Royal London deal shows appetite still there for tier-1
Bankers are hopeful that they may soon be able to issue new AT1 deals again as the secondary market recovers from the Credit Suisse write-down.
In May, Royal London, the UK life insurance, pensions, and investment mutual with two million members, 8.7 million policies and £147 billion of assets under management, launched a £350 million, perpetual non-call 10.5 years, restricted tier-1 (RT1) capital issue.
It is the first tier-1 capital issue in Europe since the controversial write-down of Credit Suisse additional tier-1s that briefly saw that whole market trade down to an average price of 83 cents on the euro in March, with some banks’ AT1s trading in the 60s.
RT1s are the European insurance industry’s equivalent of banks’ AT1 capital instruments, designed to be triggered if an insurer breaches its minimum capital requirement or suffers a steep fall in the solvency capital requirement (SCR).
The SCR is designed to keep insurers and reinsurers as going concerns for at least 12 months, with 99.5% certainty, in the wake of unexpected losses from insurance underwriting, from market and/or credit risk in their investment portfolios, or from operational risk.
This was a complicated transaction that took 18 months to structure, in part owing to Royal London, as a mutual, having no common equity into which the instruments could convert.