The decision by Swiss authorities to fully write down Credit Suisse’s additional tier 1 notes, without imposing full losses on the bank’s equity, does not imply that EU and UK authorities will treat insurers’ restricted tier 1 instruments the same way, according to Fitch Ratings.

Its comment came in response to the Swiss Bank’s forced takeover by its rival USB earlier this month. 

According to the agency, Credit Suisse’s AT1 notes were fully written down “on the granting of extraordinary liquidity backed by the Swiss government to avert a crisis amid a rapid surge in deposit outflows”. 

In contrast, liquidity considerations or regulatory interventions alone are unlikely to trigger RT1 write down, according to Fitch. 

It said RT1 write-down conditions are “more narrowly defined” than those of Credit Suisse’s AT1 notes and would typically only be triggered by an insurer’s regulatory capital metrics falling below specified levels, and not by liquidity considerations alone. 

The agency said: “As EU and UK insurers’ assets and liabilities are broadly matched by nature and duration due to Solvency II requirements, a decline in capital to below trigger levels would typically occur much less rapidly than a run on a bank, even in a financial market shock. Insurers are also much less prone than banks to surges in outflows that could stress their liquidity or capital.”

RT1 investors have priority over equity holders, Fitch said, noting that the EU and UK authorities have stated they will stick to the conventional creditor hierarchy for claims in bank liquidations, “imposing losses first and fully on equity before then moving to subordinated creditors”.

Fitch added RT1 instruments often have equity conversion features. “Conversion terms vary between instruments but conversion should leave investors no worse-placed than existing equity holders. RT1 instruments also feature fully discretionary coupons, which we would expect to be cancelled in a stress scenario.”

Solvency II own funds are categorised by quality into three tiers, based on 'permanence' and 'loss absorbency', with tier 1 being the highest quality. At least 50% of the insurer’s capital held to cover the solvency capital requirement must be tier 1 capital. 

It can be restricted such as junior debt security and unrestricted such as ordinary shares. At least 80% of tier 1 items should be unrestricted with no more than 20% being RT1. 

Fitch also said EU and UK insurers have minimal exposure to Credit Suisse’s AT1 notes relative to their capital and earnings partly due to the high Solvency II capital charges that apply to sub investment-grade debt.

Rival agency AM Best said last week Credit Suisse’s bailout has little impact on insurers.