CIRC mulls looser junior debt policies

The China Insurance Regulatory Commission (CIRC), the country's top insurance authority, is considering scraping fundraising rules which prevent insurers' parent companies from issuing subordinated debt on their behalf, according to an announcement made Tuesday by the commission.

The CIRC had issued amended debt management regulations which prohibited subordinated loan placement by insurers' parent companies in 2011. The commission will be soliciting opinions on the proposed abolishment of this restriction until January 28, according to its statement.

The move is aimed at easing the capital pressures facing Chinese insurers, many of which are struggling to raise funds as the value of the subordinated debts they have sold themselves approaches the upper limit established by the CIRC in 2011, Shi Lei, a senior bond analyst from Ping An Securities, told the Global Times.

According to the CIRC's guidelines, insurance companies are allowed to issue junior debts equaling up to 50 percent of their net assets.

Yet, after several years of subordinated debt placement, several insurers are now approaching - or, in some instances, have surpassed - the regulator's 50 percent limit.

As of August 2012, the subordinated debts issued by China Pacific Life Insurance Co, Ping An Life Insurance Company of China and New China Life Insurance Co had amounted to 53.5 percent, 43.4 percent and 47.9 percent of their net assets respectively, according to a survey from China Securities Co.

"Regulators have to ease the restraints on insurers' fundraising by enabling their parent companies to sell subordinated debt for them," Shi said.

Many domestic insurance companies are now facing a growing need for capital as they strive to comply with solvency ratio regulations while weakness in the capital market drags down their investment yields, Shi explained.

In order to remain on a financially sound footing, insurers are typically required to maintain a solvency ratio - that is, the ratio of net assets relative to premiums - above 150 percent, according to the CIRC's rules.

"Currently, selling subordinated debts is the easiest way to remain solvent," Shi said.

He also explained that the main function of subordinated debts from the point-of-view of insurers is to help them live up to solvency requirements, since insurers will only get permission to issue such debts from regulators when their solvency rates dip below the 150 percent mark or when it is expected to fall below that level within two years' time.

China's insurance companies issued subordinated debts worth a total of 20.85 billion yuan ($3.35 billion), 57.75 billion yuan and 94.5 billion yuan annually between 2010 and 2012, according to a China Securities Journal report, citing figures from the CIRC.