* 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
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
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
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
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
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
"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."
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
(Reporting by Helene Durand; Editing by Natalie Harrison and