Goethe-Universität Frankfurt’s Beyer: How European Insurers Shifted From Safety to High Yield During COVID-19 Stress

So Marcel, what was the core question that motivated your Gambling for Market Recovery study?

So when I was looking at the literature on the field, I saw the prevalent findings are using U.S. data and there's well documented that there are indeed tendencies to reach for yield outside of the crisis.

But most of the most of the time, whenever markets start to contract, those tendencies vanish.

With the little evidence we have on European markets, however, there is, for example, data by German Bundesbank, who indeed find that there can be an increase in higher yield assets on insurance balance sheets during times of market stress, especially during the COVID-19 pandemic crisis.

And as a European, I was asking myself whether those findings that have been made on the US markets with US data also hold for European markets.

secondly when looking at the price developments of high yield and investment grade corporate assets during the market contraction one can see that there is a potential for value investing so the prices were crashing like 10 percentage points and even twice as much for high yield assets and insurers as expertise investors with very long investment horizons could have stepped in here.

And I was seeking to answer whether that did happen or not.

You did mention market contraction.

Can you summarize your main findings about how European insurers adjusted corporate bond holdings during the COVID-19 market contraction?

Yeah, sure.

I'm glad you asked that.

So before coming to my results, let me briefly say a couple of words on the methodology I was using because to answer that question was not trivial.

because in europe there is no publicly available reporting of assets or of transactions or holdings data so insurers do have to report those things but only to the regulators and it's not publicly available so what i had to do is i had to come up with a technique to estimate those portfolio holdings However, the way I did it enables me to have it on daily frequency.

So I have for each day an observation that tells me something about the structure of the corporate bond portfolio.

And the way I did it, you can imagine it as I had the changes in the asset values of corporate bond assets.

And I know the changes in the equity values of the insurance companies.

And what I tried to do is I tried to filter out as much noise as possible and then come up with an estimation on the composition of the European interest or interest in general asset portfolio.

Okay, regarding my results, I find that during the onset of the crisis insurers tended to invest safer I see large increases in the exposure to triple a rated government bonds, but also to a rated corporate instruments.

But the new light of the daily estimation showed that even before the markets began to recover, insurers in Europe were seemingly investing into high yield corporate assets again.

And this observation is much more pronounced for insurance firms with higher liquidity, measured in my case in the solvency ratio.

Those are, in essence, the eligible capital over the required capital.

And for the top decile of those firms, this safer investment in the onset of the crisis is even barely present anymore.