Author| Lou Yongfei, Deputy General Manager of Li'an Excellence Insurance Brokers Co., Ltd., Expert of the "Expert Think Tank" of Henan Insurance Society
China Insurance, Issue 4, 2024
The status quo of capital increase and share expansion of insurance companies
With the implementation of the "C-ROSS II" project, the solvency level of the mainland insurance industry has shown a downward trend as a whole, and in order to meet regulatory requirements, some insurance companies have supplemented their capital by increasing capital and expanding shares to improve their solvency level. According to data from the State Administration of Financial Supervision and Administration, as of the end of 2023, the average comprehensive and core solvency adequacy ratios of insurance companies were 196.5% and 127.8%, respectively, a decrease of 35.5% and 91.9% compared with the end of 2021, of which property insurance companies were 236.5% and 204.3%, respectively, and life insurance companies were 186.2% and 110.3%, respectively. After the implementation of the "C-ROSS II" rule, under the influence of factors such as the inclusion of future surpluses in the capital classification of insurance policies and the upward adjustment of risk factors of investment assets, the solvency adequacy ratio of life insurance companies has declined significantly, resulting in the solvency adequacy ratio of life insurance companies being significantly lower than that of property insurance companies, and some of the small and medium-sized life insurance companies have not reached the solvency standard and are under the regulatory warning line. At the same time, in the face of fierce market competition, insurance companies also need to consume a lot of capital to enhance their core competitiveness by developing new varieties, expanding channel markets, and setting up branches. In view of this, in order to improve the solvency level or core competitiveness, some insurance companies usually supplement their capital by increasing capital and shares.
According to incomplete statistics, in 2023, a total of 19 national insurance companies (insurance groups, life insurance companies, property insurance companies) across the country will be approved for 20 capital increases and share increases, with a cumulative capital increase of about 24 billion yuan, of which Chinese Life (Overseas) has completed two capital increases and share increases throughout the year. Details are shown in Table 1.
However, due to factors such as the downturn in macroeconomic growth, the decline in the profitability of small and medium-sized insurance companies, and the tightening of industry regulatory policies, the insurance industry as a whole is more difficult to increase capital and shares. From the perspective of the external environment, on the one hand, the regulatory policies of the insurance industry are becoming stricter, and the threshold conditions for the shareholders of insurance companies, especially strategic shareholders, are higher, and they need to meet extremely strict financial index requirements. On the other hand, insurance companies, especially small and medium-sized insurance companies, are affected by factors such as large fluctuations in the capital market and high underwriting costs, and their profitability continues to decline, the profit loss area further expands, and they are unable to distribute dividends to shareholders, and the value of equity investment of insurance companies is not high. From the perspective of investors, investors' attitudes towards equity investment in insurance companies are changing, and their willingness to increase capital and invest in shares is declining. In recent years, many private enterprises have difficulties in operation, limited development, and shrinking investment, and their operation and financial status are difficult to meet the threshold of insurance company shareholders required by the regulatory requirements, and they cannot obtain satisfactory return on investment, and the use of insurance funds is subject to many policy restrictions, so the willingness of private enterprise investors to increase capital and invest in insurance companies has declined; Local state-owned enterprises are more interested in the equity of small and medium-sized insurance companies based on the consideration of the layout of the financial industry, but the goal of increasing capital and investing in insurance companies is generally actual control, and they can move the headquarters of insurance companies to the local area and change the place of registration to the local area, so as to increase tax revenue. employment and play the role of the headquarters economy, but the relocation and change of registration place may have certain conflicts with the government where the headquarters of the insurance company is located, and the cost of communication and coordination is high. If the relocation of the headquarters of the insurance company and the change of the place of registration cannot be realized, the willingness of local SOE investors to increase capital and invest in shares will be greatly reduced.
