Joining a steady stream of Chinese life insurers seeking to bolster their depleted capital resources, Ping An, China’s second-largest life insurer, has announced plans to issue up to CNY26bn ($4bn) through a convertible bond issue.
Shares traded in China are A shares. Foreigners can only buy B shares.
“The CB [convertible bond] market in China is currently relatively flush with capital, and investors are relatively enthusiastic about the instrument,” the insurer noted in a statement.
The move to raise additional capital follows Ping An’s acquisition in July 2011 of a 52.4% stake in SDB in Shenzhen Development Bank which entailed a cash payment of CNY2.69bn by Ping An. Following the acquisition, Ping An was also obliged to take a one-off, negative CNY1.952bn accounting adjustment.
Ping An’s convertible bond will have a term of six years and carry an interest rate of not more than 3%.
According to Ping An, its solvency ratio at the end of October 2011 stood at 170.7%. Following the convertible bond issue, the solvency ratio will rise to 194.9%, assuming an issue of CNY26bn.
Ping An’s proposed capital raising follows hard on the heels of the completion of a CNY30bn subordinated bond issue by China’s largest life insurer China Life in November 2011.
The 10-year bond has an annual coupon rate of 5.5% for the first five years. after which China Life has the option to redeem the bond. If it does not use this option, the coupon rate will increase to 7.5% for the second five years.
According to Xinhua, China’s official news agency, the bond issue by China Life is likely to be followed by further capital raising initiatives by the insurer.
Ping An and China Life are not alone in their quest for additional capital. According to Joyce Huang, director at rating agency Fitch’s Asia-Pacific insurance team, insufficient internal capital generation has made external funding capabilities essential in supporting the solvency of Chinese life insurers.
She explains that the sharp decline in Chinese listed equity values is of particular concern.
“Chinese life insurers have mainly relied on investment income for profits and their investment performance is sensitive to stock market fluctuations,” says Huang.
“Substantial marked-to-market losses in equity investments undermined Chinese life insurers’ profitability and capitalisation in 2010 and the first half of 2011.”
Continued weakness of Chinese listed equity in the second half of 2011 will have possibly weakened the capital position of some insurers further, she adds.
Indicative of pressure on insurers’ capital, the key Shanghai Stock Exchange Composite Index fell by 20% in the second half of 2011 and by 22% during the year as a whole.
Taking even harsher punishment, Ping An’s share price on the Hong Kong Stock Exchange ended the year 41% down while China Life’s share price ended 40% lower.
Huang points out that to boost their capital, a number of unlisted life insurers have followed the same route as China Life by issuing subordinated debt.
However, she stresses that because of the generally short tenor of subordinated debt it can be viewed as only a stop-gap solution. Issuers of subordinated debt in China generally redeem the debt within five years or less to avoid interest step-up provisions, she notes.
Equity issues would clearly provide a long-term solution. However, the overall, level of investor enthusiasm for potential new equity capital raising exercises by Chinese insurers appears to be decidedly muted.
This was highlighted by the outcome of the initial public offer (IPO) by New China Life (NCL) on the Hong Kong and Shanghai stock exchanges in December 2011. NCL, China’s third-largest life insurer, raised $1.9bn in the IPO which was originally targeted to raise up to $2.3bn.
NCL’s IPO was also pitched at the lower end of its indicative price range – HK$28.50 ($3.67) per share for the Hong Kong Stock Exchange tranche.
Hardly a roaring success, NCL’s Hong Kong-listed shares ended 2011 9.8% down on their issue price at HK$25.70.