TheChek News Flow

Deal for data-management software firm would have ranked among Salesforce’s largest

Talks between Salesforce CRM -0.57%decrease; red down pointing triangle and data-management software firm Informatica have fizzled after the companies couldn’t agree on terms, according to people familiar with the matter.

The Wall Street Journal reported earlier this month that Salesforce was discussing a deal to buy Redwood City, Calif.-based Informatica, which could have been valued in the neighborhood of $10 billion. It would have ranked among Salesforce’s largest acquisitions.

After the April 12 report, Salesforce shares traded sharply lower. Salesforce stock fell 7.3% the first trading day after the story ran, erasing more market value than the deal would likely have been worth. Salesforce has a market capitalization of about $262 billion.

Shares of Informatica also fell sharply, down more than 6.5% that day. Informatica stock had climbed 43% year-to-date, racing ahead of the price Salesforce had been planning to pay.

Salesforce had been discussing a price for Informatica in the mid-$30s a share, about where the stock closed Friday. At the time of the report, it had been trading at $38.48.

Salesforce, which has historically had a voracious appetite for deals, had already been on a tight leash after a shareholder rebellion over its acquisition strategy, among other things.

A swarm of at least five activist investors descended on the company this past year. To appease the activists, Salesforce disbanded a committee focused on M&A and shifted its focus toward improving profitability.

San Francisco-based Salesforce specializes in cloud-based software that helps sales staff manage customer relationships.

Informatica helps companies manage their data across cloud and on-premise systems, allowing organizations to better analyze the data they collect. It counts companies ranging from Unilever to Toyota and Deloitte as customers.

Private-equity firm Permira and the Canadian Pension Plan Investment Board in 2015 took Informatica private in a transaction valued at $5.3 billion after roughly 15 years as a public company. The business went public again in 2021.

A deal for Informatica would have ranked as Salesforce’s biggest since it closed the roughly $28 billion acquisition of workplace-collaboration products company Slack Technologies in 2021. (That was Salesforce’s biggest acquisition ever.)

Dealmaking in the U.S. is off to a stronger start this year, but there are still factors keeping buyers on the sidelines. Stubborn inflation pressures persisted in March, derailing the case for the Federal Reserve to begin reducing interest rates soon. It is also an election year, giving some buyers pause to pursue big transactions.

Exits for private-equity firms are also harder to come by, at a time when investors in investment firms are increasingly asking for money back.

Legislate in haste; repent at leisure

Revising the rules of the sovereign-debt restructuring game isn’t simple. For example, adding “collective action clauses” to sovereign bond contracts to deter holdout creditors was a 20-year process.

The idea was first proposed after Mexico’s 1994 Crisis, an initial form was adopted in 2003 after Argentina’s 2001 default on almost $100bn in bonds, and adequately powerful clauses were only adopted in 2014, in the wake of Argentina’s messy litigation in the New York courts and Europe’s debt crisis.

Yet New York is in a rush to do something radical in just a few months. That could cause serious trouble for the sovereign debt market.

Here’s what’s going on: Last year, three groups of senators and assembly members proposed competing laws to favour sovereign debtors over their creditors. The drive for a law was initiated by social activists and legislators angered by Puerto Rico’s debt problems, but broadened and gained energy when Washington-based Jubilee activists joined the effort.

Capturing the mood in Albany, New York State Senate finance chair Liz Krueger said at a recent press conference that:

The stated rationale for the three laws are that poor countries are too weak to negotiate for themselves against sophisticated investors, and aggressive hedge funds take advantage of poor countries in New York courts. The draft bills, however, are a grab bag of ideas, rather than a coherent, well-calibrated solution to the stated problems.

The first bill would add a bankruptcy-like debt-adjustment mechanism to sovereign debt issued under New York law. The second would cap the judgments available to creditors at a level established by bilateral lenders in corresponding international debt negotiations. A hedge fund owning a New York law bond, for example, would not be able to obtain a court judgment exceeding the value the U.S. had accepted in exchange for its defaulted loans in a Paris Club negotiation.

