European Insurance
Subordinated Debt
Attractive Opportunities in an Evolving Market
The capitalisation of insurance companies has evolved radically over the past
few years. Most insurers have substantially improved their capital positions
over this period, and the Solvency II Directive has now gone live (Jan-16). As
such, Solvency II is no longer the big unknown, and we have seen relatively
good ratios from most companies (see Fig. 2, 3). However, ratios have declined
moderately this year primarily due to the downward trend in interest rates. We
view a Solvency II ratio >200% to be excellent, 175-200% to be strong, 160-
175% to be fair, 150-160% to be adequate and <150% to be poor. Looking
ahead, we expect most of the Continental European and UK insurers to
maintain their ratings for the longer term, despite issues such as the low rate
environment, natural catastrophe risk, pension reform in the UK and adjusting to
the new mark-to-market capital regime (i.e., Solvency II).
Insurance subordinated debt continues to be a very attractive prospect for
investors, in our view. Despite reasonable earnings and strong Solvency II
ratios, insurance tier 2 debt trades c. 165bps wide of similar bank tier 2
securities. While ultimately we expect this differential to compress to c. 50-
60bps, we recognise this is likely to occur over an extended period as the market
gets more comfortable with the evolving insurance asset class. However,
investors looking for higher yields in the near term should find the sector
attractive on a risk-adjusted return basis. For example, despite provisions for
mandatory or optional coupon deferral, we have only encountered two cases in
the past few years where these features have been used (Groupama, SNS Real).
We include a sample of insurance tier 2 bonds yielding >4.5% below (see Table
2). Overall, we continue to believe that greater issuance and a growing investor
base will encourage market participants to focus more attention on the sector.
As a mark-to-market capital regime, Solvency II ratios are heavily influenced
by volatility across security and real asset markets. In general, higher corporate
spreads lower the Solvency II ratio, while higher government spreads move the
ratio higher, although exceptions do exist, and sensitivities vary across firms.
Sensitivities to other asset classes, e.g. equities and real estate, are also
important to consider when thinking about Solvency II ratios. We have included
reported sensitivity analyses for each insurer in our universe on pgs. 12-13).
We expect transparency around Solvency II reporting to only increase from
here. Starting with FY16, companies will have to report their Solvency II
ratios both with and without transitional factors. This should provide a greater
degree of comparability between companies and give an indication of which
companies have been more ‘aggressive’ in the use of transitionals.
Starting this year, we saw the first issuance of tier 3 securities (AVLN and
CNPFP). Rated the same as tier 2 but with shorter duration, and higher yielding
vs. senior debt, we think this is likely to be a sought after asset class, amplified
by relatively little supply (capped at 15% of SCR for each insurer). Aviva issued
CAD 450mn in Apr-16, while CNP Assurances brought a €1bn deal in Oct-16.
Tier 3 does include mandatory deferral, although is linked to MCR and not SCR,
and there is no optional deferral feature. We expect companies to issue a
maximum of 1-2 tranches of tier 3 considering the limit on percentage of SCR
Non volevo dirlo per evitare guerre di religione, ma il report (di cui sopra è solo l'intro) è molto lungo e complesso (49 pagine) non tutte da me ben comprese.
