Axa €1bn Tier 2 restarts sub debt, after insurance outperforms

Axa issued the first euro subordinated FIG transaction in four weeks today (Tuesday), a €1bn 20.25 year non-call 10.25 Tier 2 that attracted some €4.6bn of demand and landed at a new issue premium of just 10bp, reflecting both the insurance sector’s attractions and the broader recovery in FIG market sentiment.

The new issue is the first euro sub debt from an insurance company or bank since 7 March, after which the crises of Silicon Valley Bank and Credit Suisse put paid to issuance plans. The French insurer’s deal is also the first subordinated insurance trade in euros since 11 January, when CNP Assurances sold a €500m 30.5 non-call 10.5 sustainable Tier 2 debut.

With a view to managing its call schedule over the coming years, Axa hit the market this morning with initial price thoughts of the mid-swaps plus 295bp area for the 20.25 non-call 10.25 benchmark, expected ratings A2/A- (Moody’s/S&P). The size and spread were then set in one step at €1bn — the issuer’s target size — and 260bp on the back of €3bn of demand, and the order book good at re-offer totalled €4.6bn.

André Bonnal, FI syndicate at joint bookrunner Crédit Agricole CIB, said the lack of insurance supply played in Axa’s favour, in conjunction with an emergent duration bid and the issuer’s strong profile.

“The trade worked out beautifully,” he said. “We had the feeling that the bid for duration would be very strong, given that the market now believes terminal rates are going to be reached sooner rather than later, and these kinds of yields are likely to disappear, so it makes sense for investors to load on duration. That really helped the transaction as well as the scarcity value that has been building alongside modest supply expectations in regards to insurance.

“We had all of the big asset managers that count in insurance sub in the book and could even have fully allocated the transaction with the top six counts alone.”

The leads saw fair value at the mid-swaps plus 250bp area, citing Axa 4.25% 2043 non-call 2032s at 245bp and taking into account the short curve extension. The leads’ fair value calculations were done on an i-spread basis to the reset date rather than the first call date, i.e. putting it at a tighter level than might otherwise have been seen.

“Ultimately, there was a strong consensus that this was going to be a successful and attractive trade even at 260bp,” said Bonnal, “which is just 10bp of new issue premium — quite skinny, if you consider the turmoil we have seen in the market.”

The performance of insurance debt since the failure of SVB and emergency takeover of Credit Suisse had earlier suggested investors were acknowledging the sector’s differences to the banking industry. The iBoxx Insurance Subordinated index, for instance, outperformed the iBoxx Euro Banks Tier 2 index in the wake of the US bank’s collapse, and went on to trade inside its bank counterpart as fears over the Swiss bank mounted (see chart over).

“It makes sense that we’ve seen this outperformance,” said Bonnal. “Just as the EU banking sector was never really in the same situation as the US banking sector, the insurance sector is clearly further away from being in a similar situation.

“The illiquidity of the insurance sector has also played a little bit in favour of insurers,” he added.

Insurance paper could not, however, fully escape the market turmoil, with Tier 2 debt early this week still some 20bp-30bp wider than pre-SVB, while Restricted Tier 1 (RT1) were two to four points lower on a cash basis after a substantial rally since last week, having traded as much as eight to 10 points lower after news of the write-down of Credit Suisse AT1 emerged.

“Clearly the market was hurt,” noted Bonnal, “but similarly to the rest of the financial sector, there hasn’t been any panic-selling; this was a remarking exercise that has now stopped and we are already closing on the pre-SVB levels across the capital structure.”

Insurance differences supportive

The write-down of some $17bn of Credit Suisse Additional Tier 1 (AT1) has nevertheless led to increased scrutiny of not only deeply subordinated bank instruments, but also their insurance counterparts, namely RT1. Investors are keener than ever to understand the fine print of both the structural features of the instrument, and the resolution process issuers would face.

Furthermore, insurance companies are far from immune from the impact of the sharp increases in yields that were at the centre of the failure of Silicon Valley Bank (SVB).

