What you must know about PICC's $4b IPO in Hong Kong

The IPO would be credit positive for its major insurance subsidiaries.

According to Moody's, insurance holding company People’s Insurance Company (Group) of China kicked off its road show for its initial public offering (IPO) of up to $4 billion (RMB24.9 billion) on the Hong Kong Stock Exchange.

Here's more from Moody's:

The IPO would be credit positive for its major insurance subsidiaries, PICC Property & Casualty Insurance Company Limited, PICC Life Insurance Company Limited, and PICC Health Insurance Company Limited, because the proceeds would replenish their capital bases.

The subsidiaries’ capital adequacy levels have been under negative pressure owing to their rapid premium growth over the past few years.

PICC Life and PICC Health are the most in need of new capital: at the end of June, their solvency margin ratios were 136% and 101%, respectively, just barely above the regulatory minimum of 100%.

These levels fall into the “Adequacy Solvency I” level, whereby both companies may be requested by the China Insurance Regulatory Commission to submit a plan explaining how they would maintain their solvency.

We attribute their weak capital adequacy levels to their significant premium growth since 2009 and their low profitability to the substantial start-up costs they have incurred since their founding in 2005.

PICC P&C would also benefit from a boost to its capital, although its solvency margin ratio was 184% at the end of June owing in part to its ability to raise fresh capital from a secondary offering in December 2011.

Aside from strengthening the subsidiaries’ capitalization, the IPO would result in a partial privatization of the PICC Group that would help to improve its corporate governance and transparency.

The IPO would reduce PICC Group’s effective government ownership1 to around 83.3% from 100%, and points to the government’s willingness to now have a less dominant role in the industry and let it develop and function on a more commercial basis.

However, because PICC P&C is China’s largest property and casualty insurance company and is still majority government-owned (post-IPO, the government’s effective ownership would decrease to 57.5% from 69.0%), we expect PICC P&C to continue playing a policy role such as promoting agricultural insurance in rural areas.

The IPO, which, if successful, would be the largest in Hong Kong since 2010, would also allow foreign investors, particularly other insurers, to buy stakes in the group. This would provide a source for technical transfer, especially for PICC P&C.

PICC Group’s IPO has been delayed several times since the beginning of this year because of a volatile equity market. To raise its likelihood of success this time, the company has reportedly scaled back the size of the IPO from $6 billion and scrapped its plan to list in Shanghai because it is more difficult to obtain regulatory approvals from the mainland owing to the poor performance of the A-share stock market this year. These steps highlight the group’s urgent need for capital.