The research is an update to the markets and does not constitute a rating action. The level of financial leverage increased to 25% on average in 2016 and in the first half of 2017, driven by favourable refinancing conditions, after declining for the last 7 years from a 2008 peak of 32.8%.
"We expect European insurers' and reinsurer's financial leverage to gradually increase over the next two years," said Antonello Aquino, an Associate Managing Director at Moody's. "Persistently low interest rates, which encourage (re)insurers to borrow and refinance existing debt cheaply, and growing focus on deployment of excess capital are the primary drivers of the increase in leverage".
Although interest rates rose during 2017 and 2018YTD, they remain well below the average for the last 10 years, allowing insurers to take advantage of low refinancing costs. In particular senior debt has become very attractive with several insurers being able to issue debt at exceptionally low yields.
Moody's views that any expectation of monetary tightening will further accelerate new debt issuance as (re)insurers seek to lock in current very low servicing costs. A growing focus on deployment of excess capital will also contribute to increase financial leverage. As the largest (re)insurers have solid overall capital positions, Moody's anticipates that they will start looking more closely at their surplus capital through share buybacks, dividend increases or acquisitions.
These measures will suppress growth in (re)insurers' shareholders' equity, contributing to an increase in leverage. Although pressure to boost Solvency II ratios has eased compared with 2015 and 2016, when the regime was introduced, these ratios remain inherently volatile especially in the event of combined market movements.
Moody's expects (re)insurers to respond to any volatility in their ratios by issuing subordinated debt. While political risks in Europe have receded, potential uncertainty this year related to the Italian elections in March and the ongoing Catalonian independence dispute could increase volatility in the ratios.
The report, "(Re)insurers -- Europe; Financial leverage increases driven by favourable refinancing conditions"
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