By Koh Gui Qing

SEATTLE (Reuters) – Some insurers operating in the United States stand to reap a windfall worth hundreds of millions of dollars from the relaxing of a 31-year-old rule on reporting interest rate-related losses, a Reuters review of regulatory filings and interviews with executives and analysts show.

U.S. regulators who met in Seattle on Sunday voted to change how insurers should recognize these losses after the industry lobbied for the move.

The change, whose scope and financial impact are first reported here, will free up cash which insurers can use to write new policies, invest in their business, or boost their share price through dividends and stock buybacks, according to their financial disclosures and analysts who cover them.

At least 23% of life insurers rated by credit ratings agency Fitch stand to benefit, because their interest rate maintenance reserves (IMR), which reflect gains or losses from interest rate changes, were negative as of the end of December. That is up from 8% a year earlier. A negative IMR forces insurers to tap pots of money they would have otherwise spent on their business or returned to shareholders.

The change, which would expire at the end of 2025 unless revisited, will allow insurers to realize some of these losses over time, rather than straight away, according to a draft of the proposal released by the National Association of Insurance Commissioners (NAIC).

The Reuters review, which included a search of the public filings of all insurers listed in the stock market as well as those rated by credit ratings agencies, shows the changes will be particularly advantageous for firms invested in long-term bonds. This is because bonds that were issued before the Federal Reserve raised interest rates more than 5 percentage points over the last year carry much lower rates, and insurers incurred losses when they sell them.

Among those insurers are Prudential Financial, OneAmerica Financial Partners, Principal Financial and Massachusetts Mutual Life Insurance Company, according to Fitch. In the case of Prudential, the reprieve would be worth more than $1.3 billion, according to the company’s disclosures. That compares to $1.8 billion in net fixed income-related losses Prudential recorded in 2022.

The NAIC’s move diverges with how banking regulators have approached the same issue. They do not give banks the option of deferring interest rate-related losses, fearing excesses that led to the 2008 financial crisis. Such losses were behind the collapse of major regional banks this year, including Silicon Valley Bank and First Republic Bank.

Some consumer advocates have criticized the NAIC for going ahead with the proposal. Edward Stone, a lawyer who has represented policyholders in cases where troubled insurance companies were liquidated, said the rule change would encourage more insurers to risk investment losses in order to juice returns.

“Insurance companies, for decades, have been trying to kick the can down the road. This is just another attempt by them to say we should get some sort of favorable accounting treatment,” Stone said.

An NAIC spokesperson said the change is in the interest of insurance policyholders, because they would make it easier for insurers to sell loss-making bonds to re-invest in higher-yielding ones, boosting their financial health.

A representative for the American Council of Life Insurers (ACLI), a lobby group that pushed for the change, said its intention is to harmonize the treatment of interest rate-related losses and gains. Under existing rules, insurers with a positive IMR realize the benefit over time, rather than immediately.

Insurers in the United States are regulated by individual states rather than the federal government, but the NAIC has said that all states will automatically adopt the change it backs. While the change sunsets in 2025, the NAIC is also considering a long-term tweak to the rules, insurers including Equitable Holdings and MetLife have said in filings with the U.S. Securities and Exchange Commission (SEC).

DEFERRING LOSSES

Following the rule change, insurers will be allowed to amortize interest rate-related losses over time equivalent to 10% of their statutory surplus. The statutory surplus is the difference between insurers’ assets and liabilities, money that can be used to pay policyholders in unforeseen circumstances.

The new regime has some safeguards. A key metric of an insurer’s financial health, its risk-based capital ratio, would have to be at least 300% after adjustments to be allowed to defer interest rate-related losses.

Prudential would have been able to reverse about $1.3 billion of $1.8 billion in bond losses last year had the new rules been in place, Chief Financial Officer Ken Tanji told analysts on the company’s second-quarter earnings call.

The change will also increase Prudential’s risk-based capital ratio to 409% from 383%, according to an SEC filing. Staying close to the 400% threshold is a target many insurers seek to achieve a better credit rating.

A Prudential spokesperson declined to comment beyond Tanji’s remarks.

A spokesperson for MassMutual, which along with Prudential, OneAmerica, and Principal Financial ranks among the insurers rated by Fitch that have the largest negative IMR balances, declined to comment on gauges of the company’s financial strength, such as its risk-based capital ratio. The spokesperson would only say that MassMutual had a negative IMR balance of $611 million as of the first quarter of 2023.

