Higher capital requirements and the inclusion of more aggressive features on subordinated debt instruments are unlikely to be a major hurdle for insurance companies, which continue to be among investors' favourite assets to hold.
Unlike banks, which have been under pressure to raise the quality and quantum of capital in recent years, insurance companies did not go through the same crisis and have had a relatively easy ride and been under less stringent regulatory pressures.
While the advent of Solvency II in Europe is moving the bar higher and new global standards require insurance companies to have higher levels of loss absorbing capital, the sector is still favoured by investors.
"The insurance sector is attractive to investors due to its strong credit quality, predictable cashflows and the relatively good yield offered on hybrid debt instruments," said Fitch.
"This is not expected to change materially under the new Solvency II regulatory framework."
Even the new-style Tier 1 instruments - which from January 1 2016 will start to resemble bank Additional Tier 1 deals and have to include loss absorption features such as write-downs or equity conversion - won't deter investors.
"New style insurance Tier 1 bonds are likely to be more investible for mainstream fixed investors than bank AT1," said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management.
"The main difference is the coupon payments. On the insurance side, coupons would only be turned off if the SCR [Solvency Capital Requirement] was breached, which is a very low probability event. This contrasts to the much higher chance of a bank breaching its combined buffer or TLAC requirement and being forced to turn off AT1 coupons."
Insurance companies will also be helped by the fact that banks have been issuing AT1 debt since 2013.
"The establishment of the bank AT1 market over the past 18 months is helpful in terms of establishing an institutional investor base," said Nik Dhanani, head of capital solutions at HSBC.
"If the trigger for loss absorbency is based at 100% SCR coverage or less, investors should be sufficiently comfortable that it's remote enough for mainstream insurance companies who are likely to operate significantly above this level."
He did add, however, that depending on the specific terms of the instruments, there could be an incremental cost for new-generation capital securities relative to legacy structures.
Market participants expect the cost for insurance companies selling new-style instruments to be closer to what European banks are having to pay for new-style AT1 deals.
For example, HSBC's euro AT1 was quoted at a 5.25% yield to call, some 2% higher than where Allianz's recent perpetual deal that does not include any of the new loss absorbing features was quoted.
LIMITED NEEDS
The other factor working in their favour is that insurance companies have relatively limited financing needs compared to the billions of subordinated debt that banks are expected to raise.
One DCM banker estimated the amount of new debt from European insurance companies at between 40bn and 70bn depending on individual Solvency Coverage Ratios, although others were more hesitant to name a number.
"We will see insurance Tier 1 issuance, but it won't be the dominant form," said Jake Atcheson, head of insurance DCM at Citigroup.
"There will be significantly lower supply than from banks."
The solvency capital requirement has not yet been finalised. That will be a key factor in determining the supply of Tier 1 and Tier 2 bonds, Atcheson added.
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