Moody's: Asian insurers are likely to issue more hybrid debt for their capital structures

Moody's Investors Service says that Asian insurers -- which have traditionally used subordinated debt as one of the ways to replenish their capital -- are now likely to make greater use of hybrid debt in their capital structures.

"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," says Sally Yim, a Moody's Senior Vice President.

"Moreover, capital needs are rising among insurers as are the sophistication of their capital regimes," says 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."

However, 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.

In the case of Hong Kong and Chinese insurers, their use of hybrids in their capital structures is currently low. Hong Kong's current capital regime does not have a clear definition of capital credit in relation to hybrids.

Chinese life insurers also make very limited use of hybrids, and property & casualty (P&C) insurers have not yet started issuance.

Chinese life insurers' issuance has been offshore , and issuance will rise because the features of hybrids, such as coupon deferrals and their long-dated nature, means they can qualify as core capital under China Risk-Oriented Solvency System and are a cheaper way to replenish core capital than common equity.

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.

With Japanese life insurers, hybrids now account for 10-20% of their capital, but Japanese P&C insurers make much more limited use of the instrument.

Japanese life insurers are increasing the use of hybrids to strengthen their solvency in anticipation of potential new capital regulation, which may be economic value-based and more stringent, while P&C insurers currently issue less because of their already strong capitalization.

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