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ASR aims for RT1 bond to beat QE change, saves easier issues for rainy days

ASR Nederland NV is seeking to raise €300 million via a Restricted Tier 1 capital instrument as it wants to keep Tier 2 capital and Tier 3 bond issues, which are easier to complete, for rainy days, an investor relations representative of the Dutch insurance company said in an interview.

ASR announced Oct. 5 that it plans to issue what it says is the first-ever euro-denominated RT1 instrument in Europe with roadshows in the Netherlands, Scandinavia, London and Paris running from Oct. 9. The company hopes to complete the issue by Oct. 13 as it wants to take advantage of what it sees as a favorable market environment. The ECB is due to announce its quantitative easing plans at the end of October which might lead to higher rates and potential uncertainty in the markets, Barth Scholten said.

RT1 notes are the riskiest instruments an insurance company can issue and are seen as an equivalent to the Additional Tier 1 bonds of banks. RT1 notes are either converted into equity or written down in case an insurance company runs into trouble and needs extra capital to stay afloat. Under the EU capital requirements known as Solvency II, the funds of an insurer are divided into three tiers based on the capital instruments' permanence and ability to absorb losses. Tier 1 instruments, which include ordinary share capital, noncumulative preference shares and subordinated liabilities, are of the highest quality. The Solvency II rules, which took effect in January 2016, limit the RT1 capital of an insurance company to no more than 20% of the company's total Tier 1 capital.

ASR has room for some €1.2 billion in its Tier 1 capital bucket and further €750 million in its Tier 2 and Tier 3 capital bucket, according to Scholten. Both Tier 3 and Tier 2 are very easy to issue and the company prefers to use such instruments for other purposes such as strategic mergers and acquisitions or in times when "things get a bit more difficult," he said. "When the sun is shining and you have no stress, you better invest your time into issuing a difficult instrument, which is currently a Tier 1 instrument."

Furthermore, it makes sense to replace Tier 1 with new Tier 1, according to the spokesman. ASR currently has two Tier 1 bonds with a total €209 million outstanding amount. Both bonds have a call date in 2019 and it is highly likely that the company will decide to refinance both bonds given their high coupons of 10% and 7.253%, respectively, Scholten said.

The rest of the €300 million from the RT1 issue will most probably be used toward the cash component of the acquisition of Generali Nederland NV. ASR has agreed to buy the subsidiary of Italian insurance group Generali for €143 million in cash and estimates the total commitment for the acquisition at €200 million. The payment is due in the first quarter of 2018.

ASR has previously announced it is capable of paying for Generali Nederland without external funding and still can do that. However, if it has €300 million in fresh funds, it is logical to use part of the sum for the acquisition as in this way less capital has to be paid as dividend by the subsidiaries, according to Scholten.

The acquisition of Generali will result in a reduction of ASR's Solvency II ratio by 9 percentage points, Rabobank analysts said in an Oct. 5 research note. Even so, the ratio will remain "relatively strong" at 185%, compared to 194% reported for the second quarter of 2017, the analysts said.