Analysts at DBRS Morningstar have reported that the insurance Restricted Tier 1 (RT1) securities market experienced an uptick in momentum over 2020.
Overall, European insurance companies issued approximately €4 billion, a jump of almost 100% compared with 2019.
According to analysts, issuers were quick to take advantage of record low interest rates while building up capital buffers that eroded slightly in the first half of 2020 because of the initial impact of the COVID-19 pandemic.
RT1 instruments are junior subordinated securities issued by re/insurers that can qualify as capital under the Solvency II regime in Europe.
Although the RT1 market experienced record issuances in 2020, DBRS Morningstar expects a gradual expansion as grandfathering provisions for existing capital instruments expire in 2026.
“In DBRS Morningstar’s view, the concept of contingent capital instruments has become better understood by institutional investors in insurance debt, which helped the demand for RT1 securities vastly exceed the supply of new instruments in this market in 2020,” said Marcos Alvarez, Senior Vice President and Head of Insurance.
“The relatively higher yields offered by RT1 instruments also provide an enticing alternative to investors in the current interest rate environment, and we expect further issuances in 2021.”
The RT1 market is still relatively small with approximately €10.1 billion outstanding, compared with more than €173 billion of total insurance subordinated debt in Europe.
DBRS Morningstar attributes the RT1 market’s low volume to the duration of the Solvency II regime as it was introduced in January 2016 and the grandfathering provisions established by regulators under which the old rules continue to apply for legacy instruments until 2026.
However, as the concept of contingent capital instruments has become better understood by institutional investors in insurance debt, the demand for RT1 securities has vastly exceeded the supply of new instruments in this market.
For instance, analysts noted that Allianz SE issued two tranches, one for $1.25 billion and another for €1.25 billion that were oversubscribed six and four times, respectively, with the participation of more than 700 institutional investors.
DBRS Morningstar further explained that the relatively higher yields offered by RT1 instruments also provide an enticing alternative to investors in the current interest rate environment, and the firm expects further issuances in 2021.