Insurers increase hedging to bolster inflation protection


Insurers are scaling up their inflation hedging activity in response to growing concerns over the threat of rising prices.

Insurers are scaling up their inflation hedging activity in response to growing concerns over the threat of rising prices.

Companies are increasing their allocations to inflation-linked bonds (ILBs) and other physical hedge assets as well as ramping up their purchases of inflation swaps, according to bankers and analysts.

This comes as research by Goldman Sachs Asset Management (GSAM) finds that defending earnings from the threat of inflation has become a higher priority for insurance companies this year. The survey of 252 chief investment officers and chief financial officers revealed that rising inflation is seen as the third greatest risk to investment portfolios, with 41% of all insurers citing it as a threat in the next three to five years. Inflation was seen as the sixth greatest threat in 2012.

Mike Siegel, New York-based global head of the insurance asset management business within GSAM, says insurers are looking to invest in assets linked with inflation and interest rates to protect against the risk.

“The return on inflation-linked bonds is directly tied to inflation, so they would be the most natural defence. Floating rate assets are also being looked at - the view being that if inflation rates are rising, it is very likely that nominal interest rates will be rising,” says Siegel.

“Real estate and other real assets are presumed over long periods of time to also do well in an inflationary environment,” he adds.

Market participants have observed an uptick in ILB allocations in recent months, but some say the linker market is not large enough to provide large scale portfolio hedges.

Michael Huttner, insurance analyst at JP Morgan in London, says: “Assets of European insurance companies, including the UK, is about €5trn (£4.2trn), and there are not that many linkers around.

“French insurer Scor has accumulated €0.9bn of ILBs and Munich Re has built a larger amount, about €8bn, but these are the few insurers we know of with this focus,” Huttner adds.

Insurers in the UK are using non-government bond linkers to offset inflation risk, according to bankers. Fatos Akbay, London-based head of fixed income structuring and trading at BNP Paribas, remarks: “We have seen considerable pick-up in purchase of linkers issued by infrastructure-type issuers. Insurance companies have allocated some of their investments in those bonds.”