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Focus: New rules on utilisation of insurance funds

30 November 2010

In brief: The China Insurance Regulatory Commission has recently released new rules governing the utilisation of insurance funds and given further guidance on insurance companies' investment activities. Head of Corporate, North Asia, David Wenger (view CV), Senior Associate Wayne Wang and Consultant Crystal Zhang report.

• Background
• The interim measures and the circular
• Definition of 'insurance funds' under the interim measures
• Permitted investments under the interim measures
• Ratio requirements
• Prohibited investments
• The equity investment measures
• The real estate measures
• Conclusion

Background

The PRC Insurance Law was amended in 2009 to specify that, for the first time, insurance companies may use their funds to invest in 'immovable assets'. Investment by insurance companies in bonds, shares and investment funds is also permitted. After almost a year, in July 2010, CIRC released the interim measures and the circular in order to expand further the scope of permitted investments by insurance companies and provide further guidance on the scope of such activities. In addition, CIRC has promulgated the equity investment measures and real estate measures, to set out further details regarding equity investment and real estate investment of insurance funds.

The interim measures and the circular

The interim measures apply to insurance companies incorporated in the PRC, as well as insurance asset management companies that are used by insurance companies to conduct the investment of insurance funds.

Definition of 'insurance funds' under the interim measures

The 'insurance funds' referred to in the interim measures include capital funds, public reserve funds, undistributed profits, various forms of reserves and other funds of insurance companies, whether they are dominated in renminbi or foreign currency.

Permitted investments under the interim measures

The investment of insurance funds shall be restricted to the following forms:

• bank deposit;
• purchase and sale of bonds, shares, units of securities, investment funds and other negotiable securities;
• real property; and
• other forms of fund utilisation prescribed by the State Council.

In case of investment in real property with insurance funds, the real property shall refer to land, buildings and other things permanently attached to land. Insurance funds can also be invested in equity of joint stock or limited liability companies legally established and registered within China that have not been publicly listed on a stock exchange.

Ratio requirements

The interim measures and the circular set out specific ratio requirements for each of the permitted investments. For instance:

• The aggregate book balances of investments in unsecured enterprise (company) bonds and debt financing instruments of non-financial enterprises shall not be more than 20 per cent of the total assets of the insurance company at the end of the preceding quarter.
• The aggregate book balances of investments in shares and equity funds shall not be more than 20 per cent of the total assets of the insurance company at the end of the preceding quarter.
• The book balance of the investment in equity of unlisted enterprises shall not be more than 5 per cent of the total assets of the insurance company at the end of the preceding quarter; the book balance of the investment in financial products related to the equity of unlisted enterprises shall not be more than 4 per cent of the total assets of the insurance company at the end of the preceding quarter; the aggregate amount of the said two balances shall account for no more than 5 per cent of the total assets of the insurance company at the end of the preceding quarter.
• The book balance of the investment in real property shall not be more than 10 per cent of the total assets of the insurance company at the end of the preceding quarter; the book balance of the investment in real property related financial products shall not be more than 3 per cent of the total assets of the insurance company at the end of the preceding quarter; the aggregate amount of the said two balances shall account for no more than 10 per cent of the total assets of the insurance company at the end of the preceding quarter.

Prohibited investments

The insurance funds shall not be invested in the following ways:

• depositing funds in a non-banking financing institution;
• purchasing shares to which the stock exchange applies a 'special treatment' or a 'special treatment with a warning of listing termination risk';
• investing in equity or real property of enterprises that do not have an expected stable cash flow return or asset appreciation value, or high-polluting enterprises, which do not comply with the industrial policies of the state;
• directly engaging in real estate development and construction;
• engaging in venture capital investment;
• using the investment assets generated from utilisation of insurance funds to provide guarantees for others or to issue loans, except for loans pledged against individual insurance policies; and
• other investment activities forbidden by the CIRC.

The equity investment measures

Under the equity investment measures, the equity that could be invested with insurance funds refers to equity of companies limited by shares and limited liability companies lawfully established and registered in the PRC, and that are not publicly listed on a stock exchange in China.

Insurance funds may be invested in equities either directly (whereby the insurance companies invest in and hold the equity directly) or indirectly (whereby the insurance companies invest in financial products such as an equity investment funds promoted and established by equity investment management institutions).

Insurance companies proposing to invest in equity directly shall satisfy a set of requirements, such as (without limitation):

• having a solvency adequacy ratio of not less than 150 per cent as at the end of the last fiscal year and, at the time of the investment, having a solvency adequacy ratio of not less than 150 per cent as at the end of the last quarter;
• being profitable and having net assets of not less than RMB1 billion during the last fiscal year (this requirement does not need to be satisfied for indirect equity investment with insurance funds); and
• not having been found to have committed a major violation of laws or regulations during the most recent three years.

Insurance funds may not be invested in the equity of enterprises that do not comply with state industrial policy, do not have a forecast of a stable cash flow return or asset appreciation prospects, are highly polluting or energy intensive, do not meet state energy saving and environmental protection standards, or have a relatively low technology-added value. Insurance funds must not be invested in venture investment funds or risk investment funds, and must not be invested in the establishment of, or the taking of an equity interest in, investment institutions.

Direct investment in equity with insurance funds shall be limited solely to the equity of insurance enterprises, non-insurance financial enterprises and insurance business-connected enterprises such as pension, medical or automobile service enterprises.

If an insurance company intends to make an equity investment that will grant it control of the target, the insurance company shall use its capital funds. If an insurance company intends to make other direct investment in equity, the insurance company may use its capital funds or funds from its liability reserve funds that have a term matching the asset investment term.

An insurance company proposing to make direct equity investment shall engage qualified professional entities to provide services such as due diligence, investment consulting and legal advice.

The real estate measures

Insurance funds can be invested in infrastructure-type real property, non-infrastructure-type real property and financial products related to real property, subject to the provision that real estate investments with insurance funds are restricted to commercial real property, office real property and real property for pension, medical service and automobile service that are related to an insurance business, as well as real property for its own use.

An insurance company investing in real estate shall satisfy a number of conditions, such as (without limitation):

• having an solvency adequacy ratio at the end of last fiscal year not lower than 150 per cent, and an solvency adequacy ratio at the end of the last quarter not lower than 150 per cent; and
• being profitable in the last fiscal year and having a net asset not less than RMB 100 million.

Real estate investments with insurance funds must abide by the principle of dedicated land for dedicated use, and insurance companies shall not speculate on land prices or take advantage of investing in the name of pension and own-use real property to develop and sell residential property.

Insurance companies investing in real estate shall not conduct the following activities:

• providing unsecured debt financing;
• using the real property invested to provide mortgage guarantees;
• investing, developing or selling residential property;
• directly engaging in real estate development and construction (including development of tier-1 land);
• investing and setting up real estate development companies or investing in the shares of unlisted real estate enterprises (excluding project companies), or controlling real property enterprises through investing in their shares; or
• using funds raised by means of borrowing, bond issuance, repurchase, interbank borrowing and other methods to invest in real property, unless otherwise stipulated by the CIRC.

Conclusion

The new regulations CIRC has issued have broadened the investment channels of insurance funds and provided detailed guidelines on those investments. Although the promulgation of these regulations by CIRC is an important step in opening the door for insurance companies to invest in equities and real estate, there are strict compliance requirements for conducting those activities. Foreign invested insurance companies should be aware of these regulations and seek advice on how to invest their funds according to PRC law.

For further information, please contact:

• David WengerPartner, Hong Kong
  Ph: +852 2903 6256
  Ulaanbaatar
  Ph: +976 7711 0231
  David.Wenger@allens.com.au