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Insurance sub-debt rules may weaken capital base
By Fitch Ratings |
April 11, 2013, Thursday
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Print Edition
Print Edition
THE capitalization 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.
The lifting of the restrictions on holding company sub-debt could encourage insurance groups to utilize 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 percent 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.
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.
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