Understanding direct investment of insurance capital in equity

In recent years, the China Insurance Regulatory Commission (CIRC) issued regulations addressing the investment of insurance capital in equity, the major ones including the Interim Measures for the Investment of Insurance Capital in Equity and the Notice on Issues Relevant to the Investment of Insurance Capital in Equity and Immovable Assets. They have had a salutary effect in promoting the security and effectiveness of the application of insurance capital. However, with the development of practice, problems of how to understand and apply the relevant CIRC regulations have also arisen.

Q: Do the interim measures and notice apply to the investment of insurance capital in equity by insurance asset management companies?

A: From article 3 of the interim measures, direct equity investments and indirect equity investments are directed at insurance companies – including insurance group (holding) companies – seemingly implying that the interim measures and the notice do not apply to the application of insurance capital by entities (such as insurance asset management companies) other than insurance companies.

However, from a broader perspective, the interim measures and the notice similarly apply to the investment of insurance capital in equity by insurance asset management companies, for two specific reasons:

1.the addressees of both the interim measures and the notice are insurance group (holding) companies, insurance companies and insurance asset management companies, indicating that the investment of insurance capital by the three types of companies are subject to both sets of regulations; and

2.Article 38 of the interim measures specifies that “An insurance asset management company satisfying the provisions of items (1), (3), (7) and (8) of article 9 hereof, that was profitable during the preceding fiscal year and that has net assets of not less than RMB500 million [US$80 million] may directly invest capital in the equity of non-insurance financial enterprises”. This provision directly addresses the investment in equity by insurance asset management companies.

Naturally, since the funds of insurance asset management companies are mostly entrusted funds in nature, their investment in equity is relatively special.

Q: What is the scope of direct equity investment?

A: Considering the relevant provisions of the interim measures and the notice, the scope of direct equity investment for which insurance capital can be used is:

1.Article 12 of the interim measures specifies that “The direct investment in equity of insurance capital shall be limited solely to the equity of insurance enterprises, non-insurance financial enterprises and insurance business linked to old age pensions, medical, automobile service and other such enterprises”. This provision specifies five industries in which direct equity investments may be made.

2.Article 39 of the interim measures reiterates the provision on investment in the equity of infrastructure-type enterprises of the Tentative Administrative Measures for the Indirect Investment of Insurance Capital in Infrastructure Projects: “The investment of insurance capital in the equity of infrastructure enterprises shall be handled in accordance with relevant provisions hereof.” Accordingly, insurance capital may be directly invested in the equity of an infrastructure-type enterprise.

3.The third paragraph of article 1 of the notice specifies that “To the scope of the direct investment of insurance capital in equity is added the equity of energy enterprises, resource enterprises as well as insurance business-linked modern agricultural enterprises and new commercial, trading and logistics enterprises, and such target enterprises shall be in compliance with state macro policy and industrial policy and have stable cash flows and good economic results”.

4.Further, the Interim Measures for the Investment of Insurance Capital in Immovable Assets permit the investment of insurance capital as equity in immovable assets.

From this it can be seen that insurance capital may be invested in the equity of a total of 11 types of enterprises. However, at present the CIRC is insufficiently clear in respect of the provisions of certain articles, making it difficult for those in the industry to understand the pertinent indicated scope. Perhaps, against the background of the increasingly multi-faceted development of today’s economy, the apparent space accorded by the CIRC will lead to the active participation of insurance capital in the development of every new industry.

Q: Do the interim measures and the notice apply to direct investment in the equity of insurance-type enterprises?

A: Pursuant to article 54 of the Administrative Interim Measures for the Application of Insurance Capital and article 9 of the interim measures, the term “material equity investment” means an investment that will grant control of the non-insurance financial enterprise or insurance business-linked enterprise into which the investment is to be made.

From this it can be seen that the investment of insurance capital in an insurance-type enterprise should be deemed a direct investment in equity other than a material equity investment. If an insurance company invests in an insurance-type enterprise, is it required to carry out reporting or approval procedures in accordance with the interim measures, so resulting in a conflict with the Administrative Measures for Insurance Company Equity?

From the current practice of the CIRC, it can be seen that if an insurance company increases the capital of a subsidiary insurance company, it is only required to proceed in accordance with the Administrative Measures for Insurance Company Equity.

Perhaps it is based on these administrative measures being ministerial-level rules and regulations governing insurance company equity, whereas the interim measures are a regulatory document governing the investment of insurance capital in equity, with ministerial-level rules and regulations taking precedence over regulatory documents. We believe it should be expressly specified that the interim measures do not apply to the investment by an insurance company in its subsidiary insurance companies.

At the beginning of 2013, the CIRC indicated that it would revise and improve the regulations governing the investment in equity. In addition to the issues discussed above, we believe that many regulatory provisions in operation are difficult to comply with to the letter, and it is necessary to handle them with a degree of flexibility. We believe that the CIRC will further improve the regulations, and by doing so more effectively guide practice in the direct investment of insurance capital in equity.