Solvency II, the EU’s regulatory regime for the insurance industry, came into force on January 1, 2016. Under the regime – which was long in the making – insurers have to hold at least half their solvency capital in the form of Tier 1 capital, meaning it is loss-absorbing and subordinate to all insurance liabilities and other forms of debt.
To help insurers meet these requirements, a new type of debt instrument has been devised, restricted Tier 1 bonds (RT1s), which can account for up to 20% of regulatory Tier 1 capital. Similar in nature to the banking sector’s ‘Coco’ (contingent convertible) bonds, RT1s are written down if certain trigger points are breached. Coupons are also immediately suspended.
Norwegian first
A full eight months after Solvency II was launched, Gjensidige Forsikring, the largest insurer in Norway, became the first company to issue an RT1 bond transaction, for NKr1bn ($125m). “We told the market in the fourth quarter of last year that we were considering an RT1 issue so it was a long process,” says Jostein Amdal, the chief financial officer at Gjensidige. “We weren’t sure if we should be first in the market or whether we should wait for a bigger player in Europe to launch before us. But we’re a very well recognised name in the Nordic region and we have a well priced Tier 2 issue so we decided to go forward.”
Certain regulatory features of the domestic Norwegian market also drove the decision. “Although Gjensidige is relatively conservatively leveraged, due to some specific Norwegian regulations, we had already used our full capacity for Tier 2 hybrid. So if we were going to issue hybrid debt, it needed to be Tier 1. That’s clearly more expensive than Tier 2 because it is more like equity than the subordinated debt instruments of Tier 2 but it is still much cheaper than issuing genuine equity,” Mr Amdal says.
Lots of interest
Once Gjensidige had alerted the market to its intentions, a large number of banks expressed an interest in leading the new RT1 deal. In the end, the insurer chose DNB and Nordea, two leading Scandinavian institutions, as joint bookrunners.
Mr Amdal says: “There were global banks and Scandinavian banks competing for the mandate but we chose DNB and Nordea. When it comes to choosing bookrunners, there are two things to take into consideration: structuring skills and distribution prowess. The global banks and the Nordic banks were fairly equal on the structuring side but on the distribution side, the local banks were far more plugged into the Scandinavian market.”
That said, the decision to issue in krone was not taken lightly. “Of course, the Euromarket is much deeper than the domestic market but Gjensidige is better known in the Nordics and investors are very familiar with our credit risk. Also, the current pricing is much sharper in krone than in euros, dollars or sterling,” says Mr Amdal.
Having chosen the bookrunners and narrowed down the currency options, Gjensidige could afford to bide its time. The group is a financially strong institution with a 200-year old history and an A credit rating so it had no immediate need for the capital. “Our financial position is very solid but we have relatively little hybrid debt compared with our peers. We have more pure equity so this issue was more of a capital optimisation exercise to bring down our overall cost of capital,” says Mr Amdal.
As the first issuer of RT1 bonds, there were some regulatory hoops to go through but by the second quarter of 2016, Gjensidige was ready to go. However, market conditions were unappealing. “Spreads were quite high before the [UK's] Brexit vote so it did not seem like a good time to come to market. We decided to wait until the environment improved and that turned out to be the right decision,” says Mr Amdal.
On the road
In the run-up to the launch, the group undertook a comprehensive Nordic roadshow, visiting Oslo, Bergen, Copenhagen, Stockholm and Helsinki. Institutional response was encouraging and on August 29, Gjensidige opened the books on its deal – a perpetual with a five-year call option and a spread over the Norwegian interbank offered rate of 360 to 400 basis points. The books built swiftly and within a few hours the issue had been done – priced at the bottom end of the range and still oversubscribed.
“We were very happy with the result. Our advisers did a good job. The spread was more than 100 basis points below that of comparative bank transactions,” says Mr Amdal. “Of course, as a non-life insurer, our business model is inherently more stable and Tier 1 hybrids in the banking sector are slightly different from ours. But still, we were very pleased with the pricing we achieved.”
The insurer may also come back to the market for more. “We could have gone for a larger issue but it seemed sensible not to do everything at once and spread out our call dates. But we will consider returning to the market,” adds Mr Amdal.