According to Michael Benyaya, co-head of DCM solutions and advisory at Crédit Agricole CIB, the insurance sector offers comfort on all three fronts — rates, RT1, and resolution — even if there are risks that need to be understood.

“Rising interest rates are viewed as a positive for the insurance sector, especially the life insurance sector” he said. “But it’s not 100% positive.”

Life insurance companies are exposed to rising interest rates: on the asset side — e.g. unrealised losses on bonds; in their liabilities — the risk of policyholders trying to redeem policies early, i.e. “lapse” risk; and through derivatives exposures, via margin calls.

“We saw that as of year-end 2022, IFRS equity massively decreased last year due to increasing unrealised losses on bond investments,” said Benyaya, “while Solvency 2 sensitivities show that a further increase in rates versus end-2022 levels would be marginally positive or even negative for some insurance companies. So far, these are just accounting moves; the question is whether insurance companies would have to crystalise these losses and sell such bonds to meet policyholder redemptions.

“But lapse risk is generally very low and manageable — insurance liabilities, including life insurance policies, are not usually very liquid. It’s not that straightforward to redeem early a life insurance policy and there could be penalties attached or a loss in the tax benefit. So the prospect of a bank run-type scenario for insurance companies is still pretty remote.”

Italian life insurer Eurovita was nevertheless placed into extraordinary administration last week after Italian insurance regulator IVASS had in February placed it into temporary administration and suspended redemptions of its savings policies following a high volume of surrender requests. The company had also deferred interest payments on two Tier 2 bonds based on mandatory deferral clauses and its weak financial position.

Fitch said last month that Eurovita’s fate highlights the risks that rapidly rising rates can pose to weaker insurers, but noted that its circumstances are different from those of other life companies, including its compatriots’.

Regarding resolution, a key difference between AT1 and RT1 is that the insurance instruments generally only contain a loss absorption trigger based on solvency requirement ratios (the Solvency Capital Requirement (SCR) and/or Minimum Capital Requirement (MCR)).

“With the exception of the Netherlands, there is no bail-in regime applicable to insurance companies,” said Benyaya, “so there is no statutory loss absorption provision included in RT1 terms and conditions.”

An Insurance Recovery & Resolution Directive (IRRD) akin to the Bank Recovery & Resolution Directive (BRRD) is in the making in the EU, which could be implemented in 2025-2026. This will introduce a bail-in power, amongst other resolution tools, for supervisors, who will hence have the power to impose losses on bondholders in the context of an insurance company resolution.

“However,” noted Benyaya, “this clearly states that any bail-in will be subject to the ‘no creditor worse off’ (NCWO) principle and therefore applied as per the hierarchy of claims — as enshrined also in the BRRD.”

RT1 or Tier 2?

Going forward, the insurance sector could draw support from its limited size and ongoing modest supply expectations. The circa €20bn-equivalent of outstandings in the RT1 sector, for instance, are dwarfed by the circa €250bn AT1 market, and in a first quarter when euro bank issuance has been breaking records, only two subordinated insurance euro deals have been launched before today — a €750m 10 year senior issue from Axa and CNP Assurances’ €500m Tier 2 sustainability debut (joint bookrunner Crédit Agricole CIB), both in the opening fortnight of January.

Less than €15bn of insurance sub debt is coming up for redemption or call this year, but ahead of the market’s recent disruption, a pick-up in RT1 supply had been deemed possible in light of an increase in redemptions and calls in 2024 and 2025, in particular related to legacy perpetual grandfathered Tier 1 debt issued in 2014 and early 2015.

“In an ideal scenario, a few insurers would have been looking to pre-finance these bonds early with RT1,” said Bonnal. “But even if the RT1 market has outperformed AT1, overall levels are wider than a month ago, and issuers might want to wait a bit and potentially see AT1 supply before themselves testing appetite from investors in deeply subordinated bonds.

“The big question is what kind of split are we going to have between Tier 2 and RT1?”

Indeed, Benyaya expects that, with Tier 2 capacity available, a number of insurers could fall back on the less junior instrument for refinancing the legacy Tier 1 rather than seek to raise RT1, but that many will wait before taking a decision.