Credit Suisse AT1 wipeout not a template for EU, UK insurers’ RT1, Fitch argues

Written by Adam Cadle

27/03/2023

The decision by Swiss authorities to fully write down Credit Suisse’s Additional Tier 1 (AT1) notes, without imposing full losses on the bank’s equity, does not imply that EU and UK authorities will treat insurers’ Restricted Tier 1 (RT1) instruments by the same way, Fitch Ratings has said.

Credit Suisse’s AT1 notes were fully written down on the granting of extraordinary liquidity backed by the Swiss government to avert a crisis amid a rapid surge in deposit outflows. The Swiss Financial Market Supervisory Authority viewed this as a “viability event” as set out in the notes’ terms, which triggered the write-down. In contrast, Fitch said RT1 investors should not face write-downs due to liquidity considerations alone or due to interventions from the authorities whose timing and nature may be hard to foresee in a rapidly evolving crisis.

“RT1 write-down conditions are more narrowly defined than those of Credit Suisse’s AT1 notes. RT1 write-down would typically only be triggered by an insurer’s regulatory capital metrics falling below specified levels, and not by liquidity considerations alone. As EU and UK insurers’ assets and liabilities are broadly matched by nature and duration due to Solvency II requirements, a decline in capital to below trigger levels would typically occur much less rapidly than a run on a bank, even in a financial market shock. Insurers are also much less prone than banks to surges in outflows that could stress their liquidity or capital.”

Fitch-rated EU and UK insurers have minimal exposure to Credit Suisse’s AT1 notes relative to their capital and earnings. This is partly due to the high Solvency II capital charges that apply to sub investment-grade debt.

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