The necessity and significance of capital increase and share expansion
1. Meet the solvency regulatory requirements and enhance the ability to resist risks
The solvency of insurance companies is not up to standard, which will lead to restrictions on the business development of Internet insurance, bancassurance and other channels, and have an adverse impact on equity investment and the establishment of branches. First, it is impossible to carry out Internet insurance business. According to the Notice on Further Regulating the Internet Life Insurance Business of Insurance Institutions, an insurance company shall carry out online life insurance business with a comprehensive solvency adequacy ratio of 120% and a core solvency of not less than 75% for four consecutive quarters. Second, it is impossible to set up new branches. According to the Administrative Measures for Market Access of Branches of Insurance Companies, the establishment of branches other than provincial-level branches of an insurance company shall meet the requirements of the comprehensive solvency adequacy ratio of not less than 150% and the core solvency adequacy ratio of not less than 75% in the previous year and for two consecutive quarters before submitting the application. Third, it is not possible to increase investment in equity assets. According to the Notice on Matters Concerning the Optimization of the Supervision of Equity Asset Allocation of Insurance Companies, if the comprehensive solvency adequacy ratio of an insurance company is less than 100% at the end of the previous quarter, it shall immediately stop investing in new equity assets, and the balance of equity asset investment shall not exceed 10% of the Company's total assets at the end of the previous quarter. Fourth, the expansion of bancassurance channels is limited. Banking institutions usually have certain requirements for the strength, reputation and solvency of the insurance companies that cooperate with the bancassurance channel, especially the solvency must meet the regulatory requirements and cannot become a risk institution. If solvency is not up to standard, insurers may face the risk of not being able to expand their bancassurance channels. Therefore, the capital increase and share expansion of insurance companies can help improve the scale of authorized assets and capital adequacy ratio, thereby enhancing their solvency level, meeting solvency regulatory requirements, reducing the risk of insufficient capital, and effectively improving their ability to resist risks.
2. Meet the capital needs of business development and enhance market competitiveness
Under the solvency regulatory framework, insurance companies need to consume a large amount of capital to develop new varieties, channel layout, branch establishment and other business development, and there is a positive correlation between business development and capital replenishment, but the mismatch between the demand for capital and limited capital for the rapid development of insurance business has always plagued the insurance industry. Therefore, the capital increase and share expansion of insurance companies can effectively enhance capital strength, consolidate the foundation for development, better meet the capital needs of new business layout, traditional business transformation and branch laying, and provide more financial support for business expansion, thereby bringing breakthrough development in terms of scale and efficiency, helping to further enhance underwriting capacity, profitability and market competitiveness, and give full play to the role of economic "shock absorber" and social "stabilizer".
3. Meet the needs of business collaboration and improve the level of corporate governance
By introducing strong and resourceful strategic investors, insurance companies can effectively leverage the capital and resource increments of new shareholders to build an insurance ecosystem in specific industry sectors. Through the advantages of the new shareholders in industry, technology and resources, the insurance company will achieve synergies with the company's operation in terms of strategy, business and technology, further accelerate business expansion, and promote the company's steady and sustainable development. For example, a pension industry group invests in the equity of a life insurance company in order to strengthen the business synergy between the two parties, explore the innovative model of "pension + insurance", grasp the development trend of "silver economy", and help the development of the pension industry. In addition, the introduction of high-quality strategic investors will help to diversify the company's equity structure, improve the corporate governance structure and governance mechanism, and effectively improve the level of corporate governance.
The main process of capital increase and share expansion
1. Perform internal decision-making procedures
According to Article 23 of the Measures for the Administration of Equity of Insurance Companies, the subscription of new shares or registered capital issued by an insurance company shall be subject to the corresponding internal review and decision-making procedures in accordance with the provisions of the articles of association of the insurance company. The capital increase resolution of an insurance company generally includes the amount of capital increase, the method of capital increase, and the target of capital increase. If the insurance company is a provincial state-owned enterprise, its capital increase and share expansion need to obtain the approval of the state-owned assets regulatory authority.
2. Conduct asset appraisals
In order to determine the issue price of the new shares or registered capital, the insurance company needs to hire an intermediary to evaluate the company's assets in advance, and the intermediary should choose an appraisal method suitable for the characteristics of the insurance industry and issue a corresponding asset appraisal report. If the insurance company is a provincial state-owned enterprise, its asset appraisal results need to be filed with the state-owned assets supervision department.
3. Send a subscription invitation
After the insurance company passes the resolution to increase capital and shares, it needs to issue an invitation letter to the prospective investors to subscribe for the new shares or registered capital. The original shareholders of the insurance company have the right of first refusal to subscribe, and if they are not willing to subscribe, they should issue a letter of commitment to waive the subscription. The subscription invitation letter states that the prospective investor shall give a written reply on whether to participate in the subscription within a reasonable time after receiving the invitation letter, and it is clear that if the feedback is not given in the manner and time specified in the invitation letter, it will be deemed to have given up the subscription.
