Debt Trends in the Capital Structure of European Insurers

2015 Insurance Market Briefing -Europe

etc.venues St.Paul’s, London

04 November 2015

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2015 Insurance Market Briefing - Europe 4 November 2015 5

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2015 Insurance Market Briefing -Europe


Catherine Thomas

Senior Director, Analytics, A.M. Best

Debt Trends in the Capital

Structure of European Insurers

Insurance debt in Europe


• 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


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


• 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


Coupon rate: little differentiation by

issuer credit quality

Pricing more favourable in

2014/15


Solvency II


• 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


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


• Subordinated debt most popular

• Attractive cost of capital/ return characteristics

• Debt below investment grade minimal

Size of debt issue 2005-2014


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


• Fewer, larger issues reduce cost and management distraction

Domicile of issuer 2005-2014


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


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


• 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….


• 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

Q & A


Catherine Thomas

Senior Director, Analytics, A.M. Best

Debt Trends in the Capital

Structure of European Insurers

Economy & Finance

Debt Trends in the Capital Structure of European Insurers