Higher rates have yet to remake insurers’ portfolios

Few changes should have mattered more to European insurers than the return of interest rates.

For much of the previous decade, insurers had to invest new premiums and maturing assets in a world where high-quality government bonds frequently offered negligible or negative yields. The search for income helped push portfolios towards corporate credit, private debt, infrastructure and other less liquid assets.

That pressure has reversed.

Insurers can once again buy investment-grade bonds at yields compatible with their liabilities. In theory, this should have produced one of the largest reallocations of institutional capital in years.

The aggregate portfolios tell a quieter story.

Fixed income remains dominant, as it always was. Equities have not disappeared. Alternative and private investments accumulated during the low-rate period have generally remained in portfolios rather than being rapidly unwound.

There are structural reasons for this inertia. Insurance portfolios have long duration. Assets mature gradually. Private investments cannot simply be sold because government bonds have become attractive again. Strategic asset allocations also respond to liabilities, capital requirements and accounting constraints, not merely to today’s yields.

The return of rates has unquestionably transformed insurers’ opportunity set. It has not, at least yet, transformed their portfolios to the same degree.