4. Determine the plan for capital increase and share expansion
The insurance company shall, in accordance with the provisions of the articles of association, confirm the amount of additional shares or registered capital to be subscribed by each shareholder and the new investor (if any) based on the replies of the prospective investors and the results of asset evaluation, determine the capital increase price and form a capital increase plan. The capital increase plan shall be deliberated and approved by the shareholders' meeting in accordance with the articles of association. If the insurance company is a provincial state-owned enterprise, its capital increase and share expansion plan needs to be approved by the state-owned assets regulatory authority. Since the capital increase and share expansion will lead to changes in the company's registered capital and equity structure, it is recommended that the insurance company simultaneously review the change of the company's articles of association.
5. The paid-in capital contribution is in place and the capital is verified
According to Article 69 of the Insurance Law, the registered capital of an insurance company must be paid-in monetary capital. At the same time, according to Article 36 of the Measures for the Administration of Equity of Insurance Companies, insurance companies shall open and use capital verification accounts in accordance with relevant national regulations. If an investor makes a capital contribution to an insurance company, it shall be verified by an accounting firm and a certificate of capital verification shall be issued. Therefore, investors participating in the capital increase and share expansion of insurance companies should pay in the form of monetary capital and remit the paid-in monetary capital to the capital verification account, and the accounting firm shall be responsible for the capital verification.
6. Submit to the regulatory department for approval
In the event of a capital increase by an insurance company, the existing shareholders subscribe for the new shares or registered capital without involving the new shareholders, in accordance with Article 68 of the Measures for the Administration of Equity of Insurance Companies, the following materials shall be submitted to the regulatory authorities: (1) the resolution on capital increase and share increase passed by the company's shareholders (general meeting), (2) the capital increase plan and feasibility study report, (3) the equity structure after the capital increase and share increase, (4) the capital verification report and the shareholder's capital contribution certificate, and (5) the financial accounting report of the shareholders participating in the capital increase audited by an accounting firm. The new shareholders of the company shall submit application documents such as business license, business scope, organizational structure, equity structure, industry status, source of capital increase and shareholding, foreign long-term equity investment, investment in financial institutions, tax payment certificate, credit report, business plan of investment insurance company, comprehensive risk management system, self-owned capital commitment and financial report for the past three years.
Issues that need to be paid attention to in capital increase and share expansion
On the one hand, it reflects the high qualification requirements of shareholders of insurance companies under the strong regulatory policy of the industry, and on the other hand, the value of equity investment of some insurance companies has decreased, and the subjective willingness of investors to participate in capital increase and share expansion is not strong enough, and the number of investors who meet the regulatory requirements and have the ability and willingness to take out sufficient funds to participate in the capital increase and share expansion of insurance companies has also decreased. If an insurance company wants to successfully complete the capital increase and share expansion, it needs to focus on the following issues.
1. Restrictions on the shareholding ratio of a single shareholder
According to Articles 29 and 30 of the Measures for the Administration of Equity of Insurance Companies, the shareholding ratio of a single shareholder shall not exceed one-third of the registered capital of an insurance company; if an insurance company needs to acquire an insurance company for business innovation, specialization or group operation, the upper limit of its shareholding ratio shall not be restricted, but it shall not invest in an insurance company of the same kind of business; and the upper limit of the shareholding ratio of an investor participating in the risk disposal of an insurance company with the approval of the regulatory authorities shall not be restricted. Under normal circumstances, investors hold up to one-third of the equity ratio of the insurance company, and it is more difficult to achieve absolute control of the insurance company through capital increase, unless the investor is a non-interbank insurance company or participates in the risk disposal of the insurance company. If the investor is a local state-owned enterprise and plans to relocate the headquarters of the insurance company and change the place of registration, it will need to find more qualified co-investors to participate together, which will further increase the difficulty of the transaction.
2. Restrictions on the qualifications of investors
Whether the shareholders of an insurance company meet the requirements for shareholder qualification is a key factor for the regulatory authorities to approve the capital increase and share expansion, and the regulatory authorities adopt strict approval procedures for the qualifications of shareholders of insurance companies, mainly focusing on the background of shareholders, financial status, tax payment, violations of laws and regulations, resource matching, authenticity of equity funds, etc., especially strategic shareholders also need to meet the condition that "the balance of equity investment shall not exceed net assets". In practice, the regulatory authorities usually conduct retrospective and penetrating reviews of the financial status of the investor, that is, to review the scope of the investor's merger and the financial indicators of the parent company in the past three years.
