(The following statement was released by the rating agency)
HONG KONG/LONDON, April 04 (Fitch) The capitalisation of Chinese insurance
groups could weaken following the relaxation of subordinated debt issuance rules
for holding companies, as insurers are more likely to fund growth by issuing
sub-debt instead of through new equity injections, Fitch Ratings says.
The lifting of the restrictions on holding company sub-debt could encourage
insurance groups to utilise capacity at the holding company level to issue
sub-debt. We believe the issuance of sub-debt is not a sustainable solution to
improve capital strength because the effective tenor of such debt is typically
short - five years or less. Issuers tend to redeem the debt before the actual
due date to head off higher interest costs from step-up provisions.
Furthermore, proceeds from holding companies' sub-debt issuance may flow down to
subsidiaries in order to support the operating companies' solvency margins. This
is likely to increase double-leverage and expose holding company debt to deeper
legal subordination than debt carried at the operating companies.
Solvency is under pressure as premium growth, although slowing, continues to
outpace internal capital generation. Allowing insurance holding companies in
China to issue sub-debt, subject to a cap of 50% of net assets, increases the
flexibility in capital management for insurance groups. The new rule applies to
10 Chinese insurance groups that may benefit from the ability to manage their
leverage on a consolidated basis.
China's insurance regulator, the China Insurance Regulatory Commission, issued a
new directive easing subordinated debt issuance rules last month as it moves to
manage insurance groups' leverage on a consolidated basis. The regulator had
banned such issuance and only allowed operating companies to issue sub-debt as
recently as 2011.
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The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research
2013 Outlook: Chinese Life Insurance
2013 Outlook: China Non-Life Insurance
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