Insurance companies look to another vintage year

Wed Dec 19, 2012 10:04am EST

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* Insurers to keep steady presence in capital markets

* Refinancings to remain the dominant theme

* Call risk and market volatility are main headwinds

By Helene Durand

LONDON, Dec 19 (IFR) - European insurance companies will continue to make the most of the low rate environment and insatiable investor appetite for their debt in 2013 as one of the best years for capital management and refinancings draws to a close.

European insurers - focused on maintaining steady levels of capital rather than boosting them - have almost doubled the amount of subordinated debt issuance this year to EUR17bn from EUR9bn and EUR3bn in 2011 and 2010 respectively.

New bonds have been predominantly used for refinancing purposes, and that trend is expected to continue, although there is a limited amount of debt - estimated at less than EUR20bn by Barclays - due to mature over the next three years.

Maturing debt falls even further between 2015-2019 and to just EUR15bn between 2020-2029.

Insurance companies' minimal reliance on capital markets has been one of the factors behind their resilience to the financial crisis, analysts say.

That stands in sharp contrast to banks that need to meet higher capital requirements from January 1 2013 as they grapple with the effect resolution regimes will have on them.

"(Insurance) debt securities sold in capital markets represent only 2% of liabilities and most of these are long-term debt in the form of either Tier 1 or Tier 2 capital," wrote Moody's analysts in a note published this week.

"In contrast, European banks' usage of wholesale funding - which has proved less stable during the crisis as debt markets closed to certain borrowers - remains high, at almost 20% of liabilities."

AHEAD OF THE GAME

Less uncertainty surrounding the regulatory landscape has also worked in insurers' favour, while they do not have to include unfriendly investor features - such as loss absorption triggers - that banks have to contend with.

Those factors have made it easier for insurers to access capital markets even though the implementation of Solvency 2 has been pushed back numerous times.

Most market participants do not expect Pillar 1 of Solvency 2, which will set the quantitative capital requirements for insurance, to be implemented before 2016.

"While insurance companies have structured their deals in a forward looking way towards Solvency 2 rules, this has not been the driver behind insurance issuance," said Jake Atcheson, head of insurance DCM at Citigroup.

"Insurers are generally comfortable with their capital positions and focused on keeping steady levels of capital rather than increasing or decreasing them."

European insurance companies have focused on refinancing deals that were issued between 2002 and 2005. Munich Re, for example, which raised over EUR3bn of subordinated debt in 2003, has refinanced the majority of that with three 30NC10 deals, including a EUR1bn trade in 2011 and EUR900m and GBP450m bonds in 2012. This is despite the fact that the 2003 deals are not due to be refinanced until June 2013.

"They have been keen to come early and when the market is good rather than wait, and would rather take some cost of carry then the uncertainty of not being able to refinance," said Atcheson.

Issuers that have delayed have paid the consequences.

Italy's Generali had to pay a 10.125% coupon on a EUR750m 30NC10 year Tier 2 issue in July. At the time, bankers suggested that Generali had opportunities to fund before, but chose not to.

STARS ALIGN

The general consensus though, if 2012 is anything to go by, is that European insurance companies will have no trouble in bringing new deals to market, whether subordinated or senior.

Coupons have been driven dramatically lower thanks to strong demand.

Allianz priced a USD1bn perpetual non-call 2018 fixed for life issue in November that came with a 5.5% coupon, around 275bp inside where Swiss Re sold a USD750m perpetual non-call five-and-a-half year back in March.

Issuers have also taken advantage of the strength of the Swiss and Asian retail market to ramp up the sale of perpetual deals.

"Unlike bank sub debt, where there has been more uncertainty around resolution regimes, the rules for subordinated insurance debt have been stable and there hasn't been a material change since 2010, at least for Tier Two," said Atcheson.

"One 30NC10 deal looks very like the other and investors understand the risk and can focus on the credit risk instead, which has made this paper more investable."

CALL RISK

There are still risks, though, despite the strong run. The most prominent is issuers' call strategies, which investors were reminded of in October when French insurance company Groupama deferred a Tier 1 coupon.

Moody's analysts have also warned that insurers are not immune to a sharp deterioration in European economic conditions, even though their standalone credit profiles have deteriorated less than those of European banks over the past five years.

"In the past, they have been severely affected by the combination of catastrophic events and financial market disruptions," they wrote.

"Further, future financial crises may involve different stresses that could impact insurers more than banks."

They said that almost half of its insurance ratings in Europe carried a negative outlook, or were on review for downgrade. (Reporting by Helene Durand; Editing by Natalie Harrison and Julian Baker)

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