Issuance and repurchases of surplus notes continue apace as insurers seek to take advantage of favorable market conditions to optimize their capital structures.
Farmers Insurance Exchange and Northwestern Mutual Life Insurance Co. priced new issues in recent weeks, with the former company planning to use proceeds to redeem certain outstanding, higher-coupon surplus notes and the latter reportedly allocating proceeds to general corporate purposes. Pacific Life Insurance Co. and an affiliate, meanwhile, initiated a $500 million tender offer to purchase certain securities with priority given to the insurer's highest-coupon surplus notes.
U.S. property and casualty and life and annuity companies issued at least $3.8 billion of surplus notes during the first half of 2017, according to a best-efforts review of quarterly statement disclosures and including notes sold to affiliated and unaffiliated parties. In the subsequent three-and-a-half months, according to preliminary S&P Global Market Intelligence estimates, issuance has approached $1.7 billion, largely reflecting a $400 million Farmers offering and Northwestern Mutual's $1.20 billion deal. Teachers Insurance & Annuity Association of America's $2 billion May issuance remains the largest surplus notes transaction of the year.
Interest on the newly pricing Farmers notes, which will be offered through a Rule 144A private placement, will accrue at a fixed annual rate of just under 4.75% for the first 20 years, then at a floating rate of 323 basis points in excess of the London Interbank Offered Rate, or LIBOR, for the remaining 20 years until maturity.
Farmers said deal proceeds would go toward the early repayment of a 6.15% 10-year surplus note issued to Zurich American Insurance Co. in 2011. It will also use cash on hand to repay the outstanding surplus note, which had a principal balance of $707 million as of June 30. Zurich American's parent owns Farmers Group Inc., the attorney-in-fact for the Farmers exchanges.
Farmers had just over $2 billion in carrying value of surplus notes outstanding as of year-end 2016, including the 6.15% note. All but the $707 million associated with those notes had been issued to qualified institutional buyers. Certain of the higher-coupon notes that Farmers issued in 1998 may not be redeemed until their scheduled maturities.
It has been three years since Farmers last issued surplus notes. Its $399 million October 2014 issue matures in 2054 and carries an interest rate of just over 5.45%.
Northwestern Mutual's offering represents only the second time in the company's 159-year history in which it issued surplus notes. The company's first such transaction occurred in 2010 when it issued $1.75 billion of 6.06% surplus notes due 2040 to qualified institutional buyers, a coupon that an executive had been quoted at the time as describing as "pretty darn good" for a 30-year instrument.
The coupon on the September issue was far better at only 3.85%, the lowest such rate associated with any U.S. life insurer's issuance of $100 million or more in surplus notes since at least the start of 2013, according to a best-efforts review of annual and quarterly statement data. Proceeds from the deal, according to S&P Global Ratings, are expected to be earmarked for general corporate purposes.
Assuming Northwestern Mutual holds onto the proceeds, the company stands to rank second only to TIAA in terms of the aggregate amount of surplus notes on its statutory balance sheet as of Sept. 30 among U.S. life groups. TIAA had $5.04 billion in surplus notes as of June 30, including the large second-quarter deal, followed by the group led by Massachusetts Mutual Life Insurance Co. with $2.27 billion.
Farmers and its affiliates and subsidiaries led the U.S. P&C industry with $2.48 billion in surplus notes as of June 30, with the group led by Nationwide Mutual Insurance Co. ranking second with $2.20 billion. The Nationwide Mutual life group has another $700 million in surplus notes.
The Pacific Mutual Holding Co. group ranked fifth in surplus notes among U.S. life groups as of June 30 with nearly $1.72 billion outstanding. The company's recently launched tender offer pledges a fixed spread on a sliding scale over certain U.S. Treasury reference securities for its outstanding 7.90% surplus notes due 2023, 9.25% surplus notes due 2039, 6.00% senior notes due 2020, 6.60% senior notes due 2033 and 5.13% senior notes due 2043. Approximately $621 million of the principal amount of the 9.25% surplus notes are outstanding, the company said.
Pacific Life issued the two series of surplus notes in December 1993 and June 2009.