Hybrid Securities Remain Popular Financing Tool
For the past two years, the stars have been aligned for property-casualty insurers looking to raise capital. Interest rates have been at historically low levels, and investor demand for comparatively high-rated insurance sector debt and equity capital that could be utilized under hard market conditions has been strong.
These conditions existed during a period in which many insurers needed to raise external capital, either to support premium bases that grew substantially during the hard market or to rebuild balance sheets damaged by reserve deficiencies related to asbestos claims or the soft market conditions of the late 1990s.
Fitch estimates that more than $25 billion of capital was raised in the insurance sector during this time period. While this capital took v
arious forms, hybrid securities which have characteristics of both debt and equity instruments remain popular among insurance company issuers. Hybrid securities may be more attractive than straight debt because of lower interest costs and features that may allow for interest deferrals. Utilizing hybrid securities in an insurers' capital structure can also help to optimize financial leverage and enhance returns-on-equity.
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