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Despite their higher funding cost relative to borrowing, equity issuance reduces insurers' sensitivity in their capitalisation to deterioration in underwriting margin or capital market volatility.
The growing preference for equity issuance marks a change from the historical trend of debt funding among Chinese insurers, who are allowed by regulations to include subordinated debt in the calculation of their solvency margin, providing the maturity of the debt is more than five years.
Statistics from China Insurance Regulatory Commission revealed that subordinated debt issued by the Chinese non-life and life insurance sector between 2009 and early Q412 amounted to CNY170.27 billion. However, a cap introduced by CIRC in October 2011 on the amount of subordinated debt issued has caused more and more insurers, in particular those with high financial leverage, to turn to equity issuance to fund their expansion.
Several major insurers have debt leverage close to the ceiling stipulated under the revised regulation.