OneAmerica declined to comment, while Principal Financial did not respond to requests for comment.

Some insurers that do not carry large negative IMR balances also say they would benefit from having room to take more risk when hedging interest rates. Unum Group, which has “very little” negative IMR, would see little immediate financial impact from the change but would be able to be more flexible with its hedging program when it comes to accepting losses, chief financial officer Steven Zabel told analysts on August 2.

“That would be helpful to really ramp up the hedging program a little bit more,” Zabel said.

(Reporting by Koh Gui Qing in Seattle; Additional reporting by David French in New York; Editing by Greg Roumeliotis and Anna Driver)

By Clare Jim and Shuyan Wang

HONG KONG/BEIJING (Reuters) – China’s largest private real estate developer Country Garden is seeking to delay payment on a private onshore bond for the first time, the latest sign of a stifling cash crunch in the property sector, piling pressure on Beijing to step in.

Adding to worries about contagion risk, a major Chinese trust company that traditionally had sizable exposure to real estate, Zhongrong International Trust Co, has missed its repayment obligations on some investment products.

Analysts warned that a rise in default by trust companies, also known as shadow banks, which have strong ties to the domestic property sector, will further weigh on the world’s second-largest economy.

Anxiety about contagion risks is spreading through global markets, putting China’s government under mounting pressure to deliver support for the ailing real estate sector, which accounts for roughly a quarter of the economy.

Once considered a more financially sound developer, Country Garden’s woes could also have a chilling effect on homebuyers and financial firms, with more private developers close to a tipping point if Beijing’s support does not materialise soon.

The real estate sector has suffered tumbling sales, tight liquidity and a series of developer defaults since late 2021, with China Evergrande Group at the centre of the debt crisis.

Weak overseas demand, tepid domestic consumption and persistent problems in the property sector have been major factors in China’s struggles to mount a solid post-COVID recovery.

In a move that dealt a fresh blow to investors’ sentiment, two Chinese listed companies said over the weekend that they had not received payment on maturing investment products from Zhongrong International Trust Co.

Trust firms, or shadow banks, operate outside many of the rules that govern banks, channelling the proceeds of wealth products sold by banks to developers and other sectors that are unable to tap bank funding directly.

Concerns about the outsized exposure of China’s shadow banks – a $3 trillion industry, roughly the size of Britain’s economy – to property developers have grown over the past year as the sector lurched from one crisis to another.

JPMorgan in a research note on Monday said that rising trust defaults would drag down China’s economic growth by 0.3-0.4 percentage points directly, and that it expects a “vicious cycle” of real estate financing challenges.

“In addition to the apparent financial risks and their transmissions, the latest wave of defaults from wealth management firms on trust-related products is likely to cause some substantial ripple effects for the broader economy through wealth effects,” Nomura said in a separate note.

‘CRITICAL MOMENT’

A source with direct knowledge said on Monday that Country Garden has proposed to creditors to extend repayment for an onshore private bond due Sept. 2, with an outstanding of 3.9 billion yuan, by three years in seven instalments.

Country Garden declined to comment. In separate filings during the weekend, the developer said it would suspend trading in 11 of its onshore bonds from Monday, a move traders said usually signals plans to seek repayment extensions.

In September alone, Country Garden may need to repay more than 9 billion yuan ($1.25 billion) worth of onshore bonds, according to Reuters’ calculations.

The suspension of its onshore bonds followed a report by Chinese media outlet Yicai on Friday that the company was heading for a debt restructuring, after it missed payments of two dollar bond coupons due on Aug. 6 totalling $22.5 million.

The developer’s shares dived 18.4% to HK$0.8 on Monday, dragging down the Hang Seng Mainland Properties Index which dropped 3.7%. The stock has lost 50% so far this month.

Country Garden’s offshore bonds also eased, with a few trading at the lower end of 6 cents on the dollar earlier. Most have since firmed slightly.

Its woes are adding to spillover concerns across a property market already grappling with weak buyer demand.

“The problems in the sector have been brewing for a long time, it wiped off the wealth effect among investors and no one wanted to buy property now,” said Dickie Wong, executive director at Kingston Securities.

Wong said the sector’s impact on the economy has reached a “critical moment” and that regulators should implement more policies including further cutting interest rates and reserve ratios.

