Bankers are anticipating offerings of billions of dollars of subordinated bonds from Chinese insurers if new solvency regulations are adopted.
European regulations intended to shore up balance sheets in the insurance industry may be about to unleash a wave of hybrid securities in China.
One Chinese insurer is poised to test market appetite for subordinated capital securities as early as July with an issuance that bankers will closely monitor as a gauge of the potential for new business under the changing regulations.
“The market is very excited about this. This is something that the sell-side has been pitching for a long time,” said a debt capital markets banker in Hong Kong.
China Taiping Insurance’s expected offering of US dollar-denominated perpetual subordinated bonds will be a first from the region and could pave the way for other insurers to raise capital ahead of major changes in risk capital requirements in Europe, known as Solvency II. The bonds are likely to be issued through Taiping’s Hong Kong subsidiary.
The Solvency II framework, which emerged after insurance giant American International Group collapsed during the global financial crisis, is designed to ensure insurers have adequate capital to cover their liabilities. Solvency II requirements, which go into effect on January 1 2016 in Europe, establish additional capital charges for certain kinds of risk or for risk concentrations in an insurer’s liabilities.
Regulators elsewhere in Asia either have adopted, or are actively considering, Solvency II-like requirements – notably in Australia, which has already agreed to similar guidelines.
In China, insurers have only been required to set aside capital based on total liabilities, among the loosest requirements in Asia. However, Chinese authorities have indicated they also will implement rules consistent with Solvency II by January 2016.
As a result, several Chinese insurers are likely to need to top up their capital. Many have experienced strong sales growth because it has become popular for local investors to use life insurance as an investment vehicle.
“The market is ripe for this kind of issuance. The challenge is knowing the type of structure that will be acceptable to regulators.”
Ping An Insurance, China’s largest publicly listed insurer, reported Rmb108.1bn (US$17.4bn) of gross premiums on its books at the end of the first quarter, a 27.1% increase relative to the same period last year.
Overall, China’s insurers might need US$32bn–$45bn to keep their capital at adequate levels, Standard & Poor’s analysts concluded in a review of the sector in December.
“Definitely one of the drivers for (a potential) need for capital is growth,” said Philip Chung, director of insurance rating at S&P in a telephone interview.
The anticipated adoption of the new regulatory framework in China, as well as elsewhere in the region, has already prompted debt-structuring desks to try and convince Asian insurers to raise capital-eligible securities for the past two years. A China Taiping deal will mark the first attempt to bring such a deal to market.
As with Basel III bank capital standards, insurers will, under Europe’s Solvency II guidelines, be allowed to have Tier 2 and Additional Tier 1 bonds in their capital structures, alongside common and preferred equity.
However, China has yet to indicate if perpetual securities will count towards statutory capital for insurers. It has also yet to clarify if it would require loss-absorption features to be included in the bonds for them to count as capital.
Taiping is expected to take a leap of faith and issue the bonds in line with structures that have emerged in Europe, where similar deals have proven popular. Investors believe insurance companies face fewer risks than banks and have been eager to buy Europe’s insurer hybrids.
“The market is ripe for this kind of issuance,” said another debt capital markets banker. “The challenge is knowing the type of structure that will be acceptable to regulators.”
Aside from Japan and Australia, Singapore is the most advanced in adopting new regulations. The Monetary Authority of Singapore recently circulated a request for comment on adding loss-absorption features to hybrid bonds from insurers in order for them to be treated as capital.
Still, bankers do not expect a flood of offshore hybrids from Singapore. One debt capital markets banker said Singapore firms tended to issue locally and were likely to keep doing so.
Instead, bankers have hopes pinned on China. If the country adopts a similar framework to the model proposed in Europe, billions of dollars of capital-eligible bonds could hit the market in the coming years. With these issues, millions of dollars in fees will be making their way onto the balance sheets of arrangers.
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