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This month seven insurers have raised over 3.5bn equivalent of subordinated debt in euro and dollars, a sharp increase from last September, when just one insurer came to market.
"It makes sense for insurers to consider issuing perpetual bonds where they could count towards their Tier 1 capital base once Solvency II is implemented," said Jake Atcheson, head of insurance debt capital markets at Citigroup.
Unlike banks, which have needed to turn to subordinated debt in recent years to raise more regulatory capital, insurance companies have escaped relatively unscathed. But that is changing. Insurers will soon have to sell instruments with features that allow regulators to wipe out capital quickly and restore the health of the institution.
"Under Solvency II, insurance Tier 1 bonds will look similar to bank Additional Tier 1 capital," said Atcheson. "They will have loss-absorption features including share conversion or write-down (temporary or permanent), non-cumulative coupon deferral and no dividend pushers or stoppers."
Continental European issuers are now readying deals in the hopes they will be grandfathered in by regulators.
"Insurance companies are in a transitional period where it's still possible to issue old-style instruments that do not incorporate some of the riskier elements of Solvency II's definition of own funds," said Franck Viort, head of insurance DCM at BNP Paribas. "We don't know precisely when the cut-off date will occur, but it could be as early as the end of this year."
This uncertainty is persuading issuers to sell perpetual Tier 2 bonds without loss absorption or conversion language, which they hope their national regulators will count as Tier 1.
Even so, some national regulators like the PRA want insurers to comply fully with Solvency II from the get-go. "It's interesting to see that different jurisdictions are taking different views on this," said Atcheson. "For example, we haven't seen any perpetual issuance out of the UK this year, which is probably because the PRA has said it wants insurance debt to be 'in the direction of travel of Solvency II.'"