The third bill would restore to New York State law the champerty defence for sovereign defaulters, which the legislature removed for claims of more than $500,000 in 2004. With the reinstatement of this provision, court judgments would be blocked on debt found to have been purchased with the “intent and purpose” to sue.

Top law firms question the legal soundness of the first bill, the proposed sovereign bankruptcy mechanism under New York law. Under the US Constitution, bankruptcy laws are to be enacted only by the US Congress, and only federal courts handle bankruptcy cases. The proposed law, however, would have the governor of New York appoint a “monitor” for the restructuring of sovereign debt, allow the debtor country to “petition the state for relief,” and would allow the country to file a “plan” with New York State to adjust its debt.

Furthermore, this ambitious scheme lacks detail, not even identifying a specific court to adjudicate disputes, even though disputes will inevitably arise on day one. While purporting to add a collective voting mechanism to New York law, nowhere in the law or in supporting materials is there any discussion how the new mechanism would work alongside collective action clauses that are now already included in most sovereign bonds.  

The second bill, which caps judgments to private creditors, is also poorly designed. For one, its scope is too wide: It applies to all borrowers, while a similar law passed in the UK in 2010 applied only to countries with a GDP per capita of about $1,500. Second, it’s open for abuse, as it would allow the US Treasury to dictate the cap applicable to private creditors even when bilateral creditors lack skin in the game. The Treasury could, for example, dictate terms even when private creditors have provided 98 per cent of the relevant debt and bilateral creditors only 2 per cent.

The third bill is less threatening as champerty has long been part of New York State law and its effect is known. The need for a law, in part, is because an exception was carved into the law in 2004 to protect holders of claims larger than $500,000, which was to the benefit of investors intending to hold out from sovereign debt restructurings. The proposed bill would remove this exception with respect to sovereign debt claims. That champerty works against litigious investors was proved in 1998, when Peru successfully used a champerty defence against Elliott Associates in the district court, although it was reversed on appeal.

Still, the wording of the bill as it currently stands could catch conventional investors. To work without disrupting the market it would need to provide an unambiguous ‘safe harbour’ provision so that it would apply only to investors that make a business of suing, and exempt regular buy-and-hold investors and distressed debt investors with a record of co-operating with sovereign debt restructurings.

Creditors and legal experts are gobsmacked that legislative leaders have lined up behind an amalgamation of the first two bills, the ones with the biggest problems, with activists and legislators announcing at a March 13 press conference their intention to pass the merged law by June.

Creditors are livid that the feedback they provided over the past year has seemingly been completely ignored. They contend that the draft law would raise the cost of finance for poor countries, and they’ve threatened to move the sovereign debt market to Texas, Delaware, or some other jurisdiction that won’t try to change the laws without consultations.

Moving for a vote with badly drafted bills and the market in an uproar would be a regrettable mistake. What’s needed is an open conversation and sufficient time for the legislature to draft a workable bill. The next step should be for the New York State Senate finance committee to announce hearings on the proposed laws. Proponents, opponents, the IMF, and the US Treasury should be invited to testify, as should finance ministers of developing countries, who do not appear to have been consulted on any of the draft bills.

While holding hearings might push enactment past June, they are a necessary step if the legislature wants to enact a bill supported by debtors and creditors in the sovereign debt market. Importantly, compromise is possible: Most investors do not like aggressive holdout investors because they disrupt the market, which is why investors accepted powerful holdout-stymieing CACs in 2014. If it changes course, New York legislators could succeed in carrying out a successful reform.

New York lawmakers, however, need to keep in mind that even the final enhancement of CACs in 2014 took the US Treasury two years to achieve. But a decade later, those two years look short. Today around 80 per cent of all sovereign bonds include these new clauses, and two significant 2020 debt restructurings — for Argentina and Ecuador — used the new clauses. This reform was a massive success, and the new clauses were accepted by the market at no incremental cost to sovereign borrowers.

