonds at the same rating.”

Insurers have the additional complication of regulations such as Solvency II in the European Union, that incentivise them to hold more liquid and less risky assets to benefit from lower capital charges. This has left two-thirds of insurers concerned about their ability to generate forecast returns without significantly raising investment risk, with a substantial minority finding it difficult to stay within regulatory capital limits (37%).

For insurers, bank loans and direct lending offer a chance to gain additional long-term yield through an illiquidity premium, while also exerting control and remaining within solvency limits. For risk-averse insurers, RE debt has proven an attractive means to boost yields without taking on too much additional risk, due to the relative ease of recovery.

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