Spanish debt a healthy business? Ask insurance companies!

Those who bought Spanish public debt last year made a good business, seeing how evolved the risk premium and the debt’s profitability has evolved. Risk premium reached 650 bp and 10-year Spanish bond got a return of above 7.5 per cent. Now premium is below the 300 bp and the yield is of slightly more than 4 per cent.
Spanish insurance sector was one of those that bought more State debt stock. Everyone knows insurance companies are big buyers of debt. Moreover, the sector usually boasts about it. In September 2012, “insurance and managing pension funds entities had financial investments equivalent of 368,000 million euros”, according to sources from the Bank of Spain.

Investment in fixed income is not a short-term strategy of the insurance sector, as it can be at a particular time for the rest of the financial sector, mainly the credit sector. Insurance companies’ behavior tends to be very stable and invest in public debt. Last year it accounted for almost 47% of the total investment of the Spanish insurance sector.

Spanish public debt is one of the most popular, before the debt of countries with triple A, such as Germany or France. Also investment in debt emissions carried out by countries with high premium risk such as Greece, Ireland and Portugal, fell from 2.3% to 1.6%. Specifically in the case of Greece, Spanish insurers that still have some of its debt have almost a 100% allowance.

Thus, since 1987 one of every four euros invested by the Spanish insurance sector (in particular, 27%) has been in Spanish public debt. With these levels of investment, the insurance sector is the third largest holder of public debt, behind the credit and own public administrations. During the crisis (2009-2012) this trend has doubled.

In addition to other sectors, especially banking (which received loans from the European Central Bank at 1% and bought Spanish debt with a yield above 5%), insurance companies continued to invest in Spanish public debt last year, despite the sharp decline in the rating. Agencies like Standard & Poor’s, Moody’s and Fitch – the same that maintained the highest rating for Lehman Brothers until its bankruptcy in September 2008 – lowered Spain’s sovereign debt rating from “A” to “BBB”, only two steps above the junk bond.
Still, Spanish insurance companies were confident that Spain would overcome the crisis, and would not require intervention by the European Union nor a debt haircut, and thanks to that got a high return for their investments.

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