But this result was not a matter of luck or good timing; it was instead the result of careful analysis and lengthy worldwide consultations with sovereign debtors and creditors. New York State lawmakers should learn from this experience and slow down, invite discussion, and design a new, more carefully calibrated law.

Shoe giant stumbled as CEO John Donahoe pulled away from retailers and relied on old hits. Now it says it’s refocusing on cutting-edge footwear for athletes.

In late February, Nike NKE -1.26%decrease; red down pointing triangle boss John Donahoe led a virtual all-hands meeting where he delivered a message to his staff: The company wasn’t performing at its best and he held himself accountable.

Two weeks earlier, Nike had announced it would lay off more than 1,600 employees.

Now, as the CEO spoke at the meeting, critical comments started to fill the chat window on the Zoom call while more than 20,000 employees watched.

“Accountability: I do not think that word means what you think it means,” an employee wrote. “If this is cost cutting, how about a CEO salary cut?” another wrote. Soon a cascade of laughing emojis filled the screen.

Some colleagues warned others that their posts weren’t anonymous and the chat might be monitored. The attacks went on for several minutes. “I hope Phil is watching and reading this,” an employee wrote, referencing the retired Nike co-founder Phil Knight.

The virtual protest illustrated the depths of the dissatisfaction within the sneaker giant and concern for its strategy. “How did we actually get here?” wrote one product manager.

Since the pandemic, Nike has lost ground in its critical running category while it focused on pumping out old hits and preparing for an e-commerce revolution that never came. The moves, current and former employees say, have eroded a culture of innovation and edginess that made Nike one of the world’s best-known brands.

Donahoe had told The Wall Street Journal in 2020 that his No. 1 priority when taking over the company was “don’t screw it up.” Four years later, the company is unwinding key elements of the CEO’s strategy that have backfired as a growing number of upstarts nip at its heels.

Among the reversals: As Covid raged and more shopping moved online, Nike cut ties with longtime retail partners such as DSW and Urban Outfitters and tried selling more merchandise directly to consumers. It is now asking some of those stores for help clearing out its overstuffed shelves and warehouses.

“I would say we got some things right and some things wrong,” Donahoe said Thursday, in an interview at Nike’s Beaverton, Ore., headquarters.

Losing its roots

The strategic missteps have animated a debate inside the company about its identity. In its zeal to boost digital sales, some current and former employees say, Nike veered from its roots as a maker of cutting-edge footwear for serious athletes. It has opened itself to competition from newcomers such as On and Hoka, which have borrowed from the playbook that fueled Nike’s rise—including focusing on sport over lifestyle, and taking risks on innovation.

Nike’s once torrid growth has stalled. Sales for the quarter ended Feb. 29 were flat compared with a year earlier, and shares in the company have declined 24% over the past year, compared with a 19% gain in the S&P 500.

Donahoe in the interview acknowledged the brand lost its “sharp edge” in sports and needed to boost its “disruptive innovation pipeline.” The CEO said the brand’s marketing got fragmented and that with people going back to bricks-and-mortar stores, it was clear Nike needed to invest in its retail partners.

Nike executives said in interviews that the company became too cautious after the pandemic and overly reliant on older products that were reliable sellers. They said the company has made significant changes in recent months to refocus it on putting out cutting-edge footwear.

“We were serving consumers what they know and love,” said John Hoke, Nike’s recently named chief innovation officer. “The job is to of course do that but also to show them something new, take them someplace new.”

Donahoe said Nike is going through a period of adversity and layoffs that has created uncertainty, but that the company will get through it. “Our employees have been through a lot,” he said. “Nike is actually at its best, like a great sports team, when our backs are against the wall.”

Knight, who is chairman emeritus of the board and the company’s largest shareholder, said in a statement that Donahoe has his “unwavering support.”

Donahoe said employees’ responses to the all-hands meeting reflected one of Nike’s biggest strengths: how much its staff cares about the company. “We welcome and encourage that,” Donahoe said.

