As we all know, capital is crucial for insurance company. Only with enough funds can an insurance company have ability to cover the exposures. With adequate capital, an insurance company may better develop the business, i.e. release more ads, or establish more branches, to make more profits. It is possible that during the operation, an insurance company has no sufficient capital to support its business, and under such circumstance, the insurance company will need to raise funds to replenish its capital.
Generally speaking, there are four ways for an insurance company to supplement its capital:1. IPO or Seasoned Equity Offering; 2. getting additional investment by current shareholders; 3.getting money from private offer; and 4. allotting subordinated debt. For Chinese insurance companies, the first three ways may encounter hurdles or difficulties in practice. First of all, IPO is not easy for insurance companies, because many of them, especially small and medium-sized insurance companies, may not be able to meet the high standard of IPO. Secondly, current shareholders may be more willing to use financial vehicle, rather than funds of their own, to run the insurance company. It might be very difficult to raise money from current shareholders. Lastly, due to the financial crises, many institutions have insufficient funds to make the investment. Then issuing subordinated debt becomes a practical option for many insurance companies. According to the CIRC, 10 insurance companies were approved in 2009 to issue subordinated debt. The total amount of debt reaches RMB 18 billion.
Subordinated debt may have its advantages for Chinese insurance companies under current Chinese insurance law framework. First, the reimbursement of such debt shall be subordinate to the insurance coverage and other debts, but superior to the security capital of the company. That is to say, the interests of the insured will be fully protected. Secondly, the cost of issuing subordinated debt is low in China. Thirdly, subordinated debt may offer insurance company with long term fund support, because such debt should not be reimbursed in a fixed term.
According to the Interim Measures for the Administration of Subordinated Debt of Insurance Companies, the following points are worthy of being underscored:
▲ Insurance companies, including domestic company, joint venture and foreign insurance companies in China are all qualified to issue subordinate debt;
▲ The issuing of subordinated debt should be approved by the CIRC and must be to targeted sources;
▲ The term of the debt may not be less than 5 years;
▲ The funds raised by the debt can be used only for the reported purpose.
An insurance company must meet the threshold provided in the Interim Measures for the Administration of Subordinated Debt of Insurance Companies, when it applies for allotting subordinated debt:
▲ The audited net assets should be no less than RMB 500 million;
▲ After issuing the debts, the aggregated unpaid principal and interest should not be exceeding the unaudited net assets of last year;
▲ Having good corporate governance structure;
▲ Having good internal control system and all the internal control regulations have been strictly complied with;
▲ The capital and asset does not be impropriated by the natural person, legal person, or other institutions and their affiliated parties;
▲ No serious violation of law or regulations in the last two years; and
▲ Other conditions set by the CIRC.