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PICC Group's initial public offering to improve capital adequacy and transparency
By Sally Yim |
November 27, 2012, Tuesday
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Print Edition
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PEOPLE'S Insurance Co (Group) of China Ltd, an insurance holding company, kicked off its road show last week for its initial public offering of up to US$4 billion on the Hong Kong Stock Exchange.
The IPO would be credit positive for its major insurance subsidiaries, PICC Property & Casualty Insurance Co Ltd, PICC Life Insurance Co Ltd, and PICC Health Insurance Co Ltd, because the proceeds would replenish their capital bases.
The subsidiaries' capital adequacy levels have been under negative pressure owing to their rapid premium growth over the past few years.
PICC Life and PICC Health are the most in need of new capital: at the end of June, their solvency margin ratios were 136 percent and 101 percent, respectively, just barely above the regulatory minimum of 100 percent.
Both companies may be requested by the China Insurance Regulatory Commission to submit a plan explaining how they would maintain their solvency.
PICC P&C would also benefit from a boost to its capital, although its solvency margin ratio was 184 percent at the end of June owing in part to its ability to raise fresh capital from a secondary offering in December 2011.
Partial privatization
Aside from strengthening the subsidiaries' capitalization, the IPO would result in a partial privatization of the PICC Group that would help to improve its corporate governance and transparency.
The IPO would reduce PICC Group's effective government ownership to around 83.3 percent from 100 percent, and points to the government's willingness to now have a less dominant role in the industry and let it develop and function on a more commercial basis.
However, because PICC P&C is China's largest property and casualty insurance company and is still majority government-owned. We expect PICC P&C to continue playing a policy role such as promoting agricultural insurance in rural areas.
The IPO, which, if successful, would be the largest in Hong Kong since 2010, would also allow foreign investors, particularly other insurers, to buy stakes in the group. This would provide a source for technical transfer, especially for PICC P&C.
PICC Group's IPO has been delayed several times since the beginning of this year because of a volatile equity market. To raise its likelihood of success this time, the company has reportedly scaled back the size of the IPO from US$6 billion and scrapped its plan to list in Shanghai because it is more difficult to obtain regulatory approvals from the Chinese mainland owing to the poor performance of the A-share stock market this year. These steps highlight the group's urgent need for capital.
Sally Yim is vice president and senior credit officer, Moody's Investors Service Hong Kong. The opinions expressed are her own.
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