Shift into digital

Donahoe took over Nike just before the pandemic, at a delicate time. Though he inherited a market leader and one of the world’s best-known brands, Nike was seeking a refresh after it dealt with complaints about its workplace culture that led to a management shake-up.

The Evanston, Ill., native had been CEO of eBay, where he doubled the e-commerce platform’s revenue during a seven-year stint that ended in 2015. After a sabbatical—during which he says he had a life-altering experience at a 10-day Buddhist silent meditation retreat—Donahoe went on to run cloud-computing company ServiceNow.

When he took the helm of Nike in early 2020, his marching orders from Mark Parker, his predecessor and current executive chairman, and Knight were clear. He was to turn the world’s biggest shoe maker into a tech company more directly connected to consumers through its own apps, which in turn collect valuable data from shoppers.

Parker said when he stepped down that Donahoe was the right candidate to lead Nike’s digital transformation.

Donahoe was just the fourth CEO in the company’s more than 50-year history. The only other outsider to get the job said he was ousted in 2006 after a short stint because he focused too much on the numbers.

Donahoe started out with a 100-day global listening tour that was cut short after a month when the pandemic hit.

Covid lockdowns fueled a surge in online shopping. Digital channels accounted for 30% of Nike’s sales in May 2020, about three years ahead of schedule.

Donahoe saw it as an acceleration of an inevitable shift and adjusted Nike’s plans accordingly. A few months in, he redoubled the company’s bet that it could make more money by selling products directly to consumers through its stores and digital channels. He said he believed digital sales would reach 50% of the business, and Nike should transform faster to define the marketplace of the future. It was time to act.

By late 2020, Nike dropped about a third of its sales partners and sold less merchandise to clients such as Foot Locker, DSW and Macy’s. There had been a plan to phase out wholesale clients since 2017, but with digital sales growing quickly, Donahoe said there was a need for urgency.

Executives were divided over whether Nike’s own stores, which include both factory outlets and specialty shops selling higher-priced new releases, could fill the sales void left by the retailers the company was cutting out.

In meetings, finance chief Matt Friend and Nike president Heidi O’Neill supported the aggressive exit from retail that Donahoe was pushing, while others favored a slower transition, people familiar with the matter said.

Some executives felt the specialty stores in particular worked better as marketing tools and that cutting off so many retailers so fast would backfire, the people said. Donahoe and his allies prevailed.

Nike teams were tasked to come up with a new global supply-chain process. Selling directly to consumers increased the company’s liabilities, including by shifting storage and shipping costs from wholesalers to Nike. The company would also absorb the losses from discounts if the merchandise didn’t sell quickly and inventory piled up.

One of the casualties of Donahoe’s 2020 transformation was a multibillion-dollar operation dedicated to developing footwear sold for under $100. The company deprioritized more-affordable footwear that usually sold to the sales partners that Nike was leaving behind. The move left Nike skewed toward higher-priced shoes.

The first evidence of cracks in Nike’s new approach appeared early last year when Foot Locker Chief Executive Mary Dillon said during an earnings call the brand had reversed course and was sending the retailer a wider assortment of Nike products. By the summer, Macy’s and DSW were saying the same thing.

The message was clear: Nike needed help selling merchandise.

Nike veterans said cutting off wholesale clients was one of the biggest mistakes the company has ever made. After digital sales hit the 30% of the total mark early in the pandemic, they dropped back, and haven’t reached that level since—let alone the 50% target Donahoe had foreseen.

Donahoe said in the interview the goal at the time was to lean more on specific partners, such as Dick’s Sporting Goods and JD Sports, which he considers to be more aligned with Nike, rather than make a dramatic shift in strategy. Nike deprioritized making lower-priced shoes because of supply-chain disruptions during the pandemic, but it is now making more of those products, he said.

“I don’t see it as a reversal of the strategy,” Donahoe said of the return to more retail chains. “I see it as an adjustment.”

