Nordic insurers to buy more bonds – Fitch

Adjusting to Solvency II rules could result in Nordic insurance companies buying significantly more bonds, according to analysis published by Fitch Ratings.

This is because Nordic insurance companies tend to have a much higher proportion of equities in their portfolios than the European average – but equities will be more costly to own under Solvency II, which is intended to shore up the industry against any future systemic threat.

Fitch said that equities make up 25%-40% of Nordic insurance portfolios, much higher than the 8% European average; equities as an asset will attract a higher capital charge than short-dated high-grade fixed income securities under Solvency II.

“We have already seen many European insurance companies reducing equity exposure, largely as a result of the financial crisis but also in anticipation of Solvency II. This could have a positive effect on corporate bond issuers – insurance companies represent a major source of demand in the Nordic regions,” Fitch said.

“Life insurance products with guaranteed returns, which account for two-thirds of life insurance premiums in the Nordic countries, face high capital charges under Solvency II. We do not expect supply to disappear, but we do think that companies will need to adjust to maintain shareholders’ returns – tightly controlling costs and merging to exploit economies of scale.”

Fitch does not expect the shift in allocation to bonds to happen immediately. Insurers ni the region as already well capitalised it said, while Solvency II itself does not come into effect until 2014, followed by a transition period.

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