Interview with Klaas Knot by Martin Arnold of the Financial Times. Published on December 26, 2022.Read more
Dutch insurers are selling many assets this year
Dutch insurers sold €23 billion worth of assets on balance so far this year, DNB figures show. They used about three quarters of the proceeds to meet the margin requirements under derivatives contracts. In the third quarter of 2022, the rise in insurers' margin requirements eased sharply as interest rate rises levelled off.
The €23 billion in divestments represented approximately 7% of pension funds’ total invested assets.
In September of this year we reported on pension funds’ record sales of assets. According to the latest figures, Dutch pension institutions sold 6.6% of their invested assets so far this year to meet their increased margin requirements. This trend continued from the first six months into the third quarter, with €37 billion worth of assets being sold on top of the €88 billion worth of sales in the first half of 2022.
What are margin requirements?
The liabilities of Dutch life insurers and pension funds – consisting of future benefit payments – are due in the distant future. The present value of these liabilities, which is the value based on current market prices, is highly dependent on interest rates. If interest rates fall, the present value increases. Conversely, it decreases as interest rates rise. Insurers and pension funds can hedge all or part of this interest rate risk by investing in fixed-interest securities, such as long-term bonds and mortgage loans. In addition, they may enter into derivative contracts, such as interest rate swaps. When interest rates fall, these contracts increase in value, offsetting the increase in the value of liabilities and thus reducing the negative consequences of the falling interest rates for insurers and pension funds. However, now that interest rates are rising – which is also good news for insurers and pension funds as the present value of their liabilities decreases – the value of these contracts is falling, and in some cases even turning into debt. Counterparties with which these contracts are concluded require collateral against such debts, for example in the form of a ringfenced bank account. This is also known as the margin account or margin requirement.
Insurers are mainly selling bonds, while pension funds are selling shares
While pension funds mainly sold listed shares and investment fund units, insurers mainly divested bonds. In total, insurers sold €24.5 billion worth of bonds, mainly (liquid) government bonds of euro area member states.
The fact that insurers mainly sell bonds while pension funds mainly sell listed shares is due to differences in investment asset allocation of these two types of institutions. Insurers invest mainly in bonds (36%), investment funds (26%) and (mortgage) loans (29%), but hardly at all in listed shares (3%). Pension funds, on the other hand, invest much more in listed shares (14%), in addition to their investment in investment funds (another 14%).
Neither pension funds nor insurers saw a need to sell illiquid investments such as private equity or mortgage loans.
Increase in insurers' margin requirement is levelling off
Insurers deposited €17.4 billion in margin requirements for the first three quarters of 2022, representing 5.4% of their liabilities. The largest share came from life insurers, which perform a similar function to pension funds. Like pension funds, they manage financial assets with the aim of paying out future income in the form of pension benefits or annuities.
Insurers' margin requirements increased only slightly in the third quarter of 2022. Whereas they had to deposit €8.4 billion in the first quarter, they only deposited €1.9 billion in margin accounts in the third quarter. This is in line with the trend among pension funds – which saw the growth of their margin requirements settle down to a similar extent – and follows the levelling off of interest rate rises.
Relative to their total liabilities, insurers have lower margin requirements than pension funds. Insurers hedge a smaller proportion of interest rate risk using derivatives, partly because they already hedge a higher proportion of this risk using investments in fixed-interest securities.
- Tabel 7.1.1BC: Summary balance sheet of insurance corporation by type
- Tabel 8.1.1BC: Summary balance sheet of pension funds by type