China’s economy grew at a frail pace in the second quarter as demand weakened at home and abroad, prompting top leaders to promise further policy support and analysts to downgrade their growth forecasts for the year.

State-owned China Jinmao said in a filing on Sunday it expected to post a 80% decline in net profit in the first half of this year, due to a drop in gross profit margin in some projects and a decrease in land development revenue.

Its Hong Kong-listed shares slumped 4.1% on Monday.

(Reporting by Clare Jim in Hong Kong and Shuyan Wang in Beijing; Addition reporting by Yuhan Lin in Beijing and Hongwei Li in Shanghai; Writing by Sumeet Chatterjee; Editing by Jacqueline Wong, Shri Navaratnam, Simon Cameron-Moore and Jan Harvey)

(Reuters) -Turmoil at China’s largest private developer Country Garden could set off a “vicious cycle” of financing stress on the country’s real estate investment trusts (REITs), brokerage J.P. Morgan warned on Monday.

The brokerage flagged issues at Chinese conglomerate Zhongzhi Enterprise Group, after two Chinese listed companies said they had not received payment on maturing investment products from its unit, Zhongrong International Trust.

REITs would be forced to dip into their profits if they fail to honor payments on debts, analysts said, putting at risk nearly 2.8 trillion yuan ($385.78 billion) worth of assets under the management.

These fresh worries come as Country Garden sought to delay payment on a private onshore bond for the first time and suspended trading in 11 onshore bonds.

“Unlike banks, which have holding power and are able to roll over credit to wait for an eventual resolution, alternative financing channels such as trusts may default once trust investors are unwilling to roll over the products,” J.P.Morgan analysts led by Katherine Lei said in a note.

“The default events may lead to a chain reaction on developer financing, adding stress to POE (privately owned enterprise) developers and their creditors.”

China’s property sector has been grappling with a liquidity crunch since late 2021 when China Evergrande Group collapsed and triggered a series of debt defaults.

Rising trust defaults would drag economic growth by 0.3-0.4 percentage points directly, J.P.Morgan warned.

“Beijing has already done some things to ease the tensions in the property sector, but it has been too slow and too little,” analysts at Nomura said, adding that China will be compelled to take more steps.

A cut to the reserve requirement ratio and a “small-scale” government bailout program for local-government financing vehicles could be some of policy routes, J.P.Morgan analysts said, but they do not see large-scale monetary easing or fiscal stimulus.

($1 = 7.2581 Chinese yuan renminbi)

(Reporting by Roshan Abraham and Susan Mathew in Bengaluru and Danilo Masoni in Milan; Editing by Varun H K and Arun Koyyur)

By Aditi Shah

NEW DELHI (Reuters) -Boeing has emerged as the front-runner to secure an order for around 25 wide-body planes from IndiGo, industry sources told Reuters on Monday, as India’s biggest airline deepens its international expansion with new destinations.

IndiGo is in talks to buy Boeing’s 787 family of twin-aisle aircraft, which has been pitted against Airbus A330neo jets, said the sources who are familiar with the matter.

No decision has been finalised, the sources said, requesting anonymity as the negotiations are confidential.

IndiGo said it does not comment on speculation. Boeing declined to comment. Airbus said it never comments on discussions it may or may not be having with existing and prospective customers.

Reuters first reported in March that IndiGo was in talks with Airbus and Boeing for the wide-body jets.

The recent talks come weeks after IndiGo placed a record order for 500 Airbus narrow-body jets, shadowing an earlier record deal by rival Air India for 470 Airbus and Boeing planes.

Indian carriers are trying to keep pace with the world’s fastest-growing aviation market, where demand for air travel has surged post-COVID, sending industry records tumbling even as plane manufacturers are struggling to meet output goals.

The drive by IndiGo, which has 58% share of India’s domestic market, also comes at a time when it is aiming to double its capacity by the end of the decade and expand its network, especially in international markets.

IndiGo recently launched new flights to destinations in Africa, West Asia and Southeast Asia, and is also growing its presence in Europe through its codeshare partnership with seven carriers including Turkish Airlines and KLM.

So far, IndiGo has been an exclusive buyer of Airbus narrow-body jets and a deal for wide-body planes would be a departure from that strategy. Earlier this year it began international operations with a Boeing 777, its first twin aisle aircraft taken from partner Turkish Airlines, which provides the pilots.

(Reporting by Aditi Shah; editing by Jason Neely and Conor Humphries)