Spotlight: Insurance Bonds are getting greener
Dear Investors
Slowly the insurance sector is getting greener and over the course of the last twelve months, we saw insurers following investor demand for green bonds. Up to now, four green bonds have been issued by Generali (2), CNP and Uniqa totalling to EUR 2.2bn (please see attachment 1).
While it is too early to identify any clear trends considering that there are only four green bonds outstanding with one of them being a very small new issue, there are still some take-aways for bondholders:
Structures
So far, all green bonds were classified as T2 for Solvency II purposes, but there is no generally preferred structure for green bonds. Generali continued with the bullet structures which it introduced after the issuer withdrew its S&P rating a few years ago, this time as part of a Liability Management Exercise. CNP issued a 30NC10 in line with most of its outstanding bonds. Uniqa’s green bond was driven by an acquisition and followed the trend towards shorter maturities although its 15NC5 structure looks somewhat unusual to us. T3 or senior green bonds are potential options for new issues, but are much smaller classes of insurance debt. It is less likely that insurers will issue green rT1 paper given its mandatory write-down or conversion language.
All three issuers have published green bond frameworks and will also disclose annual green bond reports. CNP was the first to publish a 25-page Green Bond Report for the FY19. The report covers only a short time-span between November 2019 when the green bond came to the market and YE19. Still, 50% of total proceeds of EUR750m were already invested in green mostly real assets by the end of 2019. Generali will publish a green bond report around one year after the issue date of their inaugural bond covering a 12 months period which Generali considers best market practice. Uniqa will publish a similar report but has yet to indicate a date.
Valuations
All three green bond issuers have in common that their outstanding traditional subordinated debt tends to trade at a discount to other, similarly rated insurers. The green bond issues offered them the opportunity to attract the attention of new investor groups in order to issue at tighter levels. On average, the new green bonds trade 25bp tighter than outstanding traditional paper with similar maturities reducing debt cost materially.
In the first couple of months after the new issue, Generali’s ASSGEN 2.124% 2030 bullet has continued to outperform traditional paper. The new ASSGEN 2.429% 2031 bullet initially traded around 20bp wider than Generali’s first green bond which is partly a curve effect but also due to a new issue premium that has yet to be realised.
CNP’s green bond has slightly underperformed other CNP paper but still trades around 25bp inside the newly issued 30NC10 lowering debt cost. Uniqa’s green bond, however, was issued at par with the outstanding EUR500m UQA 6% 46-26 which has a slightly later first call date and a final maturity 10 years after the green bond. This looks still pretty cheap to us given the shorter duration as the market usually prices too much for extension risk of insurers. But as the size of the new issue is with EUR200m relatively small and Uniqa is by far not a household name like Generali or CNP, the pricing of the new issue somewhat trailed the other green bonds. The market has apparently understood this very quickly and realised the new issue premium. In our view, the new relatively short-dated Uniqa green bond is also just an interim step to issue larger sizes going forward. Uniqa will now most likely call EUR350m of T2 paper in 2023, before the new issue will be up for call in 2025 followed by another EUR500m in 2026. I.e. we can possibly expect benchmark size issues by UQA in 2023-2026, at least partly in the form of green bonds.
Significant growth potential
Will other insurers follow the examples of Generali, CNP and Uniqa? We consider this as likely in light of increasing investor interest. In 2019 and 2020 to date, only around 5% of new issues by insurers were “green” (please see attachment 2).
About half of the bond volume issued by the three issuers was classified as green. This translates into a maximum potential green bond supply of around EUR12bn p.a. based on average new issue activity over the recent years. Assuming that insurers from southern Europe and insurers which are less capitalised than peers will be the predominant issuers of green bonds, we expect a new issue potential of around EUR4-6bn p.a. on average. We note that increasing public pressure, regulatory incentives and changing classification criteria could have a significant impact on supply of green bonds in the insurance sector but overall, significant growth can be expected in this segment of the market.
Best regards
Your Plenum-Team
Appendix
A1. Asset Swap Spread differentials to ASSGEN 2.124% 2030 bullet T2 (please see attachment 3)
A2. Asset Swap Spread differentials to ASSGEN 2.429% 2031 bullet T2 (please see attachment 4)
B1. ASW Spread differentials to CNPFP 2.0% 50-30 T2 (please see attachment 5)
B2. ASW Spread differentials to UQA 3.25% 35-25 T2 (please see attachement 6)
