The allocation decisions European insurers are making as a result of Solvency II have and will make corporate bonds more expensive and reduce equity returns
In the attached study, Mathieu L’Hoir and Mathilde Sauve from AXA Investment Managers’ Research and Investment Strategy team assess the impact of Solvency II on insurer’s allocation models and on asset prices, using AXA IM’s fund flows model, which estimates the sensitivity of stock market returns, corporate bond spreads and government bond yields to fund flows.
Key Points
• Solvency II rules result in a significant reallocation of insurers’ portfolios toward sovereigns and credit at the expense of equities. • In this study, we assess the impact of the € 500bn in asset flows generated by Solvency II on asset prices in European capital markets. • Based on our estimates, this has already reduced investors’ total return on European equities by up to one quarter since 2009 and put a substantial squeeze on corporate spreads (of up to 80bps). • Going forward, Solvency II will still be a significant driver of asset prices: it is likely to cost up to one quarter of the expected total return on equities and to bring down spreads another 60bps from current levels. • Solvency II, combined with other factors (including low interest rates and Basel III), is contributing to a structural tilt in the market toward debt securities.
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