New China Life Plans CNY 15 Bn Debt Financing

New China life insurance Co. (NCL) expects to issue not more than CNY 10 billion five-year subordinated debt and maximum CNY 5 billion ten-year debt financing instrument to improve its solvency, according to its announcement on February 1.

The debt issues will be subject to regulatory approval. The total CNY 15 billion debt financing will increase NCL’s solvency to around 250%, said China International Capital Corporation in a report, which can sustain its growth in coming two to three years. But China Merchants Securities warns that the debt financing will increase the insurer’s financial expenses in 2012, which will affect its net profit by over 10%.

NCL, which debuted on Hong Kong Stock Exchange on December 15, 2011 and listed on Shanghai Stock Exchange on December 16, had 27.74% solvency ratio at the end of 2008 and 36.19% solvency ratio at the end of 2009, far lower than the minimum regulatory requirement. It placed CNY 14 billion worth new shares to shareholders in late 2010 and issued CNY 5 billion subordinated bonds in the third quarter of 2011.

As at the end of September 2011, the solvency level in Chinese insurance industry dropped due to sharp fluctuation in capital market. NCL’s solvency ratio fell to 86.58%, compared with the 100% ratio required by China Insurance Regulatory Commission.

The Beijing-headquartered life insurer had planned to raise about USD 4 billion from dual listing in Shanghai and Hong Kong, but later had to cut the size to approximately CNY 12 billion amid the volatility of stock market.

With substantial improvement in the solvency, NCL will be eligible for overseas investment and investment in unlisted companies, real estate, non-secured debt financing plans and infrastructure debt financing plans, according to its IPO prospectus.

According to China Insurance Regulatory Commission’s new rules for subordinated bond issue, an insurer whose solvency ratio is lower than 150% or will be lower than 150% in coming two years can apply to issue subordinated bonds, but the outstanding principals and interests of subordinated bonds should not exceed its unaudited net asset in the previous year.

If NCL is approved to issue CNY 10 billion subordinated bond, its subordinated bonds outstanding will amount to CNY 15 billion, close to the 50% ceiling of its net asset. But its solvency ratio will rise above 200% following the subordinated bond issue.

Ping An Insurance (Group) Company of China Limited in late 2011 announced issue of not more than CNY 26 billion convertible bonds. Analysts comment that debt financing instrument is still an attempt by insurance companies and there is no regulation whether proceeds from debut financing can be reckoned into an insurer’s solvency.

Xiang Junbo, chairman of CIRC, said this January that CIRC encourages insurers to replenish capital and ease solvency pressure in various ways with focus on subordinated convertible bond, hybrid capital bonds and subordinated term bonds. CIRC will study and work out relevant rules to widen the channels for insurers to replenish capital.