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V. Capital Markets
aggregate in January and July. The proceeds of the $2.5 billion in senior notes sold in July, along with cash at the holding company, were used to purchase 11 series of senior notes and junior subordinated debentures of AIG Life Holdings, Inc., a wholly owned subsidiary of AIG, and 12 series of senior notes of AIG.
In May, Prudential Financial, Inc. (“PFI”) issued another series of fixed-to-floating rate junior subordinated debentures with an aggregate principal amount of $1.0 billion, which were structured with a similar regulatory capital call feature to the multiple series of junior subordinated debentures issued by PFI in the second half of 2013 and the start of 2014.
MetLife issued four series of senior notes during the year totaling $2.75 billion ($1.5 billion in March and a further $1.25 billion in November) in order to repay two series of existing senior notes upon their maturities.
There were a number of other debt issuances during the 32 year, including by Marsh & McLennan ($1.1 billion), Aflac ($1.0 billion), Aon plc ($1.0 billion), Principal ($800 million), Progressive ($400 million), Travelers ($400 million), Radian ($350 million), RenaissanceRe ($300 million), Unum
($275 million) and Third Point Re ($115 million).
D. Funding Agreement-Backed Notes
Funding agreement-backed notes are designed to generate regular cash flows to service the debt on short- or medium- term notes issued through a securitization vehicle, and transfer credit quality of a policyholder claim at the insurance company to the notes of that vehicle.
In 2015, the market for funding agreement-backed notes continued to recover steadily following the financial crisis. The year saw Protective Life Insurance Company (“Protective”), following its acquisition by The Dai-ichi Life Insurance Company, Limited, re-enter the market. In October Protective formed Protective Life Global Funding and conducted its first issuance the following month. This return came soon after Protective agreed in September to acquire certain in-force blocks of term life insurance from Genworth Life and Annuity Insurance Company through a reinsurance transaction.
The market once again was led by MetLife and New York Life Insurance Company (“New York Life”), but witnessed increased issuances from Principal Financial, Jackson National, MassMutual, Prudential, AIG, Protective and Reliance Standard. MetLife has been the leading issuer of funding agreements in each of the last seven years, with New York Life the next largest. Yet again issuances were dominated in a strong mix of domestic and foreign currencies (Euro, Sterling, Japanese Yen and Norwegian Krone and Canadian Dollar).
Capacity may now exist for additional issuances based on stronger balance sheet positions, a reduction in operating leverage and a strengthening of statutory capital.
E. Solvency II Impact on Subordinated Notes and Preference Shares of Insurance Groups
In 2015 insurers across Europe accelerated sales of perpetual subordinated debt ahead of the implementation of Solvency II, driven by the possibility of grandfathering perpetual subordinated debt as Tier 1 capital. While perpetual subordinated debt provides better protection to policyholders than other types of debt and costs less to issue, it is not as high quality as equity under rating agency and regulatory capital models. With Solvency II going into effect on January 1, 2016, perpetual debt will now need particular loss-absorbing features to qualify as Tier 1 capital (for example, default events will not be triggered where interest or redemption payments are declined by the regulator); otherwise it will be considered Tier 2 capital. These features make perpetual debt more expensive capital for insurers.
As a result of grandfathering concessions designed to help insurance companies transition to the new capital structure, some older forms of debt could nonetheless count as Tier 1 capital for a decade in many E.U. jurisdictions, as long as the funds were raised by particular dates in 2015. The U.K. Prudential Regulation Authority did, however, warn insurance groups that it expected to anticipate the enhanced quality of capital that will be needed when issuing or amending capital instruments, and that it would object to insurers issuing regulatory capital instruments in 2015 that were deliberately structured to meet the letter but not the spirit of the new criteria coming into effect in 2016 under Solvency II.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review