Ripe for the picking, insurers to hit capital bond market

Fri May 9, 2014 9:27am EDT

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By Aimee Donnellan

LONDON, May 9 (IFR) - Global insurers are preparing to make a comeback to the primary market in the coming months, keen to manage a mounting pile of redemptions and take advantage of funding levels that have plummeted to four-year lows.

Insurance companies have been noticeably absent from the new issue scene this year. Only six have accessed the market for euro and sterling capital since January, a drop of 50% from the 12 borrowers selling deals during the equivalent period in 2013.

"The market is desperate for any bit of insurance paper because supply has been so light this year," said Ian Robinson, head of credit at asset manager F&C.

"Banks haven't been issuing a lot of vanilla debt either, so increased demand is met by a sector that is shrinking from year to year."

The likes of Generali, Aegon and Wuerttembergische Lebensversicherung that came to the market in recent weeks have all been met with billions of euros of demand.

"This time of year is usually when issuers look to access the bond market; they often avoid moving ahead of annual results, but like to get financing completed ahead of the summer break," said Jake Atcheson, head of insurance DCM at Citigroup.

"Market conditions are incredibly supportive, euro rates are close to the lowest they've ever been, and spreads are the lowest they have been since the financial crisis."

This has greatly improved issuers' fortunes. Generali, for instance, sold a 30NC10 bond in 2012 with a 10.125% coupon, and recently paid less than half of that, 4.125%, for a 12-year bullet.

Redemptions are also seen as a key driver. Swiss Life, Prudential, Hannover Re, Talanx, Aviva, and Society of Lloyds all issued bonds before the crisis, and those hit their first call dates this year, according to CreditSights.

If the companies decide to exercise the calls, it will likely drive up demand further in a sector where investors are already scrambling for what is relatively low risk, high yield paper.

It's easy to understand why there is such demand. As investors attempt to weigh up the potential for bank nationalisations and bail-in, insurance companies look a relatively safe bet.

Minimal reliance on capital markets has been one of the factors behind insurance companies' resilience to the financial crisis.

"Insurers issued a lot of capital before the crisis which is coming up for redemption in 2015 and 2016," said Philippe Picagne, an analyst at CreditSights.

"It would make sense for issuers to start managing those redemptions this year as they will almost certainly be called."

FERTILE CONDITIONS

For issuers new and old, conditions are proving ideal. A dearth of supply in recent months and a four-year trough in the cost of insuring subordinated debt mean there is clear incentive to issue strategic transactions.

"Issuance is likely to pick up in the coming months as insurers look for refinancing, rating agency credit, to fund M&A activity and the strength of the market prompts them to issue bonds," said Gerald Podobnik, head of capital solutions at Deutsche Bank.

"New names are also emerging in what is expected to be a fairly heavy redemption year."

NN Group, currently the fully-owned insurance and investment management businesses of ING, is a classic example of the trend.

The Dutch insurer was flooded with more than 7bn of orders from investors desperate to get their hands on one of this year's six insurance capital deals to have emerged.

Insurers are expected to focus more on Tier 2 structures for 2014 and 2015, given there is a lack of clear definitions of Tier 1.

"From 2016, we expect increased Tier 1 bond issuance. This situation can become a problem for insurers that need to issue Tier 1 bonds as a means of recapitalising and strengthening their risk profile," CreditSights said in a research note. (Reporting by Aimee Donnellan, editing by Helene Durand and Julian Baker)

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