In the landscape of the insurance industry in 2024, the concept of bond issuance emerges as a pivotal theme.

Recent analyses reveal that a total of 14 insurance companies have issued 17 bonds in 2024, accumulating an impressive issuance scale of 117.5 billion yuanThis surge marks a historic achievement, as it follows a thrilling milestone in 2023 when issuance levels first surpassed 100 billion yuan.

Amid recent regulatory loosening, notably with the extension of the transition period for the second phase of solvency standards until the end of 2025, the industry anticipates a rapid acceleration in bond issuance from insurance companies facing capital constraints

It is projected that the bond issuance scale in 2025 may remain above the 100 billion yuan mark.

A trend of continuously declining coupon rates is noteworthy.

In recent times, the insurance sector has faced challenges in using equity financing to supplement capital due to industry growth pressuresIn contrast, bond financing offers advantages such as fewer restrictions, shorter issuance cycles, and lower costs, especially in the current low-interest-rate market environment fostering increased demand for bond issuance.

The recent statistics confirm that the 14 insurance companies issued 17 bonds in 2024, once again crossing the significant threshold of 100 billion yuan.

Among these, leading companies in life and property insurance dominate the current bond issuance wave

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A total of 10 life insurance firms collectively issued 13 bonds, accounting for 86.5 billion yuan, while four property insurance companies issued a single bond each, totaling 31 billion yuan.

Moreover, substantial bond issuances of over 10 billion yuan have become frequentChina Life Insurance topped the issuance size with a massive 35 billion yuan; subsequent issuances by Ping An Life, PICC Property, New China Life, and Ping An Property followed closely with 15 billion yuan, 12 billion yuan, 10 billion yuan, and 10 billion yuan respectively.

When it comes to the purpose behind bond fundraising, these companies cite the need to enhance their capital base and solvency capabilities, aiming to create conditions for sustainable and stable business development.

The comparatively low financing costs also contribute to the enthusiasm for bond issuance in 2024. Observations detail that the coupon rates for the 17 bonds issued by insurance firms in 2024 range from 2.15% to 2.90%, while the capital-increasing bonds and perpetual bonds from 2023 were typically around 3.5%.

Amid this situation, the strategy of "issuing new bonds to redeem old ones" has emerged as a financially advantageous choice for insurance companies

Take, for instance, Ping An Property, which announced in March 2024 the exercise of its redemption option for its 2019 capital-increasing bondsThis particular bond had a ten-year fixed coupon rate with a redemption option after five years, originally sized at 10 billion yuan with a coupon of 4.64%.

After redeeming this bond, Ping An Property issued “24 Ping An Capital Supplement Bonds 01” in July 2024, of the same size but at a significantly reduced coupon rate of 2.27%.

But what accounts for the continued decline in coupon rates for insurance company bonds? Analysts attribute this phenomenon to the overall downward pressure on market interest rates, which in turn lowers the rates at which insurance companies can issue bonds

Additionally, growing market recognition of the credit ratings and debt-repayment capacities of these firms has contributed to this trend.

Huang Dazhi, a researcher at the Star Map Financial Research Institute, noted that the lower coupon rates decrease the borrowing costs for insurers, yet simultaneously reduce the appeal of such bonds to investorsHowever, when viewed in the context of a broader asset market, where coupon rates are generally declining, this impact must be assessed with a balanced perspective.

The accelerated rollout of perpetual bonds

It's noteworthy that the issuance of perpetual bonds, which have become a new tool for insurance companies to replenish capital, has been expanding in 2024.

In September 2022, the issuance of perpetual bonds by insurance companies was officially launched

At that time, the China Banking and Insurance Regulatory Commission indicated that promoting the issuance of perpetual bonds was crucial for diversifying capital replenishment channels and enhancing core solvency ratios within the insurance sector.

A year later, in September 2023, Taikang Life Insurance received approval to issue up to 20 billion yuan in perpetual bonds, marking a significant breakthrough for the sector.

Since the onset of 2024, Ping An Life Insurance, Taikang Life, Tai'an Life Insurance, Sino-British Life Insurance, and China Postal Life have issued perpetual bonds totaling 35.9 billion yuan.

