amorgos34
CHIAGNI & FOTTI SRL
Greater Insurance issuance will lead to more acceptance and deeper
markets. Thus far in 2015, total issuance from the insurance industry has been
€13bn+ with total issuance expected to be around €20bn. While significant
issuance in a short period of time could lead to near-term spread widening, we
would expect this to be a short-term occurrence. In the longer term, as more
investors get familiar with the insurance sector and as more insurance debt
trades in the secondary market, the differential should start narrowing.
Overall, in the first half of 2015, the European Insurance sector reported
solid results. Performance was strong across the sector with life insurance doing
particularly well. We expect the overall trend of strong performance to continue
through to year end. While the theme of low global interest rates is an issue that
needs to be monitored, is it now less critical a concern than it was earlier in the
year. We believe that life new money reinvestment yields are around 2.25-
2.50% while overall portfolio yields are in the range of 3.25-3.50%. Many life
insurers now have a good track record of maintaining prudent asset liability
management policies and we do not expect insurers to report material net
amounts of mismatched books. P&C companies have reported combined ratios
of 94-97% and this should continue into H2 15 results, enabling companies to
report good core operating performance for the full year.
Insurance spreads have been severely beaten down during the past few
weeks despite no fundamental sector news. While negative global economic
headlines and the issues in the commodity and energy sector are not to be
ignored, we do not see a material change in operating environment for
insurers. Companies such as NN Group and Groupama (on positive watch by
Fitch) have seen spreads widen materially during the past several weeks. Other
higher rated insurers such as Allianz and AXA have not been spared. Investors
looking for greater yield should be able to find a lot of value in the insurance
sub-debt market with yields now in the 4.75-6.00% range. This translates to
about 100-150bps of widening in the last week in many cases.
Insurance industry senior and sub debt ratings are a derivative of the
operating company’s financial strength rating. Subordinate notes rated BBB-
/BBB, while close to the IG/HY threshold, could well be reflective of an
insurance operating company rated A+/A2 or better. As such, the underlying
financial strength rating of the insurance enterprise is likely to be excellent and
the debt service capabilities are vastly superior to what the sub debt ratings
would indicate.
Regarding regulatory action in recent history, the story is very different for
banks vs. insurers. Over the past decade, we have witnessed several large scale
failures or restructurings within the banking industry. Examples include the
Icelandic banks, Anglo Irish Bank and several of the European peripheral banks.
While Insurers are in no way immune to regulatory action, they are more likely
to be placed in managed run-off in the event of failure. During the 2008/9
financial crisis, insurers such as the monolines and AIG did get into difficulty,
but, in even in the case of AIG, bond holders did not experience a default.
The longer-term prognosis for insurance valuations looks good. Overall, we
believe that the insurance industry is very resilient, able to withstand severe
shocks and is not dependent on external funding for its ongoing business. Also
the product profile tends to be very sticky
markets. Thus far in 2015, total issuance from the insurance industry has been
€13bn+ with total issuance expected to be around €20bn. While significant
issuance in a short period of time could lead to near-term spread widening, we
would expect this to be a short-term occurrence. In the longer term, as more
investors get familiar with the insurance sector and as more insurance debt
trades in the secondary market, the differential should start narrowing.
Overall, in the first half of 2015, the European Insurance sector reported
solid results. Performance was strong across the sector with life insurance doing
particularly well. We expect the overall trend of strong performance to continue
through to year end. While the theme of low global interest rates is an issue that
needs to be monitored, is it now less critical a concern than it was earlier in the
year. We believe that life new money reinvestment yields are around 2.25-
2.50% while overall portfolio yields are in the range of 3.25-3.50%. Many life
insurers now have a good track record of maintaining prudent asset liability
management policies and we do not expect insurers to report material net
amounts of mismatched books. P&C companies have reported combined ratios
of 94-97% and this should continue into H2 15 results, enabling companies to
report good core operating performance for the full year.
Insurance spreads have been severely beaten down during the past few
weeks despite no fundamental sector news. While negative global economic
headlines and the issues in the commodity and energy sector are not to be
ignored, we do not see a material change in operating environment for
insurers. Companies such as NN Group and Groupama (on positive watch by
Fitch) have seen spreads widen materially during the past several weeks. Other
higher rated insurers such as Allianz and AXA have not been spared. Investors
looking for greater yield should be able to find a lot of value in the insurance
sub-debt market with yields now in the 4.75-6.00% range. This translates to
about 100-150bps of widening in the last week in many cases.
Insurance industry senior and sub debt ratings are a derivative of the
operating company’s financial strength rating. Subordinate notes rated BBB-
/BBB, while close to the IG/HY threshold, could well be reflective of an
insurance operating company rated A+/A2 or better. As such, the underlying
financial strength rating of the insurance enterprise is likely to be excellent and
the debt service capabilities are vastly superior to what the sub debt ratings
would indicate.
Regarding regulatory action in recent history, the story is very different for
banks vs. insurers. Over the past decade, we have witnessed several large scale
failures or restructurings within the banking industry. Examples include the
Icelandic banks, Anglo Irish Bank and several of the European peripheral banks.
While Insurers are in no way immune to regulatory action, they are more likely
to be placed in managed run-off in the event of failure. During the 2008/9
financial crisis, insurers such as the monolines and AIG did get into difficulty,
but, in even in the case of AIG, bond holders did not experience a default.
The longer-term prognosis for insurance valuations looks good. Overall, we
believe that the insurance industry is very resilient, able to withstand severe
shocks and is not dependent on external funding for its ongoing business. Also
the product profile tends to be very sticky
