CAA: Growing in assurance

Crédit Agricole Assurances launched a Eu1bn 32NC12 Tier 2 transaction on 20 September, the first such benchmark from the insurance sector since the summer break, and attracted Eu2.5bn of demand from 170 accounts. Grégory Erphelin, CFO, Crédit Agricole Assurances (CAA), and those involved in the transaction at global coordinator Crédit Agricole CIB (CACIB) discuss the execution and strategy behind the trade.

What was the rationale for this subordinated transaction?

Grégory Erphelin, CAA: Until 2014 Crédit Agricole Assurance’s funding was totally provided by Crédit Agricole SA (CASA). We then decided to change this policy so that we would have external hybrid funding provided by the market and not only by CASA. This was for two main reasons, notably the new prudential framework of Solvency II, and also changes in Standard & Poor’s rating methodology.

However, the rationale for this particular transaction differs in its objective. It was not to finance the early redemption of intra-group debt, as was the previous hybrid issuance. The notes CAA has just issued are to finance its future growth and also to strengthen its capital position. CAA has many ambitious goals in terms of future commercial growth and has to find a way to finance this. In the current low yield environment, the new solvency framework also forced CAA to go and tap the market.

It is important to understand that CAA’s long term objective remains the same, namely to reduce intra-group funding, but CAA wants to retain the flexibility to issue internal or external debt.

Could you give us an overview of CAA in its market and within the Crédit Agricole Group?

Erphelin, CAA: 100%-owned by Crédit Agricole SA, CAA is a fully-fledged and diversified insurer, operating in savings and retirement, protection, and property and casualty. CAA is a key player in the European insurance market: the eighth largest insurer in Europe and in 2015 CAA became the largest insurance provider in France. CAA is also the largest insurance subsidiary of any of the French banking groups.

CAA’s model is based on a high degree of integration within Crédit Agricole Group, and benefits from the strength of Crédit Agricole Group’s retail banking networks, mainly in France, Italy and Poland. Insurance activities are core businesses for Crédit Agricole Group and its universal customer-focused retail banking model. CAA provided roughly one-third of CASA’s net income in 2015, close to Eu1.2bn (excluding non-recurring items).

And, as disclosed in the Medium Term Plan of the Group, the ambition is to continue developing this successful bancassurance model in the coming years.

What are the key differences between the perpetual subordinated notes issued in 2014 and 2015 and this 32NC12?

Michael Benyaya, DCM solutions, CACIB: The 32NC12 has the same subordination and ranking as the perpetual notes. One of the differences lies in the interest deferral conditions: in this transaction, the mandatory interest deferral condition overrides the dividend pusher mechanism in order to be fully compliant with the Solvency II regulation.

We have also inserted an “Insolvent Insurance Affiliate Winding-up” clause to meet the requirements based on the interpretation of Recital 127 of the Delegated Acts. Finally, the mandatory replacement with equal or better quality capital period in case of a redemption for a gross-up event is applicable for 10 years from the issue date to comply with the ACPR’s guidelines in terms of tax calls.

What drove the choice of a Tier 2-style, 32NC12 issue?

Erphelin, CAA: It is a classic Tier 2 instrument and during the roadshow we got the impression that investors were very familiar with this kind of structure. It is indeed very similar to recent euro dated callable Solvency II Tier 2 securities issued by other European insurance companies.

The 32NC12 maturity structure was driven by our wish to create a curve and to manage our debt profile. We were very open during the roadshow to hear feedback from potential investors, to know if a 31 or a 32 non-call 11 or 12 was better, but it was not a major topic for them, so we chose a 32NC12 to fit with our debt profile.

What were the main topics of discussion on the roadshow?

Erphelin, CAA: We had previously announced that CAA is going to be a regular issuer and CAA came back in 2016 after its two previous trades — one in 2014 and one in 2015. The day we announced the roadshow the feedback from investors and analysts was very encouraging: they wanted more information on CAA, as the name is much better known than it was two years ago.

During the four days we effectively spent “roadshowing”, there were three foremost topics in the discussions. Firstly, it was the capital management under Solvency II, how CAA is managing this new solvency framework. The second point was the level of interest rates, and how can we deal with this new economic situation.

And then, it was about the strategy of CAA within the scope of the Crédit Agricole Group. We took a lot of time to explain the group Medium Term Plan, how CAA is going to increase the diversification of its activities, especially in the protection and property and casualty businesses.

The deal was also launched into a more volatile market than before the summer and in the wake of renewed worries about Deutsche Bank. Were you concerned about market conditions?

Erphelin, CAA: Obviously that was in the background and we were a little concerned about it, but when we decided to proceed with the deal we were quite confident because of the positive feedback we had from investors during the roadshow. We also adopted a consensual approach to pricing, as CASA has done. Taking that into consideration CAA is going to be a regular issuer — it was important to us that the trade performed well in the secondary market.

Bernard du Boislouveau, FI DCM, CACIB: The market was indeed quite shaky, but at the end of the day these kinds of transactions have a certain scarcity value for investors. When you are comfortable with the CA group, with CASA, with CAA, and you know that you have this opportunity to get some extra yield compared to the very low beta transactions we usually see in the financial institutions space, it’s an eye-catching offer.

Within one hour we had more than Eu1.25bn in the order book, which was a sign of very strong momentum, and we were ultimately in a position to price at the tightest end of the range, at 435bp over mid-swaps after initial price thoughts of the 450bp area. So, the Deutsche news was not very supportive globally in terms of spreads, but this particular transaction was frankly just a wonderful success.

You also have to compare this success to what was going on in other markets: with this transaction CAA was to an extent reopening the Tier 2 subordinated insurance market in Europe, while the Asian-targeted US dollar market was drying up.

Erphelin, CAA: Investors brought up the situation in that market during the roadshow and they were very happy with our decision to go to the euro market. It is very important to be aware of such investors’ feedback.

I would add that we wanted to do a benchmark transaction. It could have been Eu750m and we decided to go to Eu1bn thanks to the success of the deal. It’s a very good transaction for CAA.

Du Boislouveau, CACIB: You could even have done Eu1.5bn without any problem. The final book was above the Eu2.5bn mark with 170 investors — we had almost everyone in the global investor community in the book. So it was not only for a success for CAA in terms of pricing and funding strategy — on top of that it’s an excellent refresh in terms of acceptance of the signature among investors.

What are your plans for 2017 onwards?

Erphelin, CAA: We are clearly going to be a regular issuer — there is still intra-group funding provided by CASA in CAA’s book that we need to refinance in the coming years. We also would expect strong growth from the insurance group during the Medium Term Plan. However, we cannot yet say anything more precise on our funding plans.

One of the key takeaways from this deal is that we are going to increase the information we provide to the investor community. It was very useful to go and see investors face to face because they all told to us that they want more information and we will go on non-deal roadshows.

The insurance Tier 3 sector was recently opened in Europe — is this of interest to CAA?

Erphelin, CAA: Tier 3 is an instrument that could interest CAA in the future. Back in September when CAA issued, there was still room for Tier 2 and CAA wanted to issue a classic instrument, so Tier 2 was appropriate. But yes, in the future, CAA could consider looking at this kind of instrument. And why not, maybe in the longer future, look at a Tier 1 transaction?