Three-point shot
RenaissanceRe’s reopening of the Tier 3 bond market was key for Bermudan reinsurers who relied on the instrument for loss-absorbing capital.
As a hub for the global reinsurance industry, Bermuda possesses its own unique regulatory system. Under its rules, senior unsecured bonds could also serve as Tier 3 capital, which is subordinate to an insurance company’s policyholders.
But that status was threatened by S&P’s proposal in 2021 to remove capital recognition of such notes, reflecting ratings agencies’ longstanding concerns around Tier 3 bonds.
“Under the initial version of the consultation from S&P, Tier 3 issuance would have been ineligible as a form of capital in S&P’s model,” said Jonathan Gray, who leads coverage of North American banks and insurers for HSBC. “That would have been highly problematic for many Bermudan insurers and reinsurers.”
That lack of regulatory clarity had limited the pipeline for Tier 3 transactions from Bermuda, with the last such offering done by Enstar in August 2021.
But in May 2023, the ratings agency released a revised consultation document that showed a way for the sector to make Tier 3 notes viable as regulatory capital.
That gave RenRe the opportunity to reopen the market with a thoughtful structure that doubled as acquisition financing.
RenRe priced a US$750m 10-year senior note at Treasuries plus 215bp, booking around 15bp of price progression from initial price thoughts. Active bookrunners were Barclays, HSBC, Morgan Stanley and Wells Fargo.
To receive capital recognition from S&P, RenRe included a principal deferral mechanism if the insurer breached its solvency ratio. In other words, the bonds would automatically be kept on the balance sheet if the insurer was on the brink of failure, making sure the instrument could act as loss-absorbing capital in a stressed scenario.
RenRe’s ability to lean on a senior unsecured issue also meant the borrowing cost for the debt portion of its US$3bn acquisition of Validus, AIG’s treaty reinsurance business, was hundreds of basis points lower than if it had used a more subordinated instrument that could more easily qualify as regulatory capital.
In doing so, the transaction helped the acquisition become more accretive, adding to its economic and strategic benefits, and pushed RenRe into the ranks of the top five global property and casualty reinsurers.
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