Best’s Special Report: Insurers Increasing Hybrid Debt Issuance

OLDWICK, N.J.--(BUSINESS WIRE)-- Insurers are increasingly using the issuance of preferred stock and junior subordinated debt as a capital management tool amid the slowly rising interest rate environment, according to a new A.M. Best report.

The Best’s Special Report, titled, “Insurers Increasing Hybrid Debt Issuance,” states that the greater appetite reflects preferred stock yields, which are higher than other forms of debt, including fixed income bonds and common stock. Several large insurers recently have issued preferred stock and junior subordinated debt, and in many cases, the proceeds have been used to retire higher-interest debt. Recent junior subordinated issues have features very much akin to preferred stock, with the exception of having stated maturity dates. Preferred stock also generally has been subject to less volatility than bonds or equities, which is attractive if interest rates rise in a measured fashion over time. On the downside, the hybrid debt securities are junior to all other forms of debt, with preferred stock ranking only above common shareholders in terms of dividend priority.

From an issuer perspective, preferred stock may help further diversify a portfolio. A majority of the preferred stocks recently issued contain five-year call provisions that enable the issuers to redeem the stock at a set price. Investors buying the stock at higher prices may incur losses if the option is exercised.

A.M. Best assigns Issue Credit Ratings to various debt instruments issued by a non-operating insurance holding company based on the holding company’s Issuer Credit Rating (ICR). Preferred stock, along with other junior subordinated debt, trust preferred securities and capital trust securities generally are rated two notches below the ICR of the non-operating holding company. The maturity/early redemption features, servicing requirements and ranking of payments in the company debt structure are key factors in determining the equity credit that can be given when determining a company’s leverage ratios. The three primary metrics A.M. Best uses to determine equity credit are permanence, servicing and structure. Although nearly all the recent debt issues have no or very long maturity dates, they do have early redemption options within five years. This feature would serve to reduce the equity credit given; however, companies demonstrating that call activity is minimal and may be given higher equity credit.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=279207.

A.M. Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.

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Source: A.M. Best