Moody’s: ESG considerations drive insurer illiquid investment

Insurers globally have increased their illiquid asset investments, driven by low interest rates and environmental, social and governance (ESG) considerations, according to rating agency Moody’s.

In addition to enhancing returns, the integration of ESG concerns into insurers’ investment decisions will drive increased investment in illiquid assets such as renewable energy infrastructure, the agency suggested.

It added that buying more illiquid assets has also helped them counterbalance growing illiquid liabilities, such as those related to bulk annuity transactions.

According to Moody’s, illiquid assets account for about 25% of insurers’ investment portfolios globally, with a strong dispersion across insurers and geographies (strong concentration in the UK and Netherlands), and will grow in Europe and the US, particularly if interest rates remain low.

However, the benefits of insurers’ growing illiquid asset exposure balance additional risks, Moody’s Investors Service said in a just-released report.

Dominic Simpson, VP-Senior Analyst at Moody’s said: “Insurers globally have increased their illiquid asset investments, encouraged by low interest rates and ESG considerations.”

“Investing in illiquid assets generates higher returns and recurring long-term cashflows that better match long-dated liabilities. These benefits, combined with insurers’ strong liquidity, balance the additional credit risks.”

According to Moody’s, the main illiquid classes that rated European insurers invest in are mortgages and loans and private debt (corporate, infrastructure), but their exposure to illiquid assets is well diversified with investments also in real estate and private equity.

Despite low interest rates and the intention of many insurers to increase their illiquid assets, growth in their illiquid asset exposure has been slow. This is because the ability to source and the complexity of investing in illiquid assets especially for medium/smaller insurers outside of the UK and Netherlands constrains growth.

Illiquids are a “must have” for UK bulk annuity writers, it added, which rely on the illiquidity spread on these assets to meet profitability targets. Growth in bulk annuities supports further illiquid investments, which insurers aim to build up to 40-50% of assets backing annuities

Moody’s stressed that ss insurers have and will continue to expand their illiquid investments, it remains critical to monitor:

  • The risk management processes they have developed to assess and monitor this type of investment
  • The nature, quality and size of insurers’ illiquid asset exposures, taking account of any concentration in underlying assets
  • Insurers’ overall liquidity profiles, which have so far remained strong

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