Posted on Sep 10, 2010 by Sergio Ulloa
China's insurance regulator, the China Insurance Regulatory Commission (CIRC), has laid out new rules allowing Chinese insurance companies to diversify their investment channels to include Private Equity and Real Estate.
The new rules afford Chinese insurers the chance to invest up to 10 percent of assets in real estate, as well as investing a further 5 percent of assets into private equity investments and associated financial products. Some analysts estimate that the new asset investment rules will release up to CNY 100 billion (USD 14.76 billion) into the Chinese private equity and property markets.
The CIRC announced the pending changes last month but did not provide detailed rules at the time. Under the new rules issued through the CIRC website in the first few days of September, Chinese insurance companies can now directly invest in unlisted insurance-related businesses, such as pension, medical and auto services. The new rules bar insurers from investing in venture capital funds, and caps indirect private equity investments, which usually happen through funds, at 4 percent of total assets.
Chinese insurance companies do face some restrictions when investing in real estate; they are prevented from investing in residential property, being limited to commercial and office-related projects, as well as real-estate projects pertaining to the company's own uses. Insurers are further prohibited from engaging in real estate development, establishing a real estate company of their own, or investing in unlisted real estate companies.
China Life Insurance Group's project company, China Life Property will be unaffected by the new rules as it sets up to manage China Life Insurance's office buildings. China Life Insurance also holds a stake in Sino-Ocean Land Holdings, but as it is only a 24 percent stake and a non-controlling one, it will not have to sell its shares under the new rules.
The new investment opportunities could lead to a lot of money flowing into the private equity and real estate industries in China, as Chinese insurers' assets totaled CNY 4.5 trillion (USD 664.7 billion) by the end of the second quarter in 2010. This means there could be an influx of as much as CNY 450 billion (USD 66.5 billion) of insurers' money into real estate and CNY 220 billion (USD 32.5 billion) into private equity.
The new diversification of potential asset investment targets comes at a good time for Chinese insurance companies, as both China Life Insurance and Ping An Insurance Group saw their 2010 investment income drop from the previous year. Despite the fact that China Life Insurance raised their net profit 7.4 percent year on year to CNY 18.03 billion (USD 2.66 billion) for the first half of 2010, their investment income slid 4.3 percent to CNY 32.37 billion (USD 4.78 billion).
Ping An Insurance Group, China Life Insurance Company's biggest domestic competitor, also saw its total investment income drop for the first half of 2010, down about 25.6 percent from the same period a year ago, to CNY 10.37 billion (USD 1.53 billion). Ping An's return on total investment rate dropped from 4.8 percent to 3.7 percent.
So far Yuan-denominated private equity funds have raised approximately CNY 61.6 billion (USD 9.1 billion) in 2010, which raises some worries about the potential flood of cash that could flow into the private equity markets of China. The CNY 220 billion (USD 32.5 billion) that Chinese insurers could put into the industry vastly outstrips the fund-raising efforts from current private equity houses.
Not only does it appear that the Chinese private equity markets are not prepared for that size of incoming investment, but some believe that larger Chinese insurers like Ping An Group and China Life Insurance Group may set up their own private-equity businesses. Should this happen it may have a knock on effect on the private equity business by increasing competition for both funds and targets for investment, which could cause asset prices to rise.
Considering the State Council of China has previously said that commercial health insurance will play a large part in any healthcare reform in China, the ability for Chinese insurance companies to invest in insurance-related businesses, including those in the medical industry, may play a part in long term healthcare and health insurance reform in China.
Insurance Companies Mentioned:
China Life Insurance
China Life Insurance Company Limited (China Life) is a People's Republic of China-based life insurance company. The products and services include individual life insurance, group life insurance, accident and health insurance. The Company operates in four business segments: individual life insurance business, group life insurance business, short-term insurance business, and corporate and other business.
Ping An Insurance Group
Ping An Insurance (Group) Company of China, Ltd. (Ping An) is engaged in providing a range of financial products and services. The Company focuses on three businesses: insurance, banking and investment. The Company operates in five business segments: life insurance business, property and casualty insurance business, banking business, securities business, corporate and other businesses. The Company's subsidiaries include Ping An Life Insurance Company of China, Ltd. (Ping An Life), Ping An Property & Casualty Insurance Company of China, Ltd. (Ping An Property & Casualty), China Ping An Trust & Investment Co., Ltd. (Ping An Trust), Ping An Securities Company, Ltd. (Ping An Securities), Ping An Bank Co., Ltd. (Ping An Bank), Ping An Annuity Insurance Company of China, Ltd. (Ping An Annuity) and Ping An Health Insurance Company of China, Ltd. (Ping An Health), among others.