Zurich in senior record, insurers set to get funky

Zurich Insurance issued the longest ever senior bond from a European insurance company on 11 June, a EUR500m 20 year deal launched on the back of investors’ search for yield, whose impact was also felt in insurers’ subordinated activity.

In the second quarter the insurance sector was caught up in the wider euro credit market’s one-way move, as yields hit record lows and spreads compressed back towards levels seen during the European Central Bank’s asset purchase programme (APP). The tighter levels and conducive market conditions attracted issuers such as ASR Nederland and Sampo into the subordinated market in April and May, respectively.

“Whether it be seniors, Tier 2 or RT1, we have seen a substantial performance in this market,” said André Bonnal, FI syndicate at Crédit Agricole CIB. “That has provided a very nice entry point for some of the smaller insurance companies to do modestly-sized transactions, which have gone very well and been eight to ten times oversubscribed.

“They could have taken the view that the market might be even tighter in a couple of months,” he added, “but they were quite pragmatic and got their trades done very nicely.”

ASR Nederland attracted some EUR5.25bn of orders to a EUR500m 30 non-call 10 Tier 2 on 25 April, enabling it to tighten pricing from the 330bp over mid-swaps area to 300bp, allowing it to come some 5bp through fair value. Finland’s Sampo was able to tighten pricing 45bp when it sold its EUR500m 30 non-call 10 Tier 2 on 16 May, with a EUR4.4bn book allowing it to move from the 350bp area to 305bp, also 5bp inside fair value.

Going into 2019, market participants had suggested that significant supply this year could be dependent on M&A activity, and indeed in the absence of any blockbuster deals, no landmark subordinated issuance materialised in the second quarter.

However, the market dynamics allowed Zurich Insurance to set a maturity milestone in the senior space, as it sold the longest ever issue from a European insurer.

“We are clearly in a market where you have investors looking for yield, looking for spread, and one way to grab that is by going longer duration,” said Bonnal at joint bookrunner Crédit Agricole CIB. “We’d had regular proof that the 20 year tenor was quite feasible on the corporate side, where quite frankly you could do a 20 or 30 year bond every other day, but it had not been done on the insurance side.”

On the morning of 11 June, initial price thoughts of the 105bp area were announced for the EUR500m no-grow 20 year senior unsecured transaction issued by Zurich Finance (Ireland) DAC, guaranteed by Zurich Insurance Company Ltd. Demand passed the EUR1bn mark after an hour and three-quarters, and with orders above EUR1.6bn after close to three hours, guidance was set at 85bp-90bp. The deal was ultimately priced at 85bp on the back of some EUR1.7bn of orders, pre-reconciliation, putting it flat to 2bp through fair value.

Bonnal noted that whereas the corporates issuing 20 year paper were doing so into a strong insurance bid, Zurich could not rely on its peers and competitors to such an extent. Insurance companies were allocated 24% of its 20 year, with fund managers taking 66%, banks 5%, and others 5%.

“The fact that Zurich was still able to get such a hefty book just illustrated the strength of the market,” he said, “and how difficult it was for investors to pass on this trade given where they expect yields and spreads to go.”

Such dynamics also helped UMG Groupe Vyv to a successful bond market debut on 24 June, when the French mutual attracted EUR1.4bn of orders to a EUR500m 10 year senior trade. The French issuer was able to tighten pricing from the 175bp over mid-swaps area to 150bp.

“If you are French, you know about this group, but otherwise they were pretty much unknown,” said Bonnal (pictured). “The fact that they had a book of close to EUR1.5bn while opting for a 10 year for their inaugural shows investors are targeting spread and yield, and willing to go longer on duration.”

Chubb was another insurer to take advantage of the demand for duration, when it on 13 June included a 12 year tranche alongside an eight year in a EUR1.15bn senior transaction, after having tapped the 20 year maturity alongside 11 years in 2018.

The US firm’s deal was also continued a trend of reverse Yankees, coming after a EUR500m 40 non-call five Tier 2 trade for Liberty Mutual on 16 May and senior trades from MetLife and Blackstone in April.

“The cross-currency basis has been moving in favour of euros for some time and it became a lot more interesting for these American insurers to look at the euro market,” said Bonnal. “Even if they had to pay a bit of a premium over their US curves on an after-swap basis, whereas we were previously talking about a 30bp-40bp differential, more recently in some cases it was in the context of 20bp.

“Clearly those issuers were quite keen to come to the euro market, get investor diversification, and still enjoy very conducive market conditions — as we have also seen with US banks.”

The RT1 sector was lifted by the credit market rally, such that in euros all outstanding issues were for the first time trading above par. However, the only new supply was in sterling, where Pension Insurance Corporation on 18 July sold a £450m (EUR500m) perpetual non-call 10 issue at a yield of 7.375%, following a roadshow for the BBB- deal. The pricing came following IPTs of the 7.625% area and on the back of some £1.2bn of demand good at re-offer.

“We believe the relative value looks extremely attractive for such a highly rated issuer,” said a portfolio manager, “particularly in a world where yield is a scarce commodity.”

The sterling market also saw an innovative Tier 2 structure from Prudential, which on 4 July sold a £300m 30 year non-call five issue with a 100bp coupon step-up in year 10. The A3/BBB/BBB transaction was more than 10 times oversubscribed, allowing pricing to be tightened from IPTs of the 410bp over Gilts area to 350bp over.

While Prudential’s deal was structured with Moody’s hybrid equity credit in mind, changes to S&P Global’s methodology (see S&P Q&A) could lead to further innovation, according to Bonnal.

“The main takeaway from the new S&P methodology is the change in residual maturity to qualify for equity credit,” he said. “Technically, you don’t need to do 30 non-call 10 anymore – you can do 20 non-call 10 – but you still need the 20 year minimum residual maturity for Moody’s. If you have both Moody’s and S&P ratings, you might have to weigh the pros and cons, not least in terms of pricing.

“We could see a new array of structures resulting from this S&P change, and that would continue the diversification we’ve already seen this year, with the likes of CNP going with a 10 year bullet back in January and Prudential’s recent trade, as insurers really seek to optimise their capital buffers and save some basis points in doing so.”