Aviva Singlife Holdings Pte. Ltd. (ASH) has launched a dated callable subordinated note at Initial Price Guidance of 3.75% callable in 5.25 years and maturing in 10.25 years. The Tier 2 capital security will be callable at par in whole at (i) the first call date and (ii) any interest payment date thereafter, or (iii) on the occurrence of a change of qualification event or tax event. The new bond is rated Baa3 by Moody’s and BBB- by Fitch, both investment grade. Net proceeds will be used for funding the merger of Aviva Singapore Ltd and Singapore Life Pte. Ltd. into the proposed Aviva Singlife.
The Issuer
The bond issuer, ASH, is the holding company of Aviva Ltd. and Singapore Life Pte. Ltd. post the merger of the two entities. As of 30 June 2020, total assets and shareholders’ equity of Aviva Ltd. registered SGD11.5 billion and SGD663 million, respectively. On the other hand, the total assets and shareholders’ equity of Singapore Life Pte. Ltd. were $521 million and $114 million, respectively. ASH is 34.6% owned by TPG, 24.9% by Aviva UK, 14.9% by Sumitomo Life, and 25.6% by existing shareholders of Singlife.
The Bond
The new bond is rated Baa3 by Moody’s and BBB- by Fitch, both investment grade and one notch above junk. These are lower ratings than the Baa2 and BBB+ issuer ratings by the respective rating agencies, reflecting the subordination of the bond to senior bonds.
Group Operations
Aviva Singapore has a diversified new business mix with term, critical illness, disability and savings accounted for most of the value of new business (VNB) generated for H1 2020. Aviva Singapore accounted for over 90% of total assets (prior to new capital injections) and net premiums written of the combined group (Aviva Singlife) as of the end of 2019, and will be the key profit contributor to ASH in the near term.
Aviva relies strongly on financial advisory and group or affinity distribution channels. These channels constituted about 74% and 15%, respectively, of Aviva Ltd.’s operations on a standalone basis, in accordance with 2019 annual premium equivalent.
Singlife has a differentiated brand and strong digital capabilities as the first Singapore digital-only insurer established in 2017. Singlife increased its exposure to universal life policies through the launch of Singlife Account, which carries relatively higher interest rate risk and capital charges than other traditional insurance products, although the insurer plans to reduce the crediting rate to alleviate capital consumption.
On 11 September, Singlife announced it will merge with Aviva Singapore and the integration of the two entities expected to be completed over the next 6 to 12 months. Benefits from the merger will be a high degree of management integration and capital fungibility post-merger. Fitch estimates the consolidated operation had a market share of around 7% by total premiums written in 2019, and rank as the sixth largest life insurer in Singapore.
Credit View
Positives
+ Stable outlook. Management expects the company’s consolidated financial performance to gradually improve with operational and business synergies. Fitch expects the consolidated operation to maintain a strong capital buffer as a cushion against any unexpected shocks and claims arising from the coronavirus pandemic. Moody’s expects the company to remain well capitalized post-merger, supported by new capital injections from its shareholders to finance the merger.
+ Good asset quality. The combined group’s asset quality is good as most of its risky asset exposure, mainly comprising equities and investment properties, serves to back participating funds in which investment risk can be shared with policyholders. The insurer has very limited risky asset exposure in its non-participating fund and shareholders’ fund.
Negatives
– Increase in interest expenses and amortization expenses of intangible assets, arising from value of business acquired at the merger, could result in a higher breakeven point and thus lead to higher accounting earnings volatility in the next two to three years.
– Relatively high pro forma financial leverage at around 30%-35% and low earnings coverage, respectively, as of 2019 on a proforma basis, as a result of the proposed debt issuances to finance the merger. Solid solvency ratio – Aviva Singapore ample dividend capacity to support the debt servicing at the holding company level.
– Structural subordination of Tier 2 security. Creditors of ASH are subordinated to policyholders of Aviva Singapore and Singlife. ASH will be designated by Monetary Authority of Singapore (MAS) as a financial holding company and MAS’ supervision over ASH and its subsidiaries will include capital requirements, risk policies and reporting, corporate governance and key management appointments.
Source:
- Fitch Assigns Aviva Singlife Holdings ‘BBB+’ IDR, Rates Subordinated Securities ‘BBB-‘ – https://www.fitchratings.com/research/insurance/fitch-assigns-aviva-singlife-holdings-bbb-idr-rates-subordinated-securities-bbb-12-11-2020
- Moody’s assigns A3 IFSRs to Aviva Singapore and Singlife and Baa3 rating to the holdco’s proposed subordinated notes – https://www.moodys.com/research/Moodys-assigns-A3-IFSRs-to-Aviva-Singapore-and-Singlife-and–PR_1000003727
