DBRS Morningstar Releases Commentary on the European Insurance Restricted Tier 1 Market in 2020

DBRS Morningstar released a commentary titled “Insurance Restricted Tier 1 Bond Market Gained Momentum in 2020” that discusses the prospects of Restricted Tier 1 (RT1) securities under Solvency II and how European (re)insurance companies could use these instruments to meet their capitalization requirements.

The key highlights include:

-- 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.

-- DBRS Morningstar will typically rate RT1 securities three to six notches down from the operating (re)insurance company’s financial strength rating or holding company’s issuer rating, depending on the legal entity issuing these securities.

“The RT1 bond market experienced an important expansion in 2020, with European insurance companies issuing approximately EUR 4 billion, a jump of almost 100% compared with 2019. Issuers took 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 Coronavirus Disease (COVID-19) global pandemic,” says Marcos Alvarez, Senior Vice President and Head of Insurance. “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. 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.”

Notes:

The commentary is available at www.dbrsmorningstar.com.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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