A.M. Best Special Report: A.M. Best Examines Debt Trends in the Capital Structure of European Insurers

LONDON--()--Low interest rates together with highly liquid and stable financial markets have prompted European insurers to tap the capital markets in their efforts to lower the cost of capital and optimise levels of risk-adjusted capitalisation. Debt issuers have been active in 2014 and 2015 as insurers take advantage of the low interest rate environment to issue cheap paper and make early redemptions of outstanding debt.

A new report from A.M. Best titled, “A.M. Best Examines Debt Trends in the Capital Structure of European Insurers,” states that some European insurers have been rebalancing their capital positions ahead of the introduction of Solvency II. New hybrid debt instruments have been structured in line with the requirements for capital credit under the new regulations. However, as the Jan. 1, 2016, deadline for implementation of the insurance directive approaches, Solvency II is likely to become less of a driver for insurer debt issuance.

The report's findings were based on in-depth analysis of over EUR 90 billion of debt issued by European insurers between 2005 and 2014. The conclusions drawn in the study, which focuses primarily on rated debt issued by A.M. Best clients, is considered representative of the overall European insurance debt market.

The research also notes that debt issuances are commonly several times oversubscribed. Stefan Holzberger, managing director, analytics, said: "The current interest rate environment is causing investors to search for yield, with limited opportunities to obtain even reasonable returns. Insurance debt is attractive as it offers relative security and insurers have tended to avoid many of the issues that have plagued the banks. In general, insurers have strong free cash flow ratios, enabling good service of interest and steady payment of dividends. This is despite the general understanding that insurance market conditions are soft, growth levels will be modest at best, and returns are under pressure."

However, the insurance debt market is likely to remain active as European insurers’ capital management efforts lead to continued opportunistic redemption and refinancing activity. Yvette Essen, director, research & communications, added, “In recent years, European Union insurers have improved their ability to manage down both operating and financing costs – a necessity in today’s highly competitive, low growth environment.”

Factors likely to influence issuance activity in the remainder of 2015 and into 2016 include changes in interest rate policies by the U.S. Federal Reserve, the Bank of England and the European Central Bank (ECB). Quantitative easing-related purchases by the ECB, together with reduced corporate and sovereign debt issuances, have engineered an acute shortage of highly rated assets in Europe. A.M. Best expects these conditions will fuel continued demand for insurer debt and keep issuance costs low, but also remove much hope of a badly-needed rise in investment income.

To access a complimentary copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=238453.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best Company, Inc.
Stefan Holzberger, +(44) 20 7397 0288
Managing Director, Analytics
stefan.holzberger@ambest.com
or
Edem Kuenyehia, +(44) 20 7397 0280
Associate Director, Market
Development & Communications
edem.kuenyehia@ambest.com
or
Yvette Essen, +(44) 20 7397 0322
Director, Research & Communications –
EMEA
yvette.essen@ambest.com
or
Jim Peavy, +(1) 908 439 2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best Company, Inc.
Stefan Holzberger, +(44) 20 7397 0288
Managing Director, Analytics
stefan.holzberger@ambest.com
or
Edem Kuenyehia, +(44) 20 7397 0280
Associate Director, Market
Development & Communications
edem.kuenyehia@ambest.com
or
Yvette Essen, +(44) 20 7397 0322
Director, Research & Communications –
EMEA
yvette.essen@ambest.com
or
Jim Peavy, +(1) 908 439 2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com