Dutch insurers’ HY bond exposures likely to have peaked, Fitch says

Written by Adam Cadle

15/01/2024

Dutch insurers’ high-yield (HY) bond exposures appear to have peaked well below levels that would pose a risk to ratings, Fitch Ratings has said.

Low fixed-income yields over many years led insurers to invest more in HY bonds in pursuit of higher returns, but exposure largely plateaued after the steep rise in yields in 2022, and we do not expect it to increase further. HY bonds accounted for 2.6% of Dutch insurers’ bond portfolios in aggregate at end-September 2023, according to the Dutch central bank (DNB), double the proportion at end-January 2019. However, the proportion was fairly stable in 9M23.

“If HY bond exposures have indeed peaked, this would fit with Fitch’s neutral outlooks for the Dutch life and non-life insurance sectors, which reflect our expectation that the operating environment will continue to stabilise in 2024,” the ratings agency said,

HY bond exposure is low at the sector level but varies significantly among insurers, and ratings reflect this. Fitch takes account of the exposure when assessing an insurer’s investment and asset risk. The core metric in the analysis is the ratio of ‘risky assets’ to equity capital, which captures exposure to HY bonds, equities and certain other risky assets. A complementary metric is the ratio of HY bonds to equity capital. Ratios have generally crept up in recent years but the increases have not been enough to affect ratings.

“We expect investment portfolio profiles to be stable in 2024 with no material shift in asset mix or the average credit quality of bond holdings, which is typically between ‘AA’ and ‘A’. The higher yields now available on investment-grade bonds reduce the need to seek higher returns from riskier assets, particularly for life insurers with significant investment guarantees to customers. This could lead to a gradual decrease in HY bond holdings but probably not a sudden large-scale divestment,” Fitch added.

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