Swiss insurers, including Zurich Insurance Group AG (ZURN) and Swiss Life Holding AG (SLHN), may lobby the government to sell more long-term bonds as new solvency rules force them to match life insurance liabilities.
The regulations introduced two years ago require insurers to cover claims from life policies that can run for as long as 30 years with securities of similar duration. With a constitutionally enshrined policy of running a balanced budget - - the so-called debt brake -- keeping supply of Swiss government bonds tight, the only alternative is to set aside more capital.
To operate as a life insurer under the so-called Swiss Solvency Test, Swiss Life must set aside capital equivalent to about 7 percent of its balance sheet unless it can buy more government bonds, Chief Investment Officer Patrick Frost said in an interview in Zurich. That equated to about 11.4 billion Swiss francs ($11.8 billion) at the end of 2012.
“There are not enough so-called risk-free assets because of a prudent fiscal policy such as the debt brake,” said Frost. “It makes insurance and pension products more expensive, which could lead to less business.”
While only 1.4 percent of the 75.2 billion francs of outstanding Swiss government bonds have a maturity of 30 years or longer, compared with 13 percent of U.K. gilts, record low interest rates suggest the insurers may have other motivations for petitioning the government, said Daniel Bischof, a Zurich-based analyst with Helvea.
Swiss Life rose as much as 1 percent, and was up 0.9 percent at 3:56 p.m. in Zurich trading, valuing the company at 5 billion francs. The share has risen 32 percent this year, compared with a 14 percent rise of the 28-member Bloomberg Europe 500 Insurance Index.
“It’s more lobbying to relax the solvency rules than anything else,” said Bischof. “If the interest rates remain where they are, it doesn’t make sense to invest more in government bonds -- it is more attractive to look at corporate bonds and real estate.”
Zurich Insurance Group AG said it doesn’t expect the new rules to be a constraint on its capitalization, adding that the calculations for the Swiss Solvency Test are largely based on its own internal model.
“We have spoken internally about engaging with the Swiss confederation to see whether there is a way to lengthen the maturity profile of the bonds that they issue,” said Cecilia Reyes, CIO of Zurich Insurance. “It is a significant structural issue.”
“We are aware that demand has increased, partly because of regulations, and we are open for a dialog with insurers,” Urs Eggenberger, head of the Swiss Debt Management Office, said in an interview in the nation’s capital, Bern. “Sometimes it could be argued that we are the victim of our own success.”
Switzerland sold 2.37 billion francs of 30-year bonds last year and in March issued 113.6 million francs of 2042 debt. Yields on the 2042 bond are 1.114 percent compared with 0.62 percent for benchmark 10-year (GSWISS10) securities. There are negative yields on shorter-duration two- and three-year Swiss government bonds.
Switzerland’s life insurance liabilities were 136.6 billion francs at the end of 2011, according to the financial markets regulator.
“If you do not match your liabilities, it will cost you a lot of capital under the Swiss Solvency Test, and for this matching reason you need to hold quite a substantial portion in fixed-income papers,” said Ralph-Thomas Honegger, CIO of Helvetia Holding AG (HELN), Switzerland’s fourth-biggest insurer. “It would be good if we could influence the issuance, especially the duration structure of the bonds.”
The treasury should extend the kind of discussions it holds with banks to insurers and pension funds, Honegger said. That’s too late for some companies.
Nationale Suisse sold its group-life business to Swiss Life in 2011 to avoid having to hold capital reserves to meet the solvency rules introduced in January that year.
Insurers can use other instruments, such as equities and real estate, to make up for the shortfall of government bonds, said Tobias Lux, a spokesman for the Bern-based Swiss Financial Market Supervisory Authority, or Finma. The companies have to put up more capital if they buy riskier investments, such as equities, rather than bonds.
Other Swiss investments, including real estate and bonds issued by cantons or cities, are also “quite limited,” said Helvetia’s Honegger, adding that insurers are forced to seek alternatives in the euro market while hedging the currency risk.
One consequence of the bond shortage, is a “timely lowering” of the guarantees insurers can offer customers, Finma’s Lux said.
“We are trying to sell products with more flexible or lower guarantees, or no guarantees as all, but much of that is already available with banks and asset managers,” said Frost of Swiss Life.
Customers, who are searching for safe investments in the wake of the financial crisis, will bear the cost of the regulator imposing “dead-weight capital requirements,” said Damir Filipovic, a Swiss Finance Institute professor who holds the Swissquote chair in Quantitative Finance at the Ecole Polytechnique Federale de Lausanne.
“The loser, who bears the cost in the end, is the customer,” said Filipovic. “Giving all the market risk to the customers isn’t a great selling point.”
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