Resolution last month issued the largest Tier 1 deal ever from a UK insurance company, highly impressive for a debut name, but it is the distinctive nature of Resolution’s business model that sets it apart from other insurance capital transactions.
JPMorgan and Lehman Brothers structured the deal and jointly acted as bookrunners alongside RBS. “The £500 million proceeds will be used to refinance loans taken on for the Royal Sun Alliance Life and Swiss Life UK acquisitions made by Resolution Life Group last year,” says Tom Keatinge, head of insurance DCM at JPMorgan.
“Resolution is a new animal, a genuinely unique idea,” says Keatinge. Resolution operates almost like a workout firm. It goes around buying up all closed life insurance funds from forced sellers in the UK. Cashflows to service bond coupons and principal payments will only be forthcoming if the company manages to extract value from the closed life business it has purchased.
“These businesses do throw off pretty material cashflows over time,” says Eamonn Price, head of European debt capital markets at Lehman Brothers.
According to the FSA, there is around £160 billion worth of assets under management backing closed life businesses. There are also a number of funds that are dormant. Including these points to a potential £400 billion of assets that could be sold.
Insurance capital issuance has picked up dramatically over the past year triggered by change in the UK regulatory environment. The forthcoming implementation of a hard Insurance Groups’ Directive test will significantly reduce the ability of insurance companies to raise senior debt at the holding company level and downstream it to the operating company as capital.
Consequently, it makes more sense for them to issue subordinated debt from their operating companies.
“Resolution had senior debt on its books that it wanted to replace with regulatory qualifying capital,” Price says.
The sterling bond market was in good shape and demanded a relatively small new issue and asset class premium of around 20–25bp.
The BBB–/BBB rated (S&P/Fitch) deal priced at gilts plus 208bp or 173bp over Libor to the 10-year call.