3. Restrictions on the source of funds for capital increase and shareholding
The funds of the investor's capital increase and shareholding in the insurance company must be its own funds from a legitimate source, mainly including investment income, dividends of subsidiaries, capital injection by shareholders, financial allocation, etc., and shall not use bank loans, bond financing and other means to contribute capital to the insurance company, and shall use monetary contributions, and shall not use non-monetary assets such as physical objects, intellectual property rights, land use rights and other non-monetary assets as capital contributions. The regulatory authorities strictly examine the source of funds for the investor's capital increase and shareholding, especially the penetrating review of the path and duration of each fund in the bank account provided by the investor, which effectively controls the risk of the investor's capital increase and share investment, but also affects the progress of the insurance company's capital increase and share expansion to a certain extent.
4. Limitations on the choice of asset valuation method
Business asset valuation methods usually include the market approach, the income approach, and the cost approach. Insurance companies, especially life insurance companies, are typical liability-driven institutions, which are significantly different from the operating characteristics of general entity enterprises, and their profits mainly come from underwriting profits and investment income, and the value of new policies in the future is an important part of the company's asset evaluation. An asset-based approach to cost valuation. Therefore, according to the special attributes of life insurance companies, the industry usually adopts the income assessment method of "embedded value + discounted new business value". However, the income approach to asset valuation results are generally at a higher premium, often several times higher than the net assets of the insurance company. If investors do not have an in-depth understanding of the characteristics of the insurance industry, it is difficult to accept the results of asset valuation at a high premium, and they are more inclined to use the cost method to carry out asset valuation.
5. Restrictions on the excessive rights of foreign shareholders
After the mainland's accession to the WTO in 2001, the insurance industry accelerated the pace of opening up to the outside world and allowed foreign capital to set up joint ventures in China. At that time, in order to encourage the introduction of foreign capital, some joint venture insurance companies stipulated in the articles of association that the foreign shareholders had important decision-making power, or even veto power, in matters such as the amendment of the articles of association, equity transfer, profit distribution, business planning, etc., so the foreign shareholders had a strong voice at the shareholders' meeting and the board of directors. In addition, according to Article 3 of the Detailed Rules for the Implementation of the Regulations on the Administration of Foreign-funded Insurance Companies, if a joint venture insurance company has at least one insurance company with normal operation as the major shareholder, if the equity change is carried out, at least one insurance company with normal operation shall be the major shareholder after the change. Therefore, unless the investor is an insurance company or obtains an exemption from the regulatory authorities, it will be difficult to control the joint venture insurance company.
6. Restrictions on related party transactions with shareholders
In the past, some investors, especially private enterprise investors, increased their capital and invested in insurance companies, one of the purposes of which was to use insurance funds to carry out related party transactions and seek rapid development. Related-party transactions related to the use of insurance funds mainly include bank deposits with related parties, direct or indirect trading of bonds, stocks and other securities, investment in equity, real estate and other assets of related parties, and direct or indirect investment in financial products issued by related parties. According to Article 3 of the Measures for the Administration of Related Party Transactions of Banking and Insurance Institutions, insurance companies shall not engage in benefit transfer or regulatory arbitrage through related party transactions, and shall take effective measures to prevent related parties from taking advantage of their special status to infringe on the interests of insurance companies through related party transactions. High-risk insurance companies usually have violations of laws and regulations such as misappropriation and arbitrage of insurance funds by major shareholders, and there are great risks and hidden dangers in related party transactions in the use of insurance funds, which seriously endangers the capital security of insurance companies. Therefore, strengthening the supervision of related party transactions on the use of insurance funds by the regulatory authorities will help to screen out more high-quality and qualified investors for insurance companies.
Countermeasures are suggested
It is recommended to work together from the three levels of regulatory authorities, insurance companies and investors to solve the problem of capital increase and share expansion of insurance companies, so as to promote the insurance industry to better play the role of economic "shock absorber" and social "stabilizer".
