Crédit Agricole Assurances: Going solo

Crédit Agricole Assurances (CAA) marked its debut in the primary market on 7 October with a Eu750m perpetual non-call 11 issue. Here, Grégory Erphelin, chief financial officer at CAA, discusses the execution of the debut transaction, why the insurance company accessed external funding, and how it fits in with rating agency and regulatory developments.

Could you provide us with an overview of CAA’s position in the market and within the Crédit Agricole Group?

Crédit Agricole Assurances, 100% owned by Crédit Agricole SA (CASA), is a fully fledged and diversified insurer operating in the savings and retirement, personal protection, and property and casualty sectors. CAA is a key player in the European insurance market: the leading bancassurer in France and Europe, the second largest life insurance provider in France, and the fifth largest European insurer. Its model is based on a high integration within Crédit Agricole Group, notably benefiting from the strength of Crédit Agricole Group’s retail banking networks in France, Italy and Poland. To highlight some key figures: Eu26.4bn of premiums at year-end 2013; Eu1bn of net income Group share; roughly one-quarter of normalised total net income of CASA Group; and Eu235bn of assets under management. Insurance activities are a core business for Crédit Agricole Group and its universal customer-focused retail banking model. As disclosed in the Medium Term Plan of the Group last March, the ambition is to continue developing this successful bancassurance model in the coming years.

This is your first transaction in the primary markets and you started with a subordinated issue, which is not always easy. What is the rationale behind this transaction?

Until now, CAA’s funding was wholly provided by Crédit Agricole SA. We have decided to change this policy to look for external hybrid funding due to changes in the prudential framework and in Standard & Poor’s methodologies. Were the internal funding policy to be maintained, hybrid capital issued by CAA and subscribed by CASA would be deducted from CASA own funds under Basel III, and from CASA Tier 1 own funds in the case of issuance of Solvency 2 Tier 1 insurance instruments. Additionally, in the RAC calculation, insurance hybrids would be deducted from Crédit Agricole’s Core Tier 1 ratio due to S&P’s new treatment of hybrids issued by insurance subsidiaries and subscribed by Group companies. Therefore, we assessed with CASA the opportunity of meeting the hybrid capital needs of CAA through external investors. In the current market and regulatory conditions, we decided that it would be economically more efficient for the Group to finance the insurance needs of Tier 1 hybrid capital through CAA in the primary market than through CASA AT1 issuances. For CAA, our objective was mainly to anticipate our adaptation to the future Solvency 2 rules by issuing Solvency 2-compliant notes and to finance the expansion of our business activities. The rationale for this transaction must then be considered both at the Crédit Agricole group level and at the insurance level.

Furthermore, even though market conditions were more difficult in September than in the first half of 2014, they remain attractive compared with historical levels. It was a good time to test investors, especially as we wanted to issue a perpetual instrument and the Solvency 2 regulatory grandfathering window was still open.

Could you elaborate on the continuum between the last CASA AT1 and your inaugural perpetual transaction?

The rationales for the last CASA AT1 transaction and for the insurance deal are strongly consistent. Both aim to strengthen Crédit Agricole Group’s regulatory capital and the Group’s RAC. It is a positive development in terms of the financial flexibility of Crédit Agricole Group to be able to issue subordinated notes at both the CASA and the CAA level.

Turning to the technical aspects of your inaugural deal, what is the exact status of the notes? How do they rank in the waterfall? Could you give us more details on the structuring items embedded in your deal since you are targeting Tier 1 grandfathering?

We issued a perpetual instrument, eligible up to 50% of the required Solvency 1 margin. As it was issued prior to the Solvency 2 delegated act coming into force, i.e. still in the grandfathering window, the deal is expected to be grandfathered as Tier 1 during the transitional period of Solvency 2, until 2025. The note was also designed to be fully eligible as Tier 2 under Solvency 2 after the first call date in October 2025.

As you know, to be Tier 1-grandfathered, the bond should be undated and not fully compliant with Tier 2 rules under Solvency 2. Until the first call date, this instrument features both an optional and a mandatory deferral subject to a dividend pusher and there are optional early calls that can be made at any time. After the first call date, the mandatory deferral will no longer be under the constraint of the dividend pusher, and the optional early calls are automatically deactivated and the instrument becomes eligible as Tier 2.

In terms of your roadshow, what is your experience and feedback after these face to face meetings with key investors? What are the main takeaways from an issuer perspective?

As a debut issuer, we needed to present Crédit Agricole Assurances in depth as well as its plan to issue sub notes to the market. That’s why we spent five days on a roadshow explaining CAA’s position within Crédit Agricole Group and within the European insurance market, its business model and its strong credit profile. We also elaborated a lot on the disciplined risk and capital management we have developed within CAA, especially in the context of low interest rates and of the upcoming new Solvency 2 rules. It was the first time we gave detailed information on the insurance business line of Crédit Agricole and I think it was necessary and very useful to go and see investors face to face in order to explain directly the credit profile and the strategy of CAA, and to answer their questions. It was also very interesting for us to understand the sentiment of these key investors and how they assess our credit profile compared with our peers.

Moreover, we decided to test investors when market conditions were definitively heavier and more volatile than in the first half of the year. During the roadshow, investors reminded us frequently of the underperformance of recent subordinated deals in the insurance sector as well as of bank AT1s. We carefully took this into account when we discussed pricing thoughts.

In the end, I do believe that investors had a positive image of CAA and of Crédit Agricole’s integrated bancassurance model and that the rationale was well understood.

As a newcomer, were you satisfied with the syndicate structure, pricing parameters and the quality of the order book?

Pricing power is now clearly more balanced between issuers and investors. We had to take this into account whilst also considering the context of further issuances from CAA in the future. That’s why we adopted a consensual approach in primary, considering that CAA’s credit profile was certainly very well received by investors but also that the recent underperforming subordinated deals were still weighing on the market. The FIG syndicate at CACIB did a good job as sole bookrunner, with strong and constant dialogues with investors. Since the beginning of the roadshow, we had positive feedback from investors and some clear interest, which helped us to define the guidance. In summary, even if the market was volatile and the success of the transaction was fairly driven by the spread, the thorough preparation and right attitude towards potential obstacles enabled us to price a strong benchmark transaction at the tight end of the guidance.

Your transaction performed well after the break, creating positive market sentiment towards CAA. Should the market expect regular appearances from CAA? What are your plans for 2015 onwards?

It’s true that the transaction performed quite well after pricing and outperformed our peers. We are pleased to note that even dealers away from the deal acknowledged the strong outcome and adhered to our pricing paradigm and relative value scheme.

Looking ahead, our funding in wholesale markets and the size of future transactions are not yet defined, as you can imagine. But it is clear that CAA is going to be a regular issuer in the coming years.