Talanx AG, Germany’s third-biggest insurer, plans to shift investment to countries outside the euro region as monetary policy measures erode returns on assets in the currency union.
“Generally speaking, investing has become more complex and more risky as a result of the European Central Bank’s policy, which doesn’t help us at all and significantly intensifies our problem to generate the investment returns we need,” Talanx Chief Financial Officer Immo Querner said. “The main problem is not that interest rates are low; it’s how long they remain on that level.”
The ECB this month announced another round of stimulus including interest-rate cuts and a plan to buy covered bonds and asset-backed securities. Rate-setters unanimously support introducing further unconventional measures, such as quantitative easing, if inflation remains too low for a prolonged period, ECB President Mario Draghi said on Sept. 4.
“Interest rates in the U.S., the U.K. and elsewhere outside the euro zone are higher and therefore investment strategies are gradually shifting away from here,” Querner said on Sept. 25. “The international growth of our business, especially in Poland and Latin America, allows us to commit more investments to other currency areas.”
Talanx has 90.3 billion euros ($115.1 billion) of investments under management, of which 81.3 billion euros are fixed-income assets like government, covered and corporate bonds. Insurers typically invest their clients’ money in the same currency as the premiums they collect to avoid additional risks from currency movements.
The insurer reported on Aug. 14 that that second-quarter profit dropped 19 percent to 165 million euros on lower investment income. Insurers’ results are under pressure as low interest rates crimp investment returns, which typically provide a buffer for earnings when claims rise. Yields on benchmark 10- year German government bonds dropped to a record low of 0.89 percent on Aug. 29.
Talanx “feels prepared” to make the best of the prolonged low-rate environment with a “strategy to invest more in corporate bonds, to slightly increase our engagement in debt obligations of southern European countries as well as to build up a portfolio of illiquid assets,” Querner said.
Talanx doesn’t plan to significantly increase the share of equities among its investments, which currently represent 1 percent of the whole. They include a 5 percent stake in insurer Swiss Life Holding AG and 9.9 percent of German financial services broker MLP AG.
“By 2020 we will still have the majority of our investments in fixed income,” Querner said, adding that the insurer’s future asset mix “will be better diversified into other currencies and more illiquid assets such as infrastructure and loans, while government bonds will play a less important role.”
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