1. Regulatory level
The Central Financial Work Conference proposed to adhere to the prevention and control of risks as the eternal theme of financial work, comprehensively strengthen financial supervision, and effectively prevent and resolve financial risks, especially the timely disposal of risks of small and medium-sized financial institutions. The profitability and solvency of some small and medium-sized insurance companies continue to decline, and if they do not replenish capital in a timely and effective manner, they may eventually become risk institutions, which will incur greater risks and losses. On the premise of strengthening financial supervision, the regulatory authorities have adjusted and optimized the qualifications of shareholders in a timely manner, and continuously improved the policies and systems for equity management. First, the Measures for the Administration of Equity of Insurance Companies do not specify the "time for the review of financial indicators" and "the scope of review of the main body of investors", so in order to accelerate the work of increasing the capital and shares of insurance companies, it is recommended to clarify the "review of financial indicators for one year" and "review of the scope of investor merger", so as to avoid information asymmetry between the regulatory authorities and investors. In order to further consolidate the responsibility of the local government to dispose of risk institutions, it is recommended to cancel the condition that "the balance of equity investment shall not exceed net assets" in the "Measures for the Administration of Equity of Insurance Companies". Third, the foreign shareholders of some joint venture insurance companies are unwilling to continue to increase their capital, but they are limited by the provisions of the Detailed Rules for the Implementation of the Regulations on the Administration of Foreign-funded Insurance Companies that "at least one insurance company with normal operation shall be the main shareholder after the change of equity", and it may be impossible to find a suitable investor, which will have an adverse impact on the capital increase and share expansion. Fourth, we will study the management mechanism of shareholder qualifications by category, support high-quality investors who are in line with national policies, have a sound governance structure and have a sound financial situation to participate in the capital increase and share expansion of insurance companies, and allow them to break through the upper limit of one-third of their shareholdings, so as to effectively enhance the capital strength of the insurance industry.
2. At the level of insurance companies
The Central Financial Work Conference proposed that it is necessary to do a good job in five major articles, such as inclusive finance and pension finance, give full play to the economic "shock absorber" and social "stabilizer" function of the insurance industry, and further highlight the role of the insurance industry in supporting and guaranteeing the national economy, and the insurance industry should play a greater role in building a "financial power". This requires insurance companies to serve the overall development of the country, continue to reduce costs and increase efficiency, and effectively improve profitability and solvency, so as to attract more high-quality investors and change the current situation of capital supply in the insurance industry exceeding demand. First, insurance companies should focus on their main responsibilities and main businesses, continue to return to the origin of insurance protection, completely, accurately and comprehensively implement the new development concept, closely focus on the primary task of high-quality development, actively integrate into and serve the construction of a new development pattern, ensure the political, popular and professional nature of development, and make insurance an important carrier to improve people's sense of gain, happiness and security. The second is to insist on serving the real economy. Insurance companies should give full play to their advantages in risk management and capital utilization, continuously innovate the supply of products and services, provide strong insurance support for the development of the real economy, and continuously improve the quality and efficiency of services. Third, insurance companies, especially small and medium-sized insurance companies, should carry out characteristic and differentiated operations based on the local area, accelerate strategic transformation, deepen the cultivation of characteristic fields, change the extensive development model, weaken the business philosophy of pursuing speed and scale first, shift from the pursuit of premium income growth to the pursuit of high capital return level, and form a differentiated, specialized, and professional Characteristic development model, expand the proportion of value-based business, continuously reduce unreasonable marketing and channel costs, improve capital use efficiency and profitability, and promote endogenous capital accumulation.
3. At the investor level
The 2024 work conference of the State Administration of Financial Supervision and Administration proposed to improve the normalization mechanism of financial risk disposal and implement the responsibilities of institutions, shareholders, executives, regulators, territories and industries. Under the constraints of the policy of strong supervision in the industry, higher rules and regulations are put forward for the shareholders of insurance companies, which cannot carry out related party transactions or misappropriate insurance funds in violation of regulations, and have the responsibility to supplement capital and resolve risks to insurance companies. The first is to select qualified investors. Investors should strictly refer to the policies and regulations of the insurance company in terms of equity investment, capital increase and share expansion, carefully evaluate their own business development, financial situation, resource matching, etc., and then participate in the capital increase and share expansion of the insurance company if they meet the qualifications of shareholders, so as to avoid the risk of failing to pass the regulatory approval. Second, if the policy of one-third of the shareholding ratio of a single shareholder cannot be broken, especially for local state-owned enterprise investors, it is necessary to form an investment consortium with no related relationship or concerted actor relationship to jointly participate in the capital increase and share expansion of the insurance company, and the shareholding ratio may exceed one-third, which will have a significant impact on the shareholders' meeting and board of directors of the insurance company, and help achieve the goal of relocating the headquarters of the insurance company and changing the place of registration. The third is to strictly fulfill the responsibilities of shareholders. If an investor participates in the capital increase and share expansion of an insurance company and becomes a major shareholder, it shall strictly abide by the regulatory policies and regulations, shall not carry out related party transactions with the insurance company in violation of regulations, shall not misappropriate or arbitrage insurance funds, and shall make reasonable arrangements for the protection of the interests of small and medium-sized shareholders and policyholders, insureds and beneficiaries. At the same time, when the insurance company has insufficient solvency and major risks, investors have the obligation to continuously replenish capital and dispose of risks.