FSA decision prompts tightening for insurers' credit spreads

The cost of protection for the European insurance sector has tightened by up to 15bp in trading this week following a decision by UK regulator, the Financial Services Authority (FSA), to ease regulatory solvency requirements for individual life assurers.

Traders said clients were selling protection on insurance companies including Dexia, Axa and Prudential, following the decision late last Friday. Five-year senior protection for benchmark names Allianz and Axa are now both priced at around 85-90bp-mid. They both traded wider than 100bp last week as investors bought-up protection driven by fears of insurers' equity losses.

The subsequent equity rally on Monday kept credit default spreads tight at the start of the week. But as weakness re-entered the equity markets, credit markets remained resilient and stable in light flows, traders said.

In telecoms, Telefonica said yesterday it would issue €1.5 billion of 10-year eurobonds. Five-year credit default swaps for Telefonica widened 5bp in trading yesterday to 90/95bp, but traded slightly tighter at 80/95bp today. Other European telecom names also saw volatility, trading wider yesterday close in line with weak equity markets but tightening back in trading today. Credit protection costs today for France Telecom debt was trading at 262/272bp, while Deutsche Telekom credit protection costs stood at 225/235bp, both tighter by 7bp for the day.

Telecom equipment makers were also under pressure in the credit default swap market this week. On Monday, Swedish mobile specialist Ericsson delivered a downbeat outlook statement with its full-year results. Yesterday, French telco equipment company Alcatel followed with similar predictions. Five-year credit protection for Alcatel was offered at around 750bp today, 30bp wider than its close last week, while bids for Ericsson crept 10bp wider to 1,100bp. Traders said Ericsson trades were on an upfront basis and its curve was inverted, with one- and two-year protection trading higher than five-year swaps.RiskNews.net