Rising competition

Competitors have been using the sneaker giant’s playbook at its expense. Smaller brands like On, Hoka and New Balance have captured significant pieces of the market for both hard-core and everyday runners—and their popularity is spreading to the mainstream.

Often quoting Knight, the Nike co-founder, former employees said the principle always was to first capture the market for hard-core athletes with innovative performance gear, and the casual consumer would follow.

In early February, Hoka owner Deckers Outdoor tapped Nike alums to take over both the parent company and the shoe brand. Hoka had $1.4 billion in sales for the year through March 2023, compared with about $352 million three years earlier.

Hoka didn’t respond to requests for comment.

“When you’re the biggest, there’s always going to be people coming after you,” Donahoe said. Competitors give Nike an incentive to try to understand what consumers want and to figure out how to come up with something bold and different, he said.

Nike still dwarfs its competition. During Donahoe’s tenure, Nike sales have grown 31% to $51 billion in 2023. That is more than double the results of Adidas, its closest competitor by far. New Balance reported sales reached $6.5 billion last year, and upstart On almost hit the $2 billion mark.

The race to hit revenue targets came at a cost for Nike. Executives turned to the brand’s lucrative franchises, including Air Jordan and Dunk, and ramped up the releases. The strategy diluted the exclusivity prized by die-hard Nike sneaker shoppers.

Donahoe said in the interview that Nike ramped up production to meet demand on its SNKRS app, which fans use to buy the latest limited releases. In early 2021, Nike was meeting less than 5% of the demand for some releases on the app and consumers were frustrated, Donahoe said, adding the goal is to meet something closer to 20% of demand for the exclusive styles.

Now, sneaker resellers say they have seen release after release of Nike’s limited-edition kicks that don’t sell out on the SNKRS app, and that in the secondary market—a space that the brand closely monitors—prices are tanking.

Nike executives in March said they would pull back on franchise releases.

Donahoe said “franchise management has always been something Nike has done.”

Nike’s digital sales, a figure that includes direct and partner e-commerce sales, declined for the quarter ended Feb. 29. Friend, the finance chief, told analysts in March that Nike expects total sales to decline at least until the end of this year.

Struggle for innovation

The pursuit of sales growth from limited-edition sneaker releases led Nike to neglect its running category, long considered the core product of the company, former employees said.

This month in Paris, Nike unveiled its new product line for the Olympics, including running shoes with a new cushioning system that uses the company’s Air technology.

In interviews at the event, executives said the company had become somewhat risk-averse during the pandemic, when working remotely stifled creativity. Martin Lotti, chief design officer, said the company had spent too much time looking to its past.

“If you drive a car just by looking in the rear view mirror, that’s not a good thing,” Lotti said. “The bigger opportunity is the windshield.”

Current and former Nike executives believe the future of the company is in its app ecosystem, like the Nike Training and Running Club or its SNKRS app, and the data it can harness from them to help design and sell products. Inside the company, leaders have long tried to draw comparisons to Apple when talking about Nike’s innovation and design culture.

The sneaker giant has been acquiring smaller data analytics startups for at least a decade. Two years ago, it also bet on the NFT craze.

One of Nike’s biggest tech investments is a multibillion-dollar process to migrate multiple software programs into one single system. The new platform, known as S/4HANA, is still not operational and is three years behind schedule. The software is designed to help day-to-day operations, such as procurement and inventory management, and speed up digital sales.

As part of its accelerated focus on digital sales, Nike hired about 3,500 people to join what the company calls its global technology group, which includes consumer insights and data analytics. Executives at the time said they were investing in “demand sensing,” “insight gathering” and a new inventory system.

Former Nike employees with knowledge of the consumer insights strategy said executives misinterpreted the data in ways that overestimated demand for retro franchises.

During February’s round of layoffs executives trimmed layers of management across the company’s insights and analytics teams. A large technology innovation team, tasked with developing software to implement Apple’s new Vision Pro augmented reality system in day-to-day design tasks, and a separate artificial intelligence team were also eliminated.

Executives at Nike say it is entering a “supercycle” of innovation and that the new Air line of products enhances athlete performance.

At the Olympics preview event this month, the company took over the historic Palais Brongniart in central Paris with a three-day event to unveil its new Air line. Guests wandered through a museum-like, conveyor-belt installation highlighting Nike’s product evolutions and research and development programs. Athletes including runners Sha’Carri Richardson and Eliud Kipchoge modeled the new gear. Retired tennis great Serena Williams narrated the company’s lavish introduction video before appearing on stage.

Outside, 30-foot orange statues of Nike-sponsored athletes including LeBron James, Kylian Mbappé and Victor Wembanyama stood guard.

Donahoe’s relationship with Knight goes back to the early 1990s, when he was a Bain consultant on Nike projects. He joined the Nike board in 2014 and is one of the directors of an entity Knight created called Swoosh LLC, which holds roughly $22 billion worth of Nike shares and controls a majority of Nike’s board seats. Donahoe calls Knight his “greatest hero in business.”

The current CEO said he meets with his predecessor, Parker, every week.

Donahoe said that he and Parker share an approach to management he calls “servant leadership” that was embodied by some of his sports heroes, including basketball coaches Phil Jackson, John Thompson, Mike Krzyzewski and Tara VanDerveer.

“It’s never been about me. It’s about your players. And are you doing everything you can to allow your players to make the adjustments to win? And when you have a win it’s about the players and when you have a loss you say it’s on me, right?,” he said. “And that’s what I’ve always tried to embody, including during this period of time.”

This week, Donahoe is facing another test: the company is notifying several hundred more workers whose jobs are being cut.

Nissan Chief Executive Makoto Uchida said market demand for cars declined

Nissan Motor 7201 -2.48%decrease; red down pointing triangle shares fell sharply after it lowered its estimate for fiscal year net profit, partly due to slower car sales, falling short of analysts’ expectations.

Shares were recently 3.6% lower at 541.2 yen Monday morning after falling as much as 4.5% earlier.

The Japanese automaker said after Friday’s market close that net profit likely climbed 67% to Y370.00 billion ($2.39 billion) for the year ended March. That was lower than its previous forecast of Y390.00 billion and below analysts’ estimate of Y403.90 billion in a FactSet poll.

Nissan Chief Executive Makoto Uchida said Friday that market demand for cars declined, making its operating environment more difficult.

The automaker said that it sold 3.44 million vehicles last fiscal year, fewer than expected, and that it took steps to mitigate inflation’s impact on suppliers, hurting its bottom line.

In March, the Japan Fair Trade Commission said it found Nissan cut payments to subcontractors without any fault on their part from January 2021 to April 2023. The antitrust regulator said it told the carmaker not to engage in similar conduct in the future.

Ochre Bio partnering with Germany’s Boehringer Ingelheim on treatments that will harness the organ’s capacity to regenerate

German pharma group Boehringer Ingelheim has struck an up to $1bn partnership with a UK biotech to develop treatments for chronic liver disease that aim to harness the organ’s capacity to regenerate.

Under the drug discovery partnership, Ochre Bio will receive an initial $35mn investment, rising to more than $1bn in royalties if treatments are successfully brought through clinical trials. It is a similar milestone-based structure to many partnerships in the pharmaceutical industry.

The liver is the only organ that can regrow and repair itself and Ochre Bio will seek to develop drugs that restore this ability in diseased livers.

The company’s work to date has involved analysing thousands of donated human livers to develop an understanding of the causes of disease, and studying whether making changes to RNA — a vital molecule for translating genetic information into proteins — can extend the lifespan of transplanted livers.

“What we’re trying to do is give the liver a little nudge in the right direction to support it to regenerate,” said Quin Wills, chief scientific officer and co-founder of Ochre Bio. “What happens in a cirrhotic liver is [cells] don’t have that decision-making process any more to start dividing and restoring capacity. By changing certain ‘switches’, using these RNA therapies, we help them make those decisions again.”

There have been a series of recent developments in the treatment of liver disease, which is the third-largest cause of early death in the UK and other high-income countries. It is also the largest killer of 35- to 49-year-olds in the UK, according to the UK Health Security Agency.

The US Food and Drug Administration recently approved the first-ever drug designed specifically for the most common liver disease, metabolic dysfunction-associated steatohepatitis or mash, developed by Madrigal Pharmaceuticals.

People with mash have a build-up of fat deposits in the liver and it is estimated to affect 115mn people worldwide. The approval of Madrigal’s drug should help other treatments to pass regulatory hurdles, according to analysts at investment bank William Blair.

The disease is often linked with weight gain and has become more common as obesity levels have risen.

Pharma groups are optimistic about the potential for new weight loss and diabetes drugs known as GLP-1s to treat liver diseases.

A weight-loss drug licensed by Boehringer Ingelheim from Danish biotech Zealand Pharma has had positive results in liver disease trials, while Novo Nordisk is looking at the effect of its weight-loss drug Wegovy on mash.

But while these drugs could be used to treat early-stage disease, the industry thinks they will be less helpful against more advanced mash, which can involve extensive scarring or cirrhosis of the liver. New ways of tackling late-stage liver disease could delay the need for transplants, currently the only effective treatment.

Jack O’Meara, chief executive of Ochre Bio, told the Financial Times: “There still remains a huge unmet need there and we hope this partnership with Boehringer will be able to develop medicines that solve or offer solutions for patients at a later stage.”

Søren Tullin, head of cardiometabolic disease research at Boehringer Ingelheim, said Ochre Bio’s genomics experience and technology “holds the potential to uncover novel regenerative pathways that will make a meaningful difference in the lives of those affected by chronic liver disease”.

EU regulator urges action on climate threat to insurance

Eiopa head says rise in losses from natural catastrophes needs to be addressed by firms and member states

The chair of the EU’s insurance regulator has said urgent action is needed to protect Europe from climate risk, as mounting economic damage from natural catastrophes raises concerns that some areas could be rendered uninsurable.

Petra Hielkema, head of Eiopa, which supervises the bloc’s insurers, said a steady rise in losses from natural disasters such as floods and wildfires needed to be addressed by firms, member states and broader society.

She proposed a range of solutions including tightening building rules, creating national and EU-wide schemes to share risks, and drawing more deeply on reinsurance markets. “All actors need to move,” she told the Financial Times.

Her warning comes as climate change increases the frequency and severity of extreme weather events, pushing up the price of cover and feeding concerns of an “insurability” crisis. A string of big home insurers have halted new business in California, for example, in response to a surge in extreme weather losses.

Hielkema warned the industry against the “easy solution” of just excluding high-risk areas from coverage. “If you do that, you will, in the end, lose trust and lose your reason to be there.”

The EU suffered more than €50bn in economic losses from natural catastrophes in both 2021 and 2022, according to Eiopa data. That was more than three times the annual average in the previous decade.

On average, only a quarter of these economic losses at EU countries are insured, leaving a huge so-called “protection gap”.

Hielkema said EU insurers had started to raise concerns a few years ago, saying they would need to respond to the climate threat by raising prices significantly or excluding areas.

“What you now see is governments starting to realise that [responding to disasters] through just public spending might not be the best way forward. They are more and more open to discussions, and we also see more public-private partnerships develop,” said Hielkema.

Under such schemes, governments share losses from natural disasters with the insurance sector, or create structures to pool risk.

Floods in Italy, Germany and elsewhere last year led to further rises in the price of insuring homes and businesses against severe weather. Continental European commercial property insurance prices rose at the start of the year for the 22nd consecutive quarter, according to an index from broker Marsh.

Rising insurance prices were “a reflection of the risks, and the risks are going up, and they are going up quickly. It’s a call for action”, Hielkema added.

The regulator is pushing for adaptation measures including making buildings and agriculture more resilient to flooding. “Ultimately, there might even be areas where maybe you should no longer build,” said Hielkema. 

Eiopa also wants insurers to simplify their policies. Recent flooding claims exposed policies that covered flood damage “depending where the water came from”, Hielkema said, which was “completely not understandable” for consumers. 

The regulator also wants to make greater use of reinsurance markets, and aims to encourage investors to put more money into EU insurance-linked securities — such as catastrophe bonds, which pay out for certain extreme weather events.

Reinsurers have contributed to affordability problems, industry experts say, by charging much more for the cover they provide to primary insurers and tightening their terms. A relatively quiet 2023 for hurricanes meant they were able to post bumper profits.

Reinsurers “need to feel that it is not just about selling insurance and making a profit. It’s about responsibility as part of society”, Hielkema said.

Eiopa is helping to foster public-private schemes in countries including Italy that can ultimately make insurance more affordable and accessible. The regulator has also proposed an EU-wide scheme that could complement these arrangements with cover for the very biggest events.

Hielkema said any pan-EU scheme would need to be carefully calibrated to make sure individual states are pulling their weight on adaptation measures, among other considerations. “You would have to deal with several moral hazard issues.”

Global banking regulator sounds out investors on suitability of AT1s

Debt instrument has been in the spotlight since holders of Credit Suisse additional tier 1 bonds lost $17bn last year

The global banking regulator has held high-level meetings with bank executives, investors and credit rating agencies in recent weeks to assess the suitability of a form of debt that was controversially wiped out when Credit Suisse collapsed last year.

Bondholders who invested in additional tier 1 — or AT1 — securities lost $17bn when UBS took over its rival Credit Suisse last March.

The deal, which was orchestrated by the Swiss government, upended the traditional bank capital structure by imposing losses on creditors while allowing shareholders to recover $3.3bn.

The Basel Committee on Banking Supervision held a series of meetings at the European Banking Authority last month, according to people with knowledge of the talks, where the regulator sought participants’ views on how well AT1s performed during last year’s banking crisis, which resulted in several bank failures.

Among the questions the regulator asked was whether the implosion of Credit Suisse had changed investors’ views on the riskiness of AT1s and also whether banks were changing the terms on the AT1 instruments they issued.

The Basel Committee, known as the world’s most powerful financial regulator, includes regulators from 28 large economies and sets global policies, including on how much capital banks must hold.

The latest iteration of its framework on bank capital, known as Basel III or Endgame, has met with fierce lobbying by US banks, which fear significant increases in their capital requirements.

In communications sent to roundtable participants and seen by the Financial Times, the Basel Committee said that in response to the series of bank failures last March, it was carrying out “analytical work based on empirical evidence to assess whether specific features of the Basel Framework performed as intended during the turmoil”.

However, the regulator made clear that it was not currently planning to scrap AT1s.

“The roundtable aims to capture a range of perspectives on AT1 instruments, and is not an indication of planned revisions to the existing Basel Framework,” it said in its communication to attendees.

“There seems to be no motivation whatsoever to revisit Basel’s definition of AT1, but that doesn’t rule out any changes at the Swiss or even EU levels,” said Jackie Ineke, partner at Spring Investments, a Swiss fund manager. “Basel just sets minima.”

The Basel Committee declined to comment.

The future of AT1s have become a political issue across Europe since the Credit Suisse wipeout. A paper prepared by the Dutch finance ministry last month floated the idea of abolishing the instruments, but acknowledged this would need the backing of European authorities.

In Switzerland, a report into the country’s “too big to fail” regime for regulating banks considered whether to scrap AT1s, but ultimately decided against it.

The package of proposals — which is expected to be signed off into law by the Swiss parliament next year — included a recommendation to increase capital requirements on banks with foreign subsidiaries.

Swiss finance minister Karin Keller-Sutter last week told newspaper Tages-Anzeiger that it was “plausible” that the changes could result in UBS — the country’s biggest bank — having to hold between $15bn and $25bn of additional capital.

UBS’s shares have dropped around 8 per cent since the reform package was published earlier this month.