AMP Limited (ASX: AMP) is looking to raise fresh capital through the launch on a subordinated notes offer to be used to boost Tier 2 Capital at the insurer.
Investors are being offered a minimum subscription of $5,000 worth of notes with the aim of raising around $200 million with the lure of a margin between 2.65% and 2.85% above the market rate.
The debt raising by AMP comes in the wake of the company's October warning that it faced a reduction of $55 million to $65 million in its fourth quarter operating results due to issues within its Australian Wealth Protection business. And also as AMP advises that "further changes in assumptions across the life insurance portfolio are likely at 31 December 2013 which could lead to adjustments to the embedded value of the business."
According to AMP's Chief Financial Officer Mr Colin Storrie, "the funds raised will optimise the efficiency of AMP's balance sheet while increasing the company's flexibility to meet general funding requirements and support the refinancing of subordinated debt of AMP group."
Adequate capital backing is an essential feature for financial institutions such as banks, insurers, credit unions and building societies. Given how essential a strong balance sheet is, financial institutions are watched over closely by the Australian Prudential Regulation Authority (APRA).
Despite the complex nature of much of the financing it is an important consideration for investors analysing a potential investment within the sector. QBE Insurance (ASX: QBE) just this month announced the tender and redemption of US$317 million of outstanding senior convertible securities as part of its ongoing capital management program. Up to A$240 million of this tender may be provided for by the issue of QBE shares which will effectively strengthen its capital backing, however it will also dilute shareholders.
Ratings agencies also play an important part when it comes to financial institutions as the rating they ascribe affects the cost of debt. In May S&P affirmed Insurance Australia Group's (ASX: IAG) 'AA-' rating in respect of IAG's core operating subsidiaries, which is important for allowing IAG to access reasonably priced debt.
Investing in the right insurer, at the right time can certainly be profitable – just ask Warren Buffett. However investing in the wrong insurer or at the wrong time can certainly be hazardous to an investor's portfolio. As such, investing in the sector should be approached with care and significant due diligence.