US property and casualty, life and health insurers had aggregate general accounts exposure of $3.21 billion to the types of securities that will be wiped out in connection with the forced merger of Credit Suisse Group AG into UBS Group AG.

The US insurance industry's exposure to the Additional Tier (AT1) notes issued by Credit Suisse accounted for $269.5 million of its overall holdings in those kinds of contingent convertible securities, according to an S&P Global Market Intelligence analysis. The data reflects the aggregate carrying value of securities held by insurers as of Dec. 31, 2022, and reported on Schedule D, Part 1 of their annual statutory financial statements.

There have been several estimates of the industry's potential exposure, but a pre-populated template using CUSIPs for securities contained within the Markit iBoxx USD Contingent Convertible index includes the AT1s issued by Credit Suisse and various peer European financial institutions. The data also includes certain restricted Tier 1 (RT1) contingent convertible securities issued pursuant to the Solvency II risk-based capital regime.

We estimate that the AT1 and RT1 tally constituted less than 0.05% of cross-sector net admitted cash and invested assets at year-end 2022, but the fate of the Credit Suisse-issued securities offers a reminder of the potential risks than can arise in volatile times from unexpected places within investment portfolios.

AT1 notes, or bail-in capital instruments, are junior debt issued by European banks, often referred to as contingent convertibles, or CoCos. When regulators forced Credit Suisse's merger with UBS Group, Swiss rules allowed authorities to wipe out CHF15.8 billion of Credit Suisse AT1 notes, while some shareholder equity was preserved.

The Credit Suisse AT1s were assigned designations of either 3 or 4 on the National Association of Insurance Commissioners' (NAIC) scale of 1 to 6. A designation of 1 includes the lowest risk instruments while a designation of 6 represents instruments that are either in default or at the highest risk of default.

Of the total dollar amount of the US insurance industry's selected AT1 and RT1 exposure as of Dec. 31, 2022, approximately 67.9% had designations of NAIC-2, which represents investment-grade status. Designations of between NAIC 3 and 6 represent below-investment-grade ratings. There were a total of $1.01 billion in US insurance company positions in AT1 bonds with NAIC designations of 3 or 4 at year-end 2022, including the Credit Suisse instruments.

The highest amounts of US insurance industry AT1 exposure to particular issuers and their affiliates regardless of NAIC designation as of Dec. 31, 2022, were as follows, according to our CUSIP-based analysis: $380.7 million to BNP Paribas SA, $322.9 million to HSBC Holdings PLC and $290.7 million to Nordea Bank Abp.

In addition to Credit Suisse, the most significant industry positions in AT1 bonds with NAIC designations of 3 or 4 exposure were as follows: $150.5 million issued by Barclays PLC, $122.4 million by BBVA affiliates, $93.3 million by ING Groep NV, $85.7 million by Société Générale SA and $65.8 million by Deutsche Bank AG.

For the Credit Suisse AT1 bonds as of Dec. 31, 2022, based on our CUSIP-level analysis, there was only one US insurance group with more than $17.7 million of exposure: Protective Life Corp. with $77.6 million across its life subsidiaries. The Protective Life group also had the highest dollar value of exposure to the AT1 bonds with NAIC designations of 3 or 4 at year-end 2022 across issuers with $299.7 million, including the Credit Suisse bonds. Its holdings included $83.4 million and $55.9 million in AT1 bonds issued by Barclays and SocGen, respectively. Protective Life declined to comment.

There was $197.5 million of exposure as of Dec. 31, 2022, to RT1 bonds issued in November 2020 by Allianz SE across the industry. Similar to the AT1 bonds, the Allianz RT1 tranches are deeply subordinated and senior only to equity. They include a principal loss absorbency mechanism in the form of a write-down of the nominal amount in case a standard solvency-related trigger is breached, Allianz said at the time of issuance.