EMEA insurers take advantage of cheap financing: S&P

EMEA insurers take advantage of low interest rates to reduce their debt financing costs, according to an S&P Global Ratings report.

European insurers will likely continue to issue high subordinated debt volumes this year as the favourable issuance conditions are helping enhance insurers' capacity to cover financing expenses.

"We estimate rated European insurers issued €16.9 billion in 2016, a slight decline from the 2015 level," said S&P Global Ratings analyst Charlotte Chausserie-Lapree. "We expect issuance could stay quite high this year because, despite the prospect of gradually rising interest rates, regulatory developments could encourage more issues to support their solvency capital requirement coverage."

The ratings agency expects that the bulk of issuances in 2017 will continue to be traditional instruments that typically qualify for Tier 2 capital under Solvency II or local equivalents. However, there has also been some interest in less traditional hybrid instruments, such as prefunded off-balance-sheet facilities, contingent principal loss-absorbing hybrids (so-called cocos), or short-dated bullet subordinated debt over the past 12 months.

Despite the currently still favourable environment for issuance, S&P expects interest rates could gradually rise throughout the year after the European Central Bank announced on Dec. 8, 2016, that it plans to scale back the pace of quantitative easing from April 2017. If rates were to rise, or spreads were to widen in 2017, this could make opportunistic issuance less attractive.

Furthermore, the string of national elections in Europe could lead to some political uncertainty that could limit windows of favourable issuing conditions during the year.

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