The perfect time for RT1s
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The perfect time for RT1s

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European insurance companies should make the most of favourable conditions to grow nascent asset class

European insurance companies are in the sweetest spot that will allow them to push forward their capital refreshment plans before the end of a grandfathering rule on legacy hybrid debt expires in 2025.

Expected interest rate cuts have unleashed animal spirits in the capital markets, with FIG issuers riding a wave of demand.

Records in the primary market are tumbling thanks to institutional investors’ zeal to lock in higher yields before the US Federal Reserve and the ECB start to push the cost of borrowing back down, expected to begin later in the year.

That bodes well for bonds and is luring yield hunters down the capital stack to the most deeply subordinated layer — restricted tier one (RT1) deals, in the case of the insurance sector.

RT1s are equivalent to banks’ additional tier ones (AT1) and offer similar returns. But the product offers advantages over AT1s. Insurers are increasingly well capitalised and benefitting from higher interest rates and — even after Covid — no major insurer went out of business, meaning they may well be a more resilient asset class.

The evidence so far is that there is plenty of demand and not much supply. This week’s €750m debut from NN Group, paying 6.375%, attracted more than €3bn orders, even after the pricing was tightened by 62.5bp.

There has been only one other RT1 this year — Axa’s inaugural €1.5bn, sold at 6.375% in early January, backed by a book of almost €8bn.

Only €1.35bn of RT1 was issued in 2022 and 2023 combined and there is just €20bn of paper in the market, compared with nearly €200bn-equivalent of AT1.

The ECB hinted this week that interest rates are coming down. Insurers should seize the window while investors are ripe to take down risk.

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