The volume of Contingent Capital Securities (CoCo) issuance by insurers globally is set to increase as insurance companies will soon be able to issue and classify these securities as regulatory-efficient capital, says Moody's Investors Service in a special report published today.
Evolving regulation in Europe and Asia, in particular, encourages companies to issue higher proportions of more junior debt securities, although Moody's expects that the form and scale of insurance CoCo issuance will vary across the globe reflecting local insurer regulation.
"Many insurers globally are examining CoCo issuance, given low interest rates, successful issuance from banks and evolving regulatory capital requirements. CoCos have been largely the preserve of global banks thus far, but that could soon change," says Simon Harris, a Moody's Managing Director.
Similar to banking capital regulation, evolving insurance regulation is encouraging companies to issue higher proportions of more junior-ranking debt or preferred securities, providing enhanced loss absorption to policyholders in ongoing and liquidation scenarios and enabling insurers to support their regulatory capital requirements. The regulatory regimes most conducive to CoCo issuance can currently be found in Europe (Solvency II and Swiss Solvency Test), Asia (C-ROSS in China) and Australia. Moody's added that rules for global systemically important insurers and internationally active insurance groups are still pending, but may also include scope for CoCo issuance.
Moody's says that the credit implications of CoCo issuance will vary by issuer and depend on factors such as issuance size, the issuer's existing debt profile and their regulatory capital position. While the debt leverage and relatively high financing costs (relative to senior debt) related to CoCo issuance is credit negative, CoCos also add to loss-absorbing regulatory capital, a credit positive.
Moody's today also published a Request for Comment, setting out how the rating agency would intend to rate insurance CoCos that include an equity conversion or principal write-down trigger, which is designed to trip prior to the insurer failing ("high trigger" CoCos).
Moody's proposed rating approach incorporates three components:
1) the difference between the insurer's current local solvency ratio and the trigger;
2) the probability of the insurer's solvency ratio reaching a level that Moody's associates with the insurer failing;
3) the loss severity if either or both of these events occur.
The report "Insurance Issuance of CoCos to Evolve with Regulatory Changes " and Moody's Request for Comment "Moody's Proposed Approach for Rating Insurance 'High Trigger' Contingent Capital Securities" are now available on www.moodys.com
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