Insurers have slammed the European Central Bank (ECB)'s latest moves to stave off deflation, which analysts say will worsen insurers' investment performance.
The bank is to lower key ECB interest rates, increase quantitative easing and include corporate bonds in the purchase programme, and encourage bank lending (see box, below).
Some insurers evoked the price that lenders – that is, bond holders like themselves - have to pay for these measures, as well as the increasing credit bubble risks. Rating agency Moody's forecasts a decline in insurers' investments returns and a deterioration in insurers' credit quality.
Debtors are being favoured at the expense of creditors
Munich Re's chief economist Michael Menhart said he does not believe the ECB's decisions will achieve its objectives, namely stimulate lending and the economy and come closer to its inflation target of 2%.
"An additional aspect is that economic prospects in the Eurozone remain cautiously optimistic," he noted. The recent negative rate of inflation was affected by energy prices. Without them, the core inflation rate "remains clearly positive."
"The incidental effects of the extreme relaxation of monetary policy are considerable," Menhart argued. "In essence, debtors are being favoured at the expense of creditors. There is the threat of asset price bubbles and no incentive for governments to implement reforms. As well, the further reduction in interest on deposits is putting a strain on banks, yet without having the desired effect."
If the global economic situation were to deteriorate sharply once more, he added, the ECB would have already shot most of its powder.
Maximilian Zimmerer, member of the board of management of Allianz, the German insurance group, said the company does not support the ECB's negative interest rate policy.
Not only is it detrimental to savers and their retirement funds, but it can also destabilise financial markets and increase the risk of credit bubbles.
"Using negative interest rates as a form of medicine to bolster the economy is no longer working," he added. "Quite the opposite. Markets are showing signs of becoming dependent. Instead of upping the dosage, it would be wiser to gradually withdraw."
Decline in insurers' investments return
Benjamin Serra, vice president and senior credit officer in Moody's insurance team said he expects this decline in interest rates will accelerate the fall in insurers' investment returns, and accelerate the deterioration in insurers' credit quality.
Life insurers in Germany, the Netherlands and Norway will bear the brunt because their assets have a shorter duration than their liabilities, which means they need to reinvest regularly. Furthermore, "they offered high guarantees to their policyholders in the past, and the risk that their investments return falls below the guaranteed rate is increasing."
In France and Italy, life insurers offer a lower guaranteed rate and are still able to reduce policyholders' credit rates. But ever-lower investment returns leaves them with less room and less time to adapt their business model to the new environment.
"In reaction, we expect insurers to accelerate changes in their asset allocation," he added. "Insurers increasingly invest in illiquid assets, including real estate or loans, but more investments in lower quality assets, including speculative grade securities are also likely."
"The ECB's decisions do not ease the challenges facing investors seeking yield and income," commented Andrew Bosomworth, portfolio manager at PIMCO, a bond manager owned by Allianz. " We think they will reinforce the focus on peripheral government, investment grade corporate and high yield bonds, reinforcing the need for careful credit analysis. The Eurozone's private sector is still deleveraging and banks need to dispose of their non-performing loans. For active investors, this constitutes an opportunity."
The European Central Bank (ECB) has decided on the following set of measures "in the pursuit of its price stability objective":
- Lower the ECB interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00%, the rate on the marginal lending facility by 5 basis points to 0.25%, and the rate on the deposit facility by 10 basis points to -0.040% (as from 16 March);
- Expand the monthly purchase of the asset purchase programme (aka quantitative easing) from €60bn to €80bn from April 2016 to March 2017 "or beyond if necessary," with the aim of achieving inflation rates close to 2% over the medium term;
- Include investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area in the list of assets that are eligible for regular purchases under a new corporate sector purchase programme, from around the end of Q2;
- Launch a new series of four targeted longer-term refinancing operations (TLTRO II), starting in June, each with a maturity of four years, in order to incentivise bank lending to the real economy. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.
The ECB's governing council "expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases."