RT1 issuance to replace ‘grandfathered’ bonds will push up insurers’ debt costs

Written by Adam Cadle

21/02/2024

Rated European insurers will step up their issuance of Restricted Tier 1 (RT1) bonds over the next two years to replace almost €22bn of bonds which are due to lose their eligibility as regulatory capital under Solvency II, Moody’s has said.

“We estimate that at least €8bn of new RT1 will need to be issued if insurers want to maintain their current capital ratios,” it added.

“RT1 issuance will increase the industry’s debt servicing costs because interest rates have increased materially since 2022 and because the instruments, which convert to equity or are written down if the issuer’s solvency falls below a given threshold, are riskier for bondholders than other types of debt. However, we expect investor demand for RT1 debt to remain robust despite defaults last year on subordinated instruments issued by Credit Suisse and mid-sized Italian life insurer Eurovita.”

When the Solvency II capital rules came into force in 2016, European insurers were given a ten-year exemption, known as the “grandfathering” period, for older debt instruments that did not qualify as regulatory capital under the new regime. Insurers will need to replace these instruments before the grandfathering period expires in January 2026 if they wish to maintain their current solvency levels.

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