China Reinsurance plans to tap the Hong Kong Stock Exchange for as much as $2 billion ahead of new capital requirements for insurance companies that take effect next year.
The mainland insurer filed its listing application with the stock exchange last week in which it indicated it would float at least 15% of its enlarged share capital in the Hong Kong offering.
China Reinsurance will begin marketing the IPO in October and aims to complete the transaction by November, according to a person familiar with the matter. Joint sponsors CICC, HSBC and UBS will start fielding questions from the Hong Kong exchange this week, and the entire process of Q&A with HKEX will typically take about two months, the person said.
The IPO will offer global strategic investors in the reinsurance sector an opportunity to participate in a mainland reinsurance play – an area relatively little known to the public due to the limited investment channels into it.
Reinsurance refers to the insurance company practice of transferring part of the risk inherent in any insurance policy to a third-party, or reinsurer.
In 2013, China’s total reinsurance premiums rose 34.1% on a year-on-year basis to Rmb115.9 billion ($18.7 billion) – about 6.6% of the total premiums for primary insurance companies, according to data from the China Insurance Regulatory Commission (CIRC).
China Reinsurance was the country’s largest property and casualty reinsurer by total reinsurance premiums as of the end of 2013, according to CIRC. The group received reinsurance premiums of Rmb47.5 billion, more than twice those received by Swiss Re's mainland subsidiary, which ranked second in terms of total reinsurance premiums in China two years ago.
The group operates reinsurance businesses for mainland insurance companies but it also engages in primary property and casualty insurance business. The reinsurance business accounted for about 70% of the group’s total gross written premiums last year.
Part of the group’s assets are managed through its asset management unit China Re Asset Management, the country’s first insurance asset manager with a foreign shareholder. Swiss Re co-founded the asset manager in 2004 and currently holds a 10% stake.
China Reinsurance is majority-owned by state-owned investment company Central Huijin with an 84.91% shareholding, while the Ministry of Finance owns the remaining 15.09%.
New capital requirement
Proceeds from the Hong Kong listing will provide China Reinsurance with an additional capital buffer prior to the implementation of a new solvency system that requires insurers to calculate risks using more advanced metrics.
The new solvency system, known as the China Risk Oriented Solvency System (C-Ross), will apply capital requirements for insurance companies based on a more comprehensive assessment of their risks.
In other words, capital requirements for different Chinese insurers may vary depending on their level of risk exposure. Analysts expect insurers with portfolios concentrated on a single product or region to be affected the most by the system.
The two systems differ in the calculation of solvency – the measure of an insurer’s ability to pay out claims when unforeseen events occur.
Under the current regime, the solvency margin ratio is scale oriented and is calculated based on premiums and losses only. Large insurance companies therefore enjoy a distinct advantage over their smaller rivals, even though they may face high risks.
After the implementation of C-Ross, however, solvency margin ratios will be calculated based on the insurer’s exposure to market and credit risks.
Under C-Ross requirements, a Chinese insurer is required to have a solvency margin ratio of at least 200% – doubling from 100% under the current regime.
Insurers that fail to comply with the capital requirements may be subject to CIRC penalties, from financial audits to business scope restrictions and forced management changes.
China Reinsurance’s solvency margin ratio decreased to 248% by the end of 2014 from 381% in 2012. In this regard, it might appear logical for the group to strengthen its capital base through a Hong Kong listing ahead of the full implementation of C-Ross in 2016.
Industry landscape
The new capital requirements will prompt Chinese insurers to overhaul investment strategies, underwriting policies, reinsurance arrangements and capital management, according to Fitch Ratings.
They are also expected to manage capital more dynamically by issuing more types of capital instruments to strengthen their capital bases, Fitch said in a statement.
Analysts believe the implementation of C-Ross next year will be positive for reinsurance companies as primary insurers could potentially assign a larger portion of their risks and liabilities to meet the tighter requirements.
Nonetheless, China Reinsurance may face more intense competition from other reinsurers as demand grows. Swiss Reinsurance, Hannover Ruck SE and Munich Reinsurance all operate branches in China, and will look to expand in the potentially larger Chinese market.
Analysts are generally cautious about the short term outlook of Chinese insurance companies. Challenges including monetary easing and lower long-term bond yield continue to weigh on investor sentiment toward the industry, JPMorgan analysts said in a research note.
However, some analysts have expressed optimism about the long-term growth of China’s insurance sector as the globalisation of Chinese companies provides more insurance opportunities.
Chinese insurers are allowed to expand asset allocation programmes through investing in bonds with lower credit ratings. According to a CIRC statement in March, Chinese insurers are now permitted to invest in bonds with credit rating of BBB- and above, one notch lower than BBB previously.
