Insurers have always been conservative investors, putting the bulk of their assets in government bonds and fixed interest accounts.

It’s a strategy that has served the insurers well, avoiding the worst excesses of the global financial crisis.

But that “safe haven” approach is now coming under threat from the growing problems in the eurozone, and particularly the Mediterranean economies of Greece, Italy and Spain.

As these countries’ governments continue to struggle with growing mountains of debt, more government bonds are being issued to keep their economies running.

But fixed interest investments are global, and not every economy in the world is in trouble.

So do Australian insurers need to worry about what is happening on the opposite side of the world?

Omega Global Investors Fixed Income Portfolio Manager Mathew McCrum says insurers have nothing to worry about if they have been careful with their portfolio construction.

“The best performing assets class is still government bonds, returning 13%,” he told insuranceNEWS.com.au.

“Bonds from lower-risk governments such as Norway, Canada, Australia and Finland are delivering good returns.”

Concerns over Spain have also been raised by London-based HSBC Bank Strategist Wilson Chin in a client briefing note obtained by insuranceNEWS.com.au.

“Eurozone debt worries, which currently appear to centre on Spain, are not likely to ebb away soon,” he said.

“The flow into safer assets is akin to the movements in total deposits which has seen movement out of Spain and Greece and into France and Germany.”

The problems facing Spanish banks came to a head late last week, with leading lender Bankia receiving a €23.5 billion ($30 billion) bailout from the Spanish Government.

Mr Chin says the economic woes of the eurozone have not stopped government bonds being issued; in fact this year’s target is more than 50% ahead, suggesting there is still demand from investors.

Mr McCrum says the biggest impost for fixed interest investors will be the bond supply continuing to flow from the “good” European countries.

“There are some issues in the lending sector about how much exposure German banks have to those bad countries,” he said.

Volatility that has dominated global equity markets might spread across to the bond markets if the eurozone crisis continues, Mr McCrum says.

And that would be bad for Australian insurers with about 75% of their assets in fixed interest investments.

“Government bonds have been a traditionally low risk assets class that has avoided the global financial crisis volatility,” he said. “But if we have governments fail, then that volatility will increase and that will not be good for insurers.”

An example of how volatility can impact an insurer’s assets can be found in Dai-ichi Life’s full-year accounts for the year ending March 31. The life insurer has 7.5% of its asset portfolio in Japanese stocks.

In March 2010 the portfolio was worth ¥2417 billion ($30.9 billion); 12 months later its value had dropped 20.8% to ¥1915 billion ($24.5 billion). In the latest accounts, the portfolio had fallen another 12.6% and was valued at March 31 at ¥1674 billion ($21.4 billion).

Australian insurers have stayed clear of equities, with only small amounts of their portfolios exposed to global markets.

But some have avoided the sector in its entirety, as Calliden Group CEO Nicholas Kirk explained to insuranceNEWS.com.au.

“We are 100% in Australian bank deposits,” he said. “We came out of fixed interest investments last year.

“We looked at the yields of Australian bank deposits compared to fixed interest and that led us to change the portfolio to avoid market volatility.”

Mr Kirk says the problems in Greece and Spain will not damage Australian bank deposits so Calliden has avoided any downgrades to the asset portfolio.

“Any losses in the asset portfolio affects profit,” he said. “If we can avoid volatility it reduces our exposure to market losses.”

As insurers continue to battle difficult market trading conditions, the last thing they want is for the asset portfolio to start reporting losses.

How clever insurers have been at avoiding global investment problems will be revealed in the upcoming reporting season.

Any which haven’t managed their portfolios prudently will be reporting another line of losses on the balance sheet.