March 22, 2013 / 12:36 PM / 5 years ago

Insurers race to fill hybrid capital vacuum

* Insurance pipeline fills as investor demand soars

* Banks to take market reins from Q2

* Tier 1 and 2 issuance to hit EUR350bn in coming years

By Aimee Donnellan

LONDON, March 22 (IFR) - Insurance companies are racing to make the most of firm conditions in the subordinated debt market, ahead of an imminent wave of bank capital deals that will raise competition for investor cash and leave them vulnerable to market volatility.

Prudential, MACIF, Zurich, Swiss Re, AG Insurance and AXA Insurance have sold a mixture of Tier 2 debt and CoCos to ravenous investors in search of yield.

This week Norway’s biggest insurance company Storebrand became the latest, selling just EUR300m worth of subordinated debt but attracting a whopping EUR2.5bn order book.

Dutch insurer Achmea is finishing up a roadshow this week and Caplin Insurance is also tipped to make an appearance.

“Insurance hybrids are really the hotspot of the FIG market these days,” said Harman Dhami, head of FIG syndicate at RBS.

The only euro supply in the deserted bank capital market this year has been a EUR1.25bn Tier 2 from Nationwide Building Society which came last week on a hefty EUR5.5bn book.

But oversubscribed order books could soon be a thing of the past as banks need to raise as much as EUR200bn of Tier 2 debt and EUR150bn of Additional Tier 1 in the coming years, according to figures from Citi.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For graphic on estimated net issuance of bank capital instruments: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

“Once there is an agreement on the final details of CRR then banks can go ahead and issue capital. All of this seems quite plausible for the second quarter of 2013,” said Simon McGeary, head of new products group at Citigroup.

Banks will be required to hold extra capital to ensure taxpayers aren’t saddled with the bill in any future bank bailouts.

Insurers are keen to get ahead of this rush given the threat of oversupply and volatility.

“If markets are constructive they can absorb quite a lot before suffering indigestion, but the worry is that the macro picture will remain volatile causing windows to open and shut,” said McGeary.


It’s easy to understand why insurance companies are in such demand. As investors desperately attempt to weigh up the risks of the SNS nationalisation and the potential bail-in of depositors in Cyprus, insurance companies look a relatively safe bet.

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 rely on funding through the senior, covered and subordinated debt markets.

Insurance companies are also enjoying a clear field, with banks sidelined from Tier 1 markets due to unclear regulatory and tax treatment of the capital instruments.

This is set to change in mid April when a European Parliament plenary is planned to discuss the proposed Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV).

Once they receive regulatory clarity, bankers say they will start structuring and selling Tier 1.


Investors have proved willing buyers of riskier instruments, including total loss, high-trigger contingent capital issued by Barclays and KBC as well as a remarketed contingent capital instrument from Bank of Ireland.

But this demand has so far been unfulfilled as issuers remain reluctant to issue Tier 1 capital without regulatory clarity.

Tax-deductibility is one of the most important considerations that borrowers take into account in their funding decisions, as it makes debt a more attractive financing option.

Nordic issuers are tipped to be the first out as the region’s regulators have already specified that Tier 1 will be tax deductible, as is also the case in Italy.

A number of banks could be early movers, but the first need to be credits that investors are willing to buy easily, bankers say.

Certain countries are waiting for their tax frameworks to be finalised, so while it’s unlikely that issuers will pile in on top of each other, issuance is likely to increase over time. (Reporting by Aimee Donnellan; editing by Alex Chambers and Julian Baker)

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