IFR International - 28.07.2018

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UK life market adapts to new world order

„ STERLING Insurance sector shake-up drives shift in securities landscape

The shake-up in the UK life insurance sector is

driving a fundamental shift in the landscape for

their securities, as emergent players square up

to larger capital requirements just as others start

to dispense with obsolete bonds.

Regulatory change, rising costs and

increasing competition have forced stalwarts

such as Prudential, Standard Life Aberdeen and

Old Mutual to rethink strategies and transform

their operating models, leaving specialist

operators such as ROTHESAY LIFE, PHOENIX,

PENSION INSURANCE CORPORATION and JUST GROUP

to fill that gap.

This will result in a very different line-up

of issuers active in bond markets, while also

triggering a wave of liability management from

long-established borrowers recalibrating their

balance sheets.

“The acquirers - Phoenix, Rothesay, PIC and

Just - are going to need more capital, so will be

more prevalent, while the sellers are having to

restructure their bonds,” said a FIG banker.

There are already plenty of recent examples

that point to coming changes. Phoenix, for

example, raised a £500m Restricted Tier 1

bond in April to help fund its £3.24bn purchase

of Standard Life Assurance. Meanwhile, OLD

MUTUAL, in the middle of a four-way split, has

been reducing its stock of sterling liabilities and

completed a tender only this month.

SWEETENING THE DEAL

PRUDENTIAL is the latest borrower to take aim at

its debt pile. It launched a consent solicitation

last week to avoid a potential event of default

on two senior bonds, which would threaten

its planned demerger to split the British and

European businesses from its international

operations.

The company is taking no chances. The

terms were reviewed prior to launch by a special

committee of the Investment Association (IA),

which holds around 43% of the notes, and the

exercise offers investors an attractive voting fee.

“It would be odd that, for £550m [of debt],

they put the entire [demerger] process in

jeopardy. That’s why I think they had to pay

11 points on one of those bonds,” said Filippo

Alloatti, senior credit analyst at Hermes

Investment Management.

He also pointed to investor anger around

fellow insurer Aviva’s recent proposal to cancel

high-yielding preference shares.

“I think also they want to do the decent thing

in a market that was spooked at the beginning of

the year by the misjudgement of Aviva, and avoid

any association with that,” he said.

MORE TO COME

STANDARD LIFE ABERDEEN (SLA) will be keeping a

close watch on the outcome as it gears up for a

similar exercise to Old Mutual.

Until now, the company has been subject

to the Solvency II European insurance regime.

However, following the sale of its insurance

business it will be supervised on a CRD IV basis

and its estimated capital requirement will drop

to £1bn from £3.7bn.

?It has already outlined plans to retire £800m

of Tier 1 debt through a tender “as soon as

practicable after completion”, expected in the

third quarter.

The exercise should also resolve an awkward

arrangement that will require SLA to post

collateral to Phoenix since the two bonds in

question are guaranteed by Standard Life

Assurance, the entity being offloaded to

Phoenix. It may later attempt to tweak the

characteristics of its Tier 2 debt through an LME

to make those CRD IV-compliant.

In the meantime, SLA needs to decide

whether to adopt the more expensive - but

safer - route of engaging with the IA in the case

of the Tier 1 tender, or to take a more aggressive

approach. It has already attached an estimated

£200m cost to the exercise.

“The expectation would be that we try to

pitch the tender at a level which is fair to the

bondholders and fair to our shareholders so that

we get the result we require,” CFO Bill Rattray

said in May.

RINGING THE CHANGES

Prudential’s forward planning does not stop at

its consent solicitation. It has also introduced an

innovative substitution clause to its £10bn MTN

programme that could help it pre-capitalise

M&G Prudential prior to the demerger.

If activated, the clause would effectively flip

a new issue originally sold out of Prudential plc

into M&G Prudential. That could be an attractive

option for the group, particularly if the credit

market continues to widen in the coming years.

It would also remove some of the uncertainty

surrounding the demerger, which may not

conclude until 2020.

But investors may prove sceptical given the

limited disclosure around M&G Prudential

and the potential change in credit risk, which

Moody’s highlighted in June.

Prudential plc will focus on life insurance and

asset management in the rapidly expanding

markets of Asia and Africa, as well as the United

States - a very different proposition to savings

and investment-focused M&G Prudential.

But while investors would certainly charge a

premium, there should be a clearing level.

“It won’t be everybody’s cup of tea,” said

Hermes’ Alloatti. “There has to be a price for

a substitution clause. But to be fair, you know

more or less what you’re going to get if you end

up in M&G Pru.”

Alice Gledhill