Fitch: Equity issuance favored over debt

Fitch Ratings expects Chinese insurers to increasingly favor equity issuance over debt to support growth, as more approach the debt ceiling imposed by the domestic regulator, the company said in a report on Monday.

Despite its higher funding costs relative to borrowing, equity issuance reduces insurers’ sensitivity in their capitalization to deterioration in underwriting margins or capital markets volatility.

The growing preference for equity issuance marks a change from the historical trend of debt funding among Chinese insurers, which are allowed by regulators to include subordinated debt in the calculation of their solvency margin, providing the maturity of the debt is more than five years.

The China Insurance Regulatory Commission said that subordinated debt issued by the Chinese non-life and life insurance sector between 2009 and early fourth quarter of 2012 amounted to 170.27 billion yuan ($27 billion).

However, a cap introduced by CIRC in October 2011 on the amount of subordinated debt issued has caused more and more insurers, in particular those with high financial leverage, to turn to equity issuance to fund their expansion.

The most recent equity issue announcement was made by People’s Insurance Company (Group) of China, the holding entity of the country’s largest property and casualty insurer with a market share of about 36 percent.

The company said it plans to raise as much as HK$27.8 billion ($3.6 billion) through an initial public offering in Hong Kong to enhance the capital base of its operating subsidiaries in China.