Move To Diversify

For the insurance industry, the year ahead might be characterized as one in which the rich get richer. A series of advantageous restructuring policies combined with the current economic environment, including potentially higher interest rates, point toward good growth for the industry's revenues and company profit margins. As long as there aren't any negative surprises, the already cash-rich sector should continue to expand in 2010.

As a major institutional investor, the insurance industry now has assets reaching 3.5 trillion yuan. Driven by the growth of premium revenues, the group should continue to see gradual yearly increases in the funds it can use to invest. With so much money available, insurance companies are starting to explore new areas for investment, including real estate, private equity and unsecured debt.

Another promising sector: wealth management. As the average accumulated wealth rises in China and the aging population prepares for retirement or succession, various financial institutions will fight to manage that money. In the competition for this business, insurance companies have the motivation – and the track record-- to do well in this high-risk, high-return investment arena.

At present, the China Insurance Regulatory Commission (CIRC) is continuing to formulate detailed rules and regulations for the insurance industry. And the private equity and real estate sectors are monitoring its every policy move. The market seems to expect that the insurance industry will have unprecedented levels of capital and more channels for investment in 2010.

China's revised Insurance Law, which was formally implemented on National Day, October 1, 2009, broadened the insurance industry's operating areas by expanding the original scope of "buying and selling government bonds and financial bonds" to "buying and selling bonds, stocks, shares of securities investment funds and other negotiable securities." It also added real estate to the list of approved investments.

After National Day, reports of insurance companies looking to invest in real estate increased ten fold, and the real estate sector began to compute the potential scale of investment that could come from the insurance industry. A source close to CIRC stated that by conservative estimates 3 percent of the insurance industry's total capital assets could be put into real estate, with more liberal estimates putting the figure as high as 5 percent. That means the total capital available for investment in real estate would be staggering -- between 100 billion yuan and 170 billion yuan.

However, the CIRC will insist on having regulations precede any major investments, and it is still formulating those policies. The commission will issue classifications telling companies whether or not they are qualified to invest in certain high-risk sectors. Because of these strict standards, many insurance companies may be disqualified from investing in real estate.

That prospect has not stopped some insurance companies from starting to put money into the property sector. Though they cannot yet purchase real estate outright, these insurers have found ways to invest through subsidiaries, trusts, under the category "personally owned property" and through other indirect channels. Driving down Changan Avenue and Financial Street in Beijing, one can see in the modern high-rise buildings ample evidence of insurance companies' investment "showrooms."
Here's how two big insurance players got into the real estate market last year. In the summer, Ping An Trust, a subsidiary of Ping An Insurance (Group) Company of China, Ltd., signed agreements with two real estate companies (Gemdale Group and Greentown China Holdings Limited), planning to invest 25 billion yuan in property within three years. Ping An's investment will be primarily aimed at high-quality housing projects and urban integrated use projects.

Around the same time, China Life Insurance (Group) Company, acting through its asset management subsidiary, China Life Investment Holding Company Ltd., signed a strategic cooperative agreement with China Cinda Asset Management Corporation to cover commercial real estate, hotel investment and property management.

Also helping insurance companies enter the property sector is the fact that the CIRC supports their investing in areas related to their industry, such as pension funds and healthcare. For example, the CIRC recently received shareholder investment plans for certain pension funds that included details about the development of retirement property. It is clear that even though the policy gates haven't yet been completely opened, there is still plenty of insurance industry capital pouring into the property sector.

The fall of 2008 was a low point for the real estate industry in China. During that period the head of a small life insurance company told media: "Nobody has any money [to invest in property] now. If insurance capital can seize this opportunity and enter the market, the industry can definitely make a huge profit."

By 2009 the entire real estate market is different, or even bubbly. This suggests that the there won't be a massive injection of insurance industry capital into real estate in 2010. But insurance companies will nevertheless continue to use all available channels to invest, even if modestly, in the property sector.

Just as in real estate, the CIRC has not yet put forward detailed rules and regulations in regard to insurance industry investment in private equity. But some specialized requirements have been issued. They state that in order for insurance companies to invest in private equity they must establish specialized asset management companies possessing "necessary financing and investment capabilities." Ping An Insurance and The People's Insurance Company (Group) of China Limited (PICC) have already established such private equity investment platforms, while China Life is preparing to submit its application for one to the CIRC.

 "Private equity investment requires very specialized experience," said a senior executive at an insurance company responsible for investment. "The CIRC will definitely rate investment competence as an important threshold for granting market access." At the same time the executive posed the question: "In terms of private equity investment, will there be a regulatory requirement that mandates separate approval of every project? If so, will that influence the investment schedule and weaken insurance companies' competitiveness in the private equity sector?"

Despite all the industry's well-publicized progress in the real estate and private equity sectors, many analysts believe that these new investment channels have not produced any discernable difference in the estimated value of insurance companies. For one thing, this kind of "experimental" opening of the sectors has definite limits. Also, most insurance companies have been pushing to be in these investment areas for a long time; hence the market has already built in any potential stock price appreciation.

Also factored in is the insurance industry's ability to invest in debt and the stock market. Between March and April 2009, regulatory authorities issued a series of policies loosening the insurance industry's capital restrictions on debt, using infrastructure investment as a trial area for investment. The regulators also gave small-to-medium-sized insurance companies the option to invest in the stock market. Since then, insurers' investments in these areas have