The replenishment of capital by insurance companies will add new tools.
Recently, the central bank and the China Banking and Insurance Regulatory Commission have solicited public opinions on the notice on matters related to the issuance of non fixed term capital bonds by insurance companies (Draft for comments) (hereinafter referred to as the draft for comments), which intends to allow insurance companies to issue non fixed term capital bonds to supplement the core’s tier 2 capital.
This means that the relevant rules for the issuance of non fixed term capital bonds by insurance companies are about to be implemented, opening up a new channel for improving the capital supplement mechanism of insurance companies.
According to the analysis of relevant people in the industry, considering the relatively high difficulty of core capital supplement before, it is estimated that insurance companies are more willing to issue non fixed term capital bonds to supplement core capital. Since 2015, the cumulative issuance of capital supplementary bonds of insurance companies has exceeded 300 billion yuan, including 78 billion yuan and 38.9 billion yuan in 2020 and November 2021 respectively. It is expected that the issuance of perpetual bonds will not be lower than this level.
issued capital supplementary bonds of 38.9 billion
In recent years, Chinese insurance companies have entered the peak period of bond issuance. According to the data, the bond issuance scale of insurance companies reached a record high in 2020. In that year, a total of 20 insurance companies issued capital supplementary bonds, with a total bond issuance scale of 78 billion yuan. This is not only about 40% higher than the 57 billion yuan in 2018 and 54.65 billion yuan in 2019, but also forms the third peak since insurance companies began issuing bonds and financing in 2005.
Since this year, as of December 2, a total of 14 insurance companies have completed the issuance of 38.9 billion yuan of capital supplementary bonds. Together with the 15 billion yuan of capital supplementary bonds of Taiping Life Insurance and 5 billion yuan of capital supplementary bonds of Sunshine Property Insurance to be implemented, the total issuance scale will reach 58.9 billion yuan. Although this figure is less than 78 billion yuan in 2020, it is also the second highest point of bond issuance in the industry in recent six years.
The purpose of issuing capital supplementary bonds by insurance companies is mainly to improve solvency and support the company’s business development.
the demand for supplementary capital of insurance enterprises has increased greatly
In recent years, the continuous development of China’s insurance industry has put forward higher requirements for the capital structure and capital quality of insurance companies; At the same time, the regulatory authorities also continue to strengthen capital supervision with solvency as the core.
According to the analysis of relevant personnel of Ping an asset management, the “second generation compensation” regulatory rules were officially implemented in 2016, which paid more attention to the risk consideration of insurance companies and put forward higher requirements for the solvency of insurance enterprises.
Under the “compensation generation II” system, the cbcirc issued the revised regulations on the solvency management of insurance companies in early 2021. Insurance enterprises need to meet the requirements of “core solvency adequacy ratio of no less than 50%, comprehensive solvency adequacy ratio of no less than 100% and comprehensive risk rating of class B and above”.
According to the insurance regulatory data released by the China Banking and Insurance Regulatory Commission, by the end of the second quarter of 2021, the average comprehensive solvency adequacy ratio of 178 insurance companies included in the statistical scope was 243.7%, and the average core solvency adequacy ratio was 231%, of which 7 insurance companies had a comprehensive risk rating lower than class B.
Some analysts believe that, in view of the imminent implementation of the second generation of compensation, insurance companies will face more stringent capital recognition standards such as “grading policy earnings into capital”, “comprehensive penetration of assets into Supervision” and “general improvement of venture capital factors”, which will generally lead to a significant decline in the solvency of insurance companies, especially the core solvency adequacy ratio, Some insurance companies will be close to or even below the regulatory red line, so there is an urgent need for capital replenishment.
However, at present, there are not many capital replenishment tools of insurance companies, mainly including subordinated debt, subordinated convertible debt, capital replenishment debt, etc. Among them, capital supplementary bonds and private placement subordinated term bonds are mainly used to supplement subsidiary capital. Subordinated convertible bonds can only be included in subsidiary capital before equity conversion, which only helps to improve the comprehensive solvency adequacy ratio. Insurance enterprises still lack core capital supplementary tools.
The release of the insurance version of perpetual bonds is at the right time.
According to the exposure draft, the non fixed term capital bonds of insurance companies refer to the capital supplementary bonds issued by insurance companies that have no fixed term, contain write down or share conversion terms, can absorb losses in the state of continuous operation and bankruptcy liquidation, and meet the regulatory requirements of solvency.
Non fixed term capital bonds are also commonly referred to as “perpetual bonds”. As an innovative capital tool, perpetual debt has the characteristics of both stocks and bonds. Compared with ordinary debt, the biggest feature of perpetual debt is that it has the dual attributes of debt and stock.
The exposure draft defines the relevant requirements for insurance companies to issue non fixed term capital bonds. For example, the issuer is limited to insurance companies, and insurance groups are not allowed to issue capital bonds without fixed term; The non fixed term capital bonds issued by an insurance company shall contain write down or share conversion terms. When a trigger event occurs, the non fixed term capital bonds shall be written down or converted into shares; An insurance company may supplement the core tier 2 capital by issuing non fixed term capital bonds, and the balance of non fixed term capital bonds shall not exceed 30% of the core capital.
In contrast, compared with the capital supplementary bonds of insurance companies in Document No. 3 of 2015, the non fixed term capital bonds of insurance companies have a lower repayment order and include loss absorption clauses. The overall clause design is similar to that of bank perpetual bonds.
For insurance companies, due to the superposition of the second generation and phase II policy and the pressure on the growth of premium income, the solvency of insurance enterprises will face great downward pressure, and the solvency is linked to the qualification of a number of businesses. For example, only insurance companies with core solvency adequacy ratio ≥ 75% and comprehensive solvency adequacy ratio ≥ 120% for four consecutive quarters can carry out Internet insurance sales business, and the higher the solvency adequacy ratio, the higher the proportion of equity asset investment supervision (up to 45%).
the average annual issuance of perpetual bonds will exceed 10 billion
Ping an asset management analysts pointed out that considering the relatively high difficulty of supplementing core capital before, it is estimated that insurance companies are more willing to issue non fixed term capital bonds to supplement core capital. Since 2015, the cumulative issuance scale of capital supplementary bonds of insurance companies has exceeded 300 billion yuan, including 78 billion yuan and 38.9 billion yuan in 2020 and November 2021 respectively. It is expected that the issuance of perpetual bonds will not be lower than this level.
According to the analysis of the above people, the issuer may be dominated by large high-quality insurance enterprises in the medium and short term. For bond investors, the issuance of insurance perpetual bonds will provide them with more choices of investment varieties. As a licensed financial institution, the overall qualification of insurance companies is relatively good, and some head insurance companies are not weaker than state-owned stock banks. Referring to the shortage of structural assets since this year and the decline of market risk preference, bank perpetual bonds and secondary capital bonds are favored by institutions as high coupon and relatively safe assets, while insurance perpetual bonds are expected to have a certain investment attraction because they are similar to bank perpetual bonds.
The person also said that considering that the insurance perpetual bond is a new variety, the market lacks understanding of it, and there is a risk of non redemption and write down, so initial investors may be relatively cautious.
In terms of accounting, the main terms of insurance perpetual bonds are basically consistent with those of banking perpetual bonds, which have stronger equity attributes than capital supplementary bonds. Therefore, it is estimated that the probability of the issuer will include them in the equity account, and according to the consistent accounting requirements, investors should also recognize them as equity assets.
(Securities Times)
