Competition is tough, but insurers trying to raise capital can still find partners
There has been a surge in corporate bond issues in recent weeks, with hundreds of millions of pounds raised by companies. Investors have been flocking to mop up the supply of new bond issues by blue-chip companies, such as National Grid and Eon, attracted by the high returns that can now be achieved.
The success of companies in issuing bonds – albeit at a very high price – prompted Baroness Vadera, the business minister, to make her controversial comments about seeing “a few green shoots” of recovery in the economy.
The reason for the uptake is that the interest paid on bonds is now considerably higher than before the credit crunch and is much more favourable than government bond yields, which have been directly affected by the low rates.
Using the bond market to raise capital is not seen as an appropriate route for insurers, however. Bankers say concerns over the strength of insurance company balance sheets would dissuade investors from buying insurers’ corporate bonds. Investors can also get similar returns from bank bonds protected by the government’s guarantee scheme, which guards against the risk of default.
For listed insurance companies, the stock market is seen as the easiest route to raise additional capital. In recent weeks, Lloyd’s insurers Chaucer, Beazley and Catlin have announced plans to raise money through share issues. Omega unveiled an equity fundraising last year.
The challenge for insurers is that they are competing with many other cash-strapped businesses that are looking to tap investors for funds. The insurance industry’s advantage is that it has a good story to tell at the moment. Premiums rates are hardening in some lines of business and, as a result, the industry looks set to perform better than other sectors.
Nonetheless, insurers’ balance sheets have taken a battering from investment losses and high claims. The challenge is to pitch the share issue as a means of taking advantage of a business opportunity rather than an emergency measure to stave off a rating downgrade.
The reaction to the equity fundraising at Lloyd’s has been mixed. Only 60% of Chaucer’s open share placing was taken up by shareholders. Catlin’s fundraising move was expected by the market and analysts have been broadly supportive, although the rights issue was heavily discounted. Beazley’s capital raising was more of a surprise. Omega has closed its £130m placing.
There are other mechanisms for insurers looking to raise capital. Swiss Re has already turned to Warren Buffett for a CHF3bn (£1.8bn) cash injection using a perpetual note, paying 12% interest and allowing him to raise his stake in the business at an attractive price.
Insurers could also look to special purpose vehicles to raise capital quickly. Last December capital-rich Amlin launched a special purpose syndicate, raising £50m in third-party capital for a new syndicate to provide additional reinsurance cover.
Capital can also be freed up using a quota share arrangement with a reinsurer. Chaucer was reported to be considering this option before it announced its equity fundraising. The popularity of qualifying quote share arrangements at Lloyd’s has diminished in recent years after Lloyd’s reduced their use to 10% of capacity; they are also expensive to undertake.
michael.faulkner@instimes.co.uk
Key points
• Companies are raising money on the bond markets, but this route not suited to insurers
• The equity markets will be the most appropriate route for listed insurers to raise capital
• But competition for investors' money will be fierce
• Equity fundraising by Lloyd's insurers has been well received
• Other options include quota share reinsurance structures and special purpose vehicles
