Debt Trends in the Capital Structure of European Insurers
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Transcript of Debt Trends in the Capital Structure of European Insurers
Disclaimer
2015 Insurance Market Briefing - Europe 4 November 2015 5
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2015 Insurance Market Briefing - Europe 4 November 2015 6
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2015 Insurance Market Briefing -Europe
2015 Insurance Market Briefing - Europe 4 November 2015 41
Catherine Thomas
Senior Director, Analytics, A.M. Best
Debt Trends in the Capital
Structure of European Insurers
Insurance debt in Europe
2015 Insurance Market Briefing - Europe 4 November 2015 42
• Analysis of over EUR 90 billion of debt issued by European insurers between 2005 and 2014
• Rated debt issued by A.M. Best clients
– representative of European insurance debt market
• Key trends:
– Drivers
– Debt characteristics
– Issuer characteristics
Total debt issued 2005-2014
2015 Insurance Market Briefing - Europe 4 November 2015 43
EUR 4.7bn
EUR 10.7bn
EUR 10.6bn
EUR 2.9bn
EUR 6.5bn
EUR 4.4bn
EUR 8.5bn
EUR 17.4bn
EUR 10.8bn
EUR 16.3bn
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Issues mainly in stronger,
stable economies
Interest rates at historical
lows
Global financial crisis: liquidity
scarce
Source: Best’s Statement File – Global, A.M. Best data and research
ECB actions restore calm
Sovereign debt crisis: higher yields
Drivers of activity
2015 Insurance Market Briefing - Europe 4 November 2015 44
• Tax efficient alternative to equity, no dilution
• Take advantage of favourable pricing
• Refinance to lower debt service costs
• Extend maturities amid economic uncertainty
• Qualify for grandfathering ahead of Solvency II
0
2
4
6
8
10
12
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Inte
rest
Rat
e (%
)
Issue Date
Senior Unsecured Subordinated Junior Subordinated Preferred Stock and Securities
Low number of issues – mostly
senior debt
Higher returns required from
issuers in peripheral countries
More favourable pricing
2015 Insurance Market Briefing - Europe 4 November 2015 45
Coupon rate: little differentiation by
issuer credit quality
Pricing more favourable in
2014/15
Source: Best’s Statement File – Global, A.M. Best data and research
Solvency II
2015 Insurance Market Briefing - Europe 4 November 2015 46
• Grandfathering period of up to 10 years for tier 1 and tier 2 basic own funds
• Will only apply to:
– Instruments issued before 1 January 2016
– Instruments eligible under current regulatory regime
• Prudential Regulation Authority (PRA) discouraging issuance of non-conforming sub-debt
Class of debt 2005-2014
2015 Insurance Market Briefing - Europe 4 November 2015 47
EUR 1.3 bn EUR 1.1 bn
EUR 4.4 bn
EUR 0.5 bn
EUR 6.2 bn
EUR 5.6 bn
EUR 8.6 bn
EUR 3.2 bn
EUR 6.9 bn
SubordinatedEUR 0.3 bn
EUR 8.5 bn
EUR 3.5 bn
EUR 1.3 bn
aa- a+ a a- bbb+ bbb bbb- bb+
A.M. Best Debt Rating
Senior UnsecuredSubordinatedJunior SubordinatedPreferred Stock
Source: Best’s Statement File – Global, A.M. Best data and research
• Subordinated debt most popular
• Attractive cost of capital/ return characteristics
• Debt below investment grade minimal
Size of debt issue 2005-2014
2015 Insurance Market Briefing - Europe 4 November 2015 48
EUR 0.1bn
EUR 3.9bn
EUR 14.9bn
EUR 38.9bn
EUR 35.0bn
Up toEUR 100 million
EUR 101 -250 million
EUR 251 -EUR 500 million
EUR 501 -EUR 1 billion
Greater ThanEUR 1 billion
Source: Best’s Statement File – Global, A.M. Best data and research
• Fewer, larger issues reduce cost and management distraction
Domicile of issuer 2005-2014
2015 Insurance Market Briefing - Europe 4 November 2015 49
NetherlandsEUR 16.4bn
GermanyEUR 10.4bnUnited
KingdomEUR 9.5bn
ItalyEUR 7.9bn
SwitzerlandEUR 6.1bn
LuxembourgEUR 2.4bn
FranceEUR 1.9bn
SwedenEUR 0.6bn • Companies in largest
economies are the most active issuers
• National champions often predominant participants
Source: Best’s Statement File –Global, A.M. Best data and research
Type of issuer 2005-2014
2015 Insurance Market Briefing - Europe 4 November 2015 50
CompositeEUR 78.8bn
Non-LifeEUR 7.9bn
LifeEUR 6.2bn
• Most highly rated, with stable, diversified businesses
• 85% of debt issued by composite insurers
• Most maintain extensive geographic diversification
• Most writing both primary and reinsurance business
Source: Best’s Statement File –Global, A.M. Best data and research
Demand remains high
2015 Insurance Market Briefing - Europe 4 November 2015 51
• Insurance debt attractive:
– Strong free cash flows to service interest payments
– Lack of other investment opportunities
– Long-tail nature of life and casualty insurance
– In spite of modest growth and pressure on returns
• Issues commonly several times over subscribed
• Strong order books
Looking forward….
2015 Insurance Market Briefing - Europe 4 November 2015 52
• Insurance debt market likely to remain active
• Changes to central bank interest rate policies will be key influence
• Insurers focussing on managing operating and financing costs in a highly competitive, low growth environment
• Efforts aligned with group level ERM and strategic business initiatives