Norway Insurer Eyes Industry’s First Sale of Riskiest Bonds

  • Gjensidige discussing restricted Tier 1 notes with investors
  • Bonds may have high coupon payments to offset potential risks

Gjensidige Forsikring ASA is on track to become the first insurer to issue a new type of bond that will become the industry’s riskiest debt.

The Norwegian company may sell as much as 1 billion kroner ($120 million) of so-called restricted Tier 1 notes, according to Janne Flessum, its head of investor relations. The insurer has met investors this week to discuss the potential sale of the bonds, which are meant to prevent taxpayers being on the hook for losses at a financial institution.

“This will lead to more excess capital and it’s a foundation for an extraordinary dividend,” Chief Executive Officer Helge Leiro Baastad said in an interview in Oslo on Thursday.

Regulators devised the notes alongside the new Solvency II capital regime, and they will be the first bonds to take losses if an insurer runs into financial difficulties. Investors may accept this risk because of comparatively high interest payments, said Philippe Picagne, a London-based analyst at CreditSights.

“There could be huge demand,” he said. Pension funds are among potential investors because the notes may have investment-grade ratings, he said.

Restricted Tier 1 bonds are similar to additional Tier 1 notes sold by banks because holders will suffer losses if capital falls below a trigger level. Issuers can miss coupon payments to help boost capital, and the bonds can be written off or converted into shares.

Potential Market

European insurers could eventually replace their combined 21.2 billion euros ($24 billion) of outstanding Tier 1 securities with the new notes, according to Francois Lavier, Paris-based fund manager at Lazard Freres Gestion, which oversees about 17 billion euros. Still, that won’t happen in the short term because investors will first want to see how the new Solvency II capital rules work in practice, he said.

“It will take time to develop into a true market with lots of issuers,” he said.

Lysaker, Norway-based Gjensidige’s notes may have a yield premium of at least 500 basis points above the Norway Interbank Offered Rate, according to CreditSights. The research company said estimating a price was challenging because of the lack of a comparable previous issue, the small size of the possible sale and its kroner denomination.

S&P Global Ratings will probably give the bonds a BBB- grade, the lowest investment level, Gjensidige said in an investor presentation.

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