Insurers and reinsurers may join hedge funds and private-equity firms in bidding for assets as distressed European lenders raise capital to withstand the region’s debt crisis.
“Insurers have the big advantage that they have abundant liquidity coming in from customers’ premium payments,” said Andrew Broadfield, an analyst with Barclays Capital in London. “They could hold assets, which distressed banks may have to sell, until maturity even if they are illiquid.”
Allianz SE has already received calls from banks, Chief Financial Officer Oliver Baete said earlier this month, adding that Europe’s biggest insurer was “ready” to buy assets.
Commerzbank AG, BNP Paribas SA and other banks are selling assets as Europe’s leaders demand they raise capital to bolster investor confidence after writing down their holdings of Greek debt. While hedge funds target what Marathon Asset Management LP co-founder Bruce Richards calls the “motherlode” of distressed investing, insurers are focusing on forced sales of higher-quality, longer-term assets, such as mortgage loans.
Insurers, the world’s biggest investors along with mutual and pension funds, are also considering bank assets as low interest rates weigh on returns and as Solvency II rules cap investments in equities and real estate.
“Insurers are under pressure as the current interest environment is absolute poison for them in the long run,” said Philipp Haessler, an analyst with Equinet Bank AG in Frankfurt. “While they are not going after the most risky distressed assets, property, infrastructure and public sector loans could be an interesting diversification for them because of their stable cash flows.”
Solvency II rules, which the European Union plans to introduce in 2013 to align insurers’ risks with the capital they hold to protect policyholders, currently propose higher capital requirements for direct property investments than portfolios of mortgage loans and bonds, said Carsten Zielke, a Frankfurt-based insurance analyst at Societe Generale SA.
Only a few insurers and reinsurers have the “financial firepower” to buy sufficient assets to boost the capital ratios of banks, said Manfred Seitz, managing director of reinsurance international at Warren Buffett’s Berkshire Hathaway.
“We have done quite a few deals with banks in the U.S. already,” Seitz said. “I think we would also take a look at the assets that banks in Europe may put up for sale.”
Shrinking Balance Sheets
Zurich Financial Services AG, Switzerland’s biggest insurer, won’t comment on its “investment strategy for individual asset classes,” according to spokeswoman Tatjana Aepli. Emmanuel Touzeau, a Paris-based spokesman at Axa SA, Europe’s second-largest insurer, declined to comment.
Banks in France, the U.K., Ireland, Germany and Spain plan to shrink their balance sheets by about 775 billion euros ($1.03 trillion) over two years, data compiled by Bloomberg show. European lenders have about 1.3 trillion euros of non-core loans on their balance sheets, accounting firm PricewaterhouseCoopers LLP estimated in April. That could include real estate, commercial and shipping loans.
Standard & Poor’s yesterday cut the credit ratings of some of the world’s largest banks including Bank of America Corp., Goldman Sachs Group Inc., UBS AG and Barclays Plc as the ratings firm revised its methodology to increase the emphasis on the strength of each nation’s banking system.
European banks, vowing to sell distressed assets, are also lending money to buyers to get deals done and avoid greater losses as the sovereign-debt crisis deepens.
Because most buyers of distressed assets fund purchases with debt, which has become increasingly expensive and difficult to obtain, banks are financing transactions themselves, even if it means retaining loans on their balance sheets. That will slow deleveraging and make more asset sales necessary, analysts say.
While the supply will be “enormous,” the first assets offered may not be the best quality, according to Allianz’s Baete.
“Most of the banks are obviously starting with the pieces they don’t like,” Baete said on a Nov. 11 call to analysts. “Over time a lot of assets that are less liquid and meet our requirements for long duration and return will come to the market.”
Allianz rose 1.3 percent to 73.78 euros at 12:31 p.m. in Frankfurt trading. The stock of the Munich-based company has declined 17 percent this year compared with a 30 percent drop of Deutsche Bank AG, Germany’s biggest lender.
Munich Re, the world’s biggest reinsurer, said it will “closely observe” market opportunities resulting from increased capital requirements for banks, according to Reiner Back, head of fixed income and currency portfolio management at Munich-based company’s MEAG asset-management unit.
“We are highly receptive to investments that increase the level of our diversification or offer higher potential returns than comparable risks,” Back said.
Resolution Ltd., the Guernsey-based financial-services buyout firm founded by Clive Cowdery, said on Nov. 9 it may start a new company to buy bank assets.
“It’s become more intensive as there’s great sense banks will be looking to reposition and will be looking to raise capital,” Chief Executive Officer John Tiner said. “We believe that transactions may become more proximate.”
Lured by the prospect of buying banks’ portfolios at discounts, U.S. hedge funds and private-equity firms such as Apollo Global Management LLC have raised about $7 billion for funds targeting European distressed assets since 2009 and are seeking another $7 billion, according to London-based researcher Preqin Ltd. Insurers probably won’t compete for those assets, said Zielke of Societe Generale.
“While distressed bank assets can offer very high returns, they are not suitable as an investment for insurers,” he said. “They are reserved for investors such as hedge funds with more risk appetite, who are willing to take those risks.”
Zielke said lenders are being forced to sell assets to comply with tougher Basel III capital targets. The European Banking Authority last month said it would require lenders to boost capital by 106 billion euros after marking their government debt to market values in stress tests.
“If the banks were not able to raise all the capital they need, that’s the point when insurers might want to get greedy, not before,” Broadfield of Barclays said. “It’s a very good position for the insurers to be in, I’m mostly worried about the execution.”
Commerzbank, Germany’s second-largest lender, said earlier this month it could reduce risk-weighted assets by as much as 30 billion euros to meet EBA requirements on capital by the middle of 2012.
UniCredit SpA, Italy’s biggest bank, plans to wind down 48 billion euros of non-strategic assets in coming years, including commodity divisions in Asia and the U.S. BNP Paribas, based in Paris, has pledged to reduce its balance sheet by 10 percent, including cutting $82 billion in corporate-and investment-banking assets.
“The banking system will be less and less able to hold either illiquid or spread products,” said Allianz CFO Baete. “That should give us a competitive advantage.”
Insurers, which invest their customers’ money, held about $24.6 trillion of assets at the end of 2010, according to thecityuk.com, a London-based lobby group run by the City of London Corp. That compares with global hedge-fund assets of about $1.8 trillion.
“Allianz has earned itself a reputation of being ahead of the curve with alternative investments,” said Ben Cohen, an analyst at Collins Stewart Hawkpoint Plc in London. “If these bank loans come at the right price, buying some of them could be the thing to do.”