Contrasting the capital-raising bonds, what differentiates perpetual bonds? According to analysts from Huachuang Securities, both serve the purpose of enhancing capital but differ in their classification and impact on solvency ratios.

The China International Capital Corporation's fixed income report highlights that, unlike capital-raising bonds, perpetual bonds have a lower repayment hierarchy, no expiration date, and do not possess interest rate escalation mechanisms

Additionally, bonds with unsatisfactory solvency ratios are not allowed to pay interest, featuring significant subordinate characteristics.

Experts like Zhu Keli, founder of the New Economy Research Institute, suggest insurers favor perpetual bonds for their stable return rates and their ability to streamline liability structuresThis stable return characteristic invites long-term investments, providing a solid funding source for enduring company growthMoreover, by issuing perpetual bonds, insurers can enhance their liability structure, mitigating risks associated with asset-liability mismatches while bolstering their resilience against risks.

As for the decision-making process in choosing between capital-raising bonds and perpetual bonds, Zhu Keli believes insurers should consider various aspects, including their capital status, liability structure, and strategic plans

Generally speaking, capital-raising bonds suit short-term capital infusion needs, offering a shorter issuance cycle and quicker fund availability, making them ideal for addressing immediate capital pressuresIn contrast, perpetual bonds are more favorable for long-term liability management and capital planning, thanks to their extended durations and stable returns that can meet long-standing liabilities and provide reliable funding.

A forecast for an increased pace of bond issuances

The ongoing signals for capital replenishment from insurers underline the mounting pressures they face regarding their solvency.

With the implementation of the second phase of solvency standards in 2022, the framework of prudent regulatory policies governing the insurance industry has been refined

This transition has resulted in a notable decline in solvency ratios among insurers, leading to an intensified demand for capital replenishment.

Data from the National Financial Regulatory Administration shows that at the end of 2021, the average solvency adequacy ratio for the insurance sector was 232.1%, while the average core solvency ratio stood at 219.7%, both indicating a solid financial foundationHowever, by the end of the third quarter of 2024, these figures had decreased to 197.4% and 135.1%, respectively.

“The second phase of solvency standards has positively influenced capital quality and improved the measurement of capital risks, yet it also poses greater challenges for capital management among insurers,” stated Zhu Nanjun, deputy director of the China Insurance and Social Security Research Center at Peking University

He emphasized that in an environment characterized by declining interest rates and investment volatility, the insurance sector is exhibiting counter-cyclical operational trends, complicating capital management amid stringent solvency regulatory policies.

Taking into account that the shift to the second solvency standard has not yet been fully adapted, the Financial Regulatory Bureau has announced an extension of the transition period initially set to end in 2024 until the close of 2025. This decision allows insurance companies more time to comply with the regulatory adjustments.

The announcement specifies that companies significantly affected by the shift in solvency standards may discuss transition policies with regulatory authorities, which will be tailored on a case-by-case basis

Existing transition policies for those previously benefiting from such arrangements will not be further minimized following adjustments in 2025.

This extension undoubtedly provides insurance companies with additional breathing roomChen Fu, chief analyst for non-bank financial sectors at GF Securities, noted that significantly falling long-term interest rates and market volatility exert pressure on the solvency of life insurance firmsThe extended transition period is likely to alleviate solvency pressures for certain companies, facilitating a smoother adjustment to the new rules.

Looking forward to 2025, he anticipates that insurance companies under solvency pressure will accelerate the tempo of bond issuances to bolster their capital levels

Additionally, a new policy proposal aims to increase the utilization of debt-based capital tools, potentially broadening channels for increasing debt capital.

Research from CMB International Securities expects that the scale of bond financing for insurance companies in 2025 will likely remain above 100 billion yuanGiven that capital-raising bonds only address supplementary tier 1 capital needs, whereas issuing perpetual bonds enhances core tier 2 capital, the outlook for perpetual bond issuances will likely continue to expand.

Nevertheless, as the insurance sector enters a transformative phase, relying solely on external capital infusions will not adequately resolve the capital predicament facing medium and small insurers