Low-Rate Blues

The Insurance Casino

Monaco, Monte Carlo, The Casino at Dusk
Insurance executives gathered this week in Monte Carlo, home of Europe's grandest casinos.
  • Why it matters

    Why it matters

    Large insurance companies have long invested their assets in conservative investments such as bonds. But as the economic climate changes, they’re being forced to turn to riskier investments.

  • Facts


    • The PWC consulting firm estimates that by 2020 large insurers will be managing about $35 trillion in assets.
    • The real estate division of German insurance giant Allianz recently acquired a €400 million stake in a New York office development.
    • A group of investors that included reinsurer Munich Re bought Germany’s largest highway service area chain for €3.5 billion last year.
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Nikolaus von Bomhard isn’t exactly known as a hothead. But whenever the conversation turns to the zero interest-rate policy of the European Central Bank and its president, Mario Draghi, the chief executive of Munich Re, the world’s largest reinsurer, loses his composure.

The 60-year-old recently said he is “bewildered and appalled” by Mr. Draghi’s low interest-rate policy, which has put many insurers across Europe under threat of collapse over the past year and led to warnings from regulators and the International Monetary Fund.

It’s not just the average household with a savings account that faces problems investing their money as a result of the ECB policy. The current interest-rate environment is forcing large insurance giants such as Munich Re them to search for new ways of investing the premiums they gather from customers.

It’s being dubbed “the great flight.” According to an analysis by PWC, a consulting firm, by 2020 large insurers will be managing assets worth about $35 trillion, or €31 trillion. That’s money they have traditionally invested conservatively, in things like bonds. But such “safe” assets no longer bring them enough bang for their buck.

“There is a general investment emergency as a result of the ongoing decline in interest rates, due to the ECB.”

Ulrich Wallin, CEO, Hannover Rück

Investing in safe assets like bonds has been the hallmark of insurance firms for decades. Take life insurance: Many customers could expect to see their money grow by significantly more than the interest rate guaranteed by their policy, and yet there would still be enough money left over to satisfy the shareholders of these insurance companies.

That’s no longer the reality. Insurance executives attending an industry meeting in Monte Carlo this week can only dream of those days. Instead, the negative interest rate environment in Europe poses a fundamental challenge to their current business model.

“There is a general investment emergency as a result of the ongoing decline in interest rates, due to the European Central Bank,” Ulrich Wallin, head of the world’s third-largest reinsurer, Hannover Rück, told Handelsblatt. “The declining interest rates and additional uncertainties on the capital and credit market are depressing yield opportunities.”

Low interest rates may be pleasing to finance ministers such as Germany’s Wolfgang Schäuble, who actually has investors paying him to borrow money, but they are a growing problem for many large insurers, and have already forced some smaller ones to close their doors.

So what is the industry to do? The difficult situation in capital markets is prompting security fanatics at insurance companies to search for new, alternative investment opportunities.

Some are simply getting rid of their exposure. David Cole, chief financial officer of Swiss Re, is negotiating with a number of companies over the sale of life insurance portfolios for liquidation. But others are simply looking for other ways to invest their customers’ premiums.

More and more corporations are taking a look at large infrastructure and real estate projects. Mr. Wallin noted that infrastructure projects tend to be long-term investments, and therefore “tend to be an excellent fit for life insurers.” In addition, interest and income tends to be “much higher than with government bonds,” he said.

That doesn’t mean this kind of shift in investing is easy. The low interest rate policies of the ECB are depressing yields in real estate too, Mr. Wallin noted. It’s also an area that investors around the world are looking at, pushing those yields down even further. “There is a lot of competition,” Mr. Wallin conceded.

Take Germany’s largest insurance company. A few weeks ago, Munich-based Allianz went on a real-estate shopping spree in New York. Allianz Real Estate spent just under €400 million, or $448 million, to acquire a 44-percent stake in 10 Hudson Yards Tower, a newly built office building on the west side of Manhattan. The tower will be part of the larger Hudson Yards complex, the biggest development project in New York since Rockefeller Center was built in the 1930s.

014 Allianz WTB 2015 March 14 2016


More than just a prestige purchase, the deal represents a major bet on a rising real-estate market. Apartments with prestigious addresses such as Hudson Yards, in mega-cities such as New York, are already very expensive, but institutional investors such as Allianz are betting on prices continuing to rise in the future.

In fact, New York isn’t the only place where Allianz is shopping around. When the Nice and London City airports were on the market last year, Allianz’s infrastructure division was among the potential buyers.

Other insurers are trying their luck with ship and aircraft leasing. In the last five years alone, U.S. insurance companies increased the proportion of alternative assets in their portfolios from 3 to 5 percent, according to figures provided by rating agency AM Best.

The world’s largest reinsurer, Munich Re, is also increasingly investing in alternative investment classes, such as infrastructure. Last summer, Munich Re’s investment subsidiary, MEAG, joined Allianz and other investors to buy Germany’s largest highway service area chain, Tank & Rast, for €3.5 billion.

It won’t be the only deal for the giant Munich company. Munich Re plans to allocate €8 billion of its €218 billion in total capital investments in these alternative investment classes in the future.

But the plan also reveals how difficult it is to find attractive and affordable investments today. Of the €8 billion Munich Re reserved for alternative investments some time ago, it has spent only €2 billion.

“There are too few offers and too many potential buyers,” said one Munich Re executive, who declined to be named. “This destroys prices.”

Of Allianz’s €666 billion portfolio, about 14 percent is currently in “alternative investments” and the insurance giant is slowly but surely working on increasing that number.

It’s not an easy task though. Dieter Wemmer, Allianz’s chief financial officer, said there are practically no infrastructure investments to be had in Germany. Takeovers like Tank und Rast will be the exception rather than the rule, he told reporters on Tuesday.

Instead, Allianz is likely to make other acquisitions globally. “We’re looking to go very broad and global” when it comes to taking up new stakes in companies, he said. Once example: the insurer has bought about 60 wind farms across Europe, he said.

The pivot away from traditional investments also creates new problems and risks for an industry whose hallmark has long been safety.

“The deals are usually highly individual, which makes risk assessment more difficult for many companies,” said Simon Harris, who heads the insurance business for the Moody’s rating agency worldwide.

According to Mr. Harris, many companies still need to develop expertise and remain very cautious with alternative investments. “It isn’t as if insurers were rushing into the field,” said Mr. Harris, noting that many companies still need to learn to understand the business.

For Nikhil Srinivasan, chief investment officer for Italian insurance company Generali, insurers will need to become much more active than they were a few years ago. He believes that companies will not only have to send classic salespeople into the field, but also investment strategists.

“We need to keep an eye out for buildings to buy and companies to finance,” said Mr. Srinivasan. This could represent a radical shift for many an insurance company investment expert, who may have been accustomed to assessing risks through his or her Excel program.

It’s a difficult job, but one that is absolutely essential if insurance companies want to survive the current low-interest rate environment. That’s because the biggest challenge for insurers could actually come in a few years time, assuming the European Central Bank is successful in what it is trying to do, which is raise inflation across the euro zone.

Mr. Wemmer of Allianz painted the problem in simple terms: Say an insurer buys a 10-year government bond today that yields 0 percent in return, only to find that inflation has climbed back up to near 2 percent a few years from now. For the rest of that bonds’ maturity, the insurer would effectively be losing 2 percent per year. That’s an extremely dangerous position for any insurer to be in.


Carsten Herz recently became Handelsblatt’s financial correspondent in Munich after spending many years in London. Christopher Cermak of Handelsblatt Global Edition in Berlin contributed to this story. To contact the author: herz@handelsblatt.com

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