Insurance companies are now allowed to issue subordinated insurance capital bonds (ICBs), which can be another way of insurers managing their finances. The proceeds from ICBs may be counted as part of total capital available (TCA), according to a new notification by the Capital Market Supervisory Board (CMSB).
Insurers in Thailand are subject to the risk based capital framework (RBC II) under the risk based capital notifications (RBC Notification) issued by the Insurance Commission which took effect from 31 December 2019, says global law firm Baker McKenzie in a commentary.
The RBC Notification’s objective is to ensure the quality of TCA of insurance companies in line with international standards. The RBC Notification recognises ICBs. Before the new CMSB notification, there was no regulation specifying how and under what conditions insurers can issue ICBs.
To date, no Thai insurer has issued this type of subordinated bond. This has left insurance companies with alternatives to increase their capital funds by issuing shares or organic growth (i.e. profits from operations and revaluation of certain assets).
Given the uncertainty brought about by the COVID-19 pandemic, organic growth is unlikely to be a reliable solution. Meanwhile, raising equity during this time is even less attractive for both issuers and their shareholders due to the possible share price dilution effect and the erosion of voting rights of the existing shareholders.
Pursuant to the notification, insurance companies incorporated in Thailand (excluding branches of foreign insurance companies) may from 8 January 2021 offer ICBs to (a) institutional investors or (b) in any four-month period, to not more than 10 investors (each of which must be an institutional investor or a prescribed related person of the issuer). The board of directors of the issuer must set out and approve criteria for determining a related person, who must be either a director, an executive, a major shareholder, or an affiliate (i.e. a parent company, a subsidiary, a sister company, or an associated company), taking into account the appropriateness of investment and sufficiency of investment information that a related person receives.
The ICBs must be baht-denominated without any embedded derivative features, except for a call option.
Under the RBC Notification, ICBs could be treated as TCA under either tier 1 or tier 2 capital, depending on their features and subject to approval from the OIC.
Office of the SEC approval
In addition to the OIC approval, to offer for sale ICBs, an insurance company must apply for approval from the Office of the Securities and Exchange Commission (Office of the SEC).
Pursuant to the notification of the CMSB, loss absorbing features of the ICBs may be in the form of either conversion of the bonds into shares of the issuer or a write-down. If it is the convertible bonds, the issuer must be a public limited company. It is noteworthy that the notification sets out a floor of conversion price at 50% of the share price on relevant dates. However, guidelines for determining the market price will have to be prescribed by the Thai Life Assurance Association or the Thai General Insurance Association, as applicable. Hence, insurers wishing to issue convertible ICBs will have to wait until the guidelines become available.