LONDON, Oct. 18 (Reuters)—Insurers are seldom fazed by technical complexity or heavy expenditure, yet even they have flinched when confronted with the intricacy and high implementation costs of Solvency II, a set of new capital rules for the European insurance industry.

That makes Solvency II an unlikely money-making opportunity for mainstream investors.

But some experts believe those with the right risk appetite should be able to turn a decent profit from the new rules.

The key opportunity lies in buying insurers' subordinated debt, which can only count towards their Solvency II capital in limited quantities, and is therefore likely to be bought back at par as the new regime takes effect from 2013, said Urs Ramseier, managing partner at Zurich-based asset manager Twelve Capital.

With the bonds currently trading on average at a 35 percent discount, weighed by insurers' exposure to the euro zone sovereign debt crisis, such buybacks could deliver stellar returns to investors.

“August and September were very weak months for this market. That's why we believe now is a very good entry point,” said Ramseier, whose firm manages 100 million euros ($138 million) of subordinate insurance debt on behalf of European pension funds and family offices.

Some sector watchers reckon the depressed price of insurance debt makes it a good bet even without the prospect of issuer redemptions.

Credit analysts at Morgan Stanley are expecting a “bear market rally” in European insurers' bonds as measures to shore up the finances of critically-indebted euro zone nations boosts investor sentiment, they wrote in a note on Oct. 7.

The high coupon yield on depressed subordinate bonds has also made them a relatively expensive source of capital, giving insurers an added incentive to buy them back, either through formal redemptions or opportunistic purchases in the market.

Insurers including Munich Re , Standard Life and Aviva have repurchased bonds in the past year.

“There can be different motivations for buying back this debt, and it could involve both economic reasons and at the same time a desire to replace it with Solvency II-compliant debt,” said Dominic Simpson, a vice-president at credit rating agency Moody's.

However, hoovering up subordinated insurance debt is not without risk. The market slumped by up to a fifth as the euro zone sovereign crisis accelerated in August and September, and will likely remain volatile in the absence of a lasting solution.

There is uncertainty also over the timing of any bond redemptions as insurers look set to benefit from a transition period of up to 10 years to adjust their capital structures.

The European Union authorities could agree on the precise transition – or “grandfathering” – arrangements in early 2012.

“If the grandfathering is 10 years, then clearly that is going to give insurers a lot more time,” said Simpson of Moody's.

“That could dampen the incentive to call early.”

There are currently about 85 billion euros of subordinated insurance bonds in circulation, according to Twelve Capital.

Solvency II is intended to protect policyholders and investors by making insurers align their capital reserves more closely with the risks they underwrite.

The rules are currently scheduled to come into force on Jan. 1, 2013, although the industry expects their introduction to be delayed by one year.

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