In response to changes in regulation and capital holding requirements, Asian insurers are now more likely to issue hybrid debt, moving away from their traditional use of subordinated debt as a means to replenish their capital, according to Moody’s Investors Service.
Moody’s said carriers’ hybrid issuance will rise because hybrids’ features, such as coupon deferrals and their long-dated nature, means they can qualify as core capital under China Risk-Oriented Solvency System.
Hybrids are also a cheaper way to replenish core capital than common equity.
“The trend towards greater use of hybrids among insurers in Hong Kong, China and Japan has been spurred by the evolution in regulatory and capital regimes, as well as in investor sophistication in Asia,” explained Sally Yim, a Moody’s Senior Vice President.
“Moreover, capital needs are rising among insurers as are the sophistication of their capital regimes,” said Yim; “hybrids can qualify as regulatory solvency capital, and sometimes as core capital; they are less costly than equity capital and, with coupon suspensions, there is the provision of loss absorption under stress events.”
Hybrids that are not refinancing existing debt issues will raise an insurer’s financial leverage despite the equity credit available per rating agency standards, and issuing costs tend to be higher than for subordinated debt and capital replenishment bonds, Moody’s explained.
However, Hong Kong and Chinese insurers current use of hybrids in their capital structures is low: Hong Kong’s capital regime doesn’t have a clear definition of capital credit in relation to hybrids and Chinese life insurers also make very limited use of hybrids, and property & casualty (P&C) insurers have not yet started issuance.
Chinese P&C insurers have not issued hybrids so far because of their strong capitalizations, milder premium growth and their relatively less urgent need for asset allocation, said Moody’s.
Hybrids now account for 10-20% of Japanese life insurers’ capital.
Japanese life insurers have been increasing their use of hybrids to strengthen their solvency in anticipation of potential new capital regulation, which may be economic value-based and more stringent.
But Japanese P&C insurers have a more limited use of the instrument, Moody’s said this is due to the segment already having strong capitalization.
