Fitch: Not All APAC Insurers' Hybrid Issues Are Created Equal

(The following statement was released by the rating agency) Link to Fitch Ratings' Report(s): APAC Insurers: Not All Hybrids Are Created Equal https://www.fitchratings.com/site/re/10039117 Fitch Ratings-Singapore/Hong Kong-July 29: Instrument features and local regulatory frameworks are key to understanding the hybrid instruments issued by insurers in the Asia-Pacific, says Fitch Ratings. Unlike regulations for the banking industry, where regulators have universally adopted the Basel framework, rules for the insurance industry are fragmented. With a rising trend in debt issuances by APAC insurers, it has become important for investors to be able to differentiate between hybrid securities - not all hybrids are directly comparable across the various markets at face value, even when they may appear to be quite similar. The continued low interest rates have spurred debt issuance by APAC insurers. Total debt issued by APAC insurers reached USD23.6 billion in 2017, led by Chinese and Japanese insurers. The proportion of hybrid issuances in the total also rose, and hybrids made up a large majority of offshore issuance. In Korea, insurers are raising capital to meet more stringent capital requirements, while we observed a social bond offering by an Australian insurer to tap growing investor demand for investments related to environmental, social and governance (ESG) issues. Most insurers in less-developed insurance markets in the region remain strongly capitalised by common equity, driven by regulatory preference, less-developed capital markets and strong earnings accretion. Hybrid instruments face varying treatments and capital status across insurance regulatory frameworks in APAC countries. Capital tiering structures, limits on recognised amounts, and loss-absorption features are some key differentiating factors, which render hybrids unique to local environments. Therefore, from a ratings perspective, it is not appropriate for a one-size-fits-all approach to assessing such instruments. Broadly, hybrids are ranked subordinated or lower according to Fitch's Insurance Rating Criteria, due to their junior status. Further notching attributed to non-performance risks also depends on the perceived ease of activating the non-performance triggers set by the regulators and issuers; for Asia, the triggers are generally less likely to be activated until stress is severe. With the exception of Additional Tier 1 securities issued by Australian insurers, most hybrids are likely to be included in leverage calculations, due to their debt-like characteristics. In contrast, Fitch includes regular subordinated securities in most APAC countries into our capital adequacy assessment, in recognition of regulatory credit accorded by local regulators. Contact: Christopher Han Associate Director +65 6796 7224 Fitch Ratings Singapore Pte Ltd. 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