CNP Assurances: Achieving new standards

France’s CNP Assurances on 27 May sold a Eu500m 31NC11 subordinated bond that addressed Solvency I, rating agency and the latest Solvency II requirements, while achieving the third-lowest coupon on a euro-denominated Solvency II Tier 2-eligible issue. Vincent Damas, director for ALM and funding, and Stéphane Trarieux, funding and rating agencies department, of CNP Assurances discuss the rationale for the deal and share their views on Solvency II developments, while Crédit Agricole CIB’s Michael Benyaya explains the context of the latest EIOPA pronouncements.

CNP office
Issuer: CNP Assurances
Issue ratings: BBB+ (S&P)
Description: Tier 2 capital under Solvency II
Issue size: Eu500m
Tenor: 31 non-call 11
Settlement: 5 June 2014
Maturity: 5 June 2045
First call: 5 June 2025
Re-offer spread: 260bp over mid-swaps; 295.8bp over the 1.75% January 2024 Bund
Coupon: 4.25%
Re-offer yield: 4.3%
Issue/re-offer price: 99.569%
Bookrunners: BAML, Crédit Agricole CIB, Deutsche Bank, Morgan Stanley, Natixis, Société Générale CIB
ISIN: FR0011949403
Distribution:UK & Ireland 33%, France 21%, Germany & Austria 12%, Switzerland 9%, Benelux 7%, Italy 5%, rest of Europe 9%, others (including Asia) 4%.Asset managers 64%, insurance companies & pension funds 15%, banks & private banks 11%, hedge funds 7%, others 3%.

Why did CNP Assurances come to the market with a subordinated bond at this time? 

Vincent Damas, CNP Assurances: Market conditions are very favourable to issuers, with low interest rates and credit spreads having compressed over the past 18 months. In today’s markets, windows of issuance are remaining open while new issue premiums are falling. This situation contrasts sharply with the 2008-2012 period, when spreads were volatile and tending to head northward.

So we considered it was time to take advantage of this market backdrop and to progress in our regular funding programme.

Insurance sector spreads and yields are at historically low levels. Was this a factor in choosing to come to the market now?

Stéphane Trarieux, CNP Assurances: Subordinated debt is a high beta instrument, which exacerbates widening and tightening spread moves more than any senior unsecured debt. In today’s historically low yield environment, appetite for such investment opportunities out of the insurance sector is growing. The headline coupon of our subordinated 31 non-call 11 structure reached 4.25%, which is the lowest level ever achieved by CNP Assurances since its first subordinated issue in 1999.

Stéphane Trarieux, CNP Assurances

Stéphane Trarieux, CNP Assurances

Were you satisfied with the execution of the deal in terms of size and demand? 

Damas: CNP Assurances decided to cap the size of the issue at Eu500m from the outset. We enjoyed an order book almost 10 times as large as the transaction size. On the back of this strong response, initial guidance was tightened by 15bp from initial price thoughts of mid-swaps plus 275bp to mid-swaps plus 260bp. This level implies zero new issue premium.

Why did you not hold a roadshow? Was there any marketing ahead of execution? 

Trarieux: CNP Assurances’ signature is well known by investors and very well established across the board. We have a long track record in the primary market, with several benchmark issues in various markets and currencies — euros, US dollars and sterling — and with a greater frequency of issuance since 2010.

Nevertheless, permanent investor dialogue is key and essential. This is why we conducted a pan-European credit update in April to present our 2013 annual results.

Why did you choose the 31 non-call 11 structure? 

Damas: The 31 non-call 11 structure is the right instrument to lengthen the average duration of our debt. It also leaves us the possibility of tapping that particular bond during one year if we need to.

We opted for the traditional insurer-style Tier 2 structure, as it is well known and accepted by investors. This structure is eligible under Solvency I, Solvency II and offers equity credit from the rating agency standpoint.

More generally, how is the transition to Solvency II affecting your capital planning and needs?

Trarieux: CNP Assurances was one of the first European insurers to launch a Solvency II-compliant Tier 2 transaction as early as September 2010. Since then, this format has become a standard in the industry although Solvency II had not even come into force. At that point in time the final rules had not even been officially published.

Like every insurance company, we are benefiting from measures taken by the Directive Omnibus 2, which establishes the grandfathering until 2026 of debt issued before 2016. This transition period is long enough. It offers a great degree of comfort with regards to the eligibility of our debt. It also allows a smooth replacement of our maturing debt.

Michael Benyaya, DCM Solutions, Crédit Agricole CIB: There are no identified capital needs stemming from the implementation of Solvency II for the largest insurance companies. This is notably highlighted by the absence of large capital increases in the insurance sector launched to comply with the new standards. Insurance companies remain active on the subordinated debt market, but this is primarily for refinancing purposes.

The flexibility of the grandfathering provisions provides insurers with a high degree of visibility in terms of capital planning. These grandfathering arrangements have led to the resurgence of the Solvency I format and a couple of issuers have even issued perpetual Solvency I bonds to benefit from a grandfathering of Tier 1 in the Solvency II capital structure.

That said, the vast majority of issuers, like CNP Assurances, continue to demonstrate a strong willingness to adhere to the Solvency II standards despite the remaining uncertainties, notably introduced by the recent EIOPA texts and in particular the publication of the Technical Specifications in conjunction with the Stress Tests.

(See below for further details.)

To what extent are differences between rating agency and Solvency requirements a challenge in your capital planning and also bond issuance?

Damas: So far the insurance sector has benefited from relative stability of rating methodologies for hybrid instruments as well as from their treatment in the economic capital. We think that the rating agency methodologies will evolve and could gradually converge with the prudential rules of the European Union. In the mid to long run this should offer greater visibility with regards to the eligibility criteria of the outstanding debt in the market. To the best of our knowledge, we have not seen any rating agency-driven early calls of insurance hybrid debt. And we are not aware of any projects to modify insurance hybrid debt criteria.

Vincent Damas, CNP Assurances

Vincent Damas, CNP Assurances

Is the perpetual structure that was used by Allianz in late 2013 of interest to CNP Assurances? Are similar issues in your plans?

Trarieux: We are closely looking at any such structures, and already in 2012 we issued perpetual transactions denominated in US dollars on the back of the strong appetite of Asian private banks. We don’t rule out coming back in perpetual format in euros, depending on our capital planning needs and subject to market conditions.

How EIOPA standards affect structuring

What are the key structuring developments introduced by the recent EIOPA texts?

Michael Benyaya, DCM Solutions, Crédit Agricole CIB: EIOPA has specified the form of incentives to redeem that are not limited and hence not compliant with the Solvency II framework. This includes a change in the distribution structure from a fixed to a floating rate combined with a call. This will probably be a major point of contention between EIOPA and issuers as the majority of transactions targeting direct Tier 2 Solvency II eligibility have used a fixed-to-floating mechanism. In addition, EIOPA texts also clarify that early redemption calls — e.g. tax/regulatory/rating agency — are not allowed prior to five years from the date of issuance. However, substitution and variation language will be allowed.

In this context, what were the key elements of the structure utilised by CNP Assurances?

Benyaya: The 31NC11 bond targets direct Tier 2 eligibility under Solvency II and qualifies under Solvency I in the dated category up to 25% of capital requirements. The structure effectively absorbs some of the recent developments in relation to Solvency II own funds released by EIOPA. The coupon structure thus has a five year interest reset period after the first call date, in lieu of a fixed-to-floating mechanism, which seems to be considered as an incentive to redeem that is not limited and not compliant. EIOPA’s clarification on early redemption calls is addressed by a provision in CNP Assurances’s 31NC11 bond whereby the early calls at par upon tax, regulatory or rating methodology events and the exchange and variation clause upon a regulatory or a rating methodology event will automatically lapse if, at any time following the implementation of Solvency II but before the first reset date, they would prevent the notes from being treated as at least Tier 2 under Solvency II including for the purpose of compliance with any grandfathering provisions.

What are the key drivers for issuing a dated subordinated bond while some issuers have used a perpetual format to potentially benefit from a grandfathering in Tier 1 under Solvency II?

Benyaya: In contrast to banks, there is no specific focus at this stage on Tier 1 in the insurance sector and there is no identified need for Tier 1 capital under Solvency II for the largest issuers. CNP Assurances will also benefit from the full eligibility of the expected profits in future premiums in unrestricted Tier 1 as well as the probable grandfathering in restricted Tier 1 of the legacy perpetual hybrid.

Another important driver is that there is no additional equity credit benefit for the perpetual format in the S&P methodology as it can qualify in the intermediate content category like the dated format. CNP Assurances is currently only rated by S&P and hence does not specifically target the higher basket recognition with a perpetual format afforded by the Moody’s criteria. Finally, a dated format carries obviously a lower coupon hence protecting the fixed charge coverage ratio which is closely monitored by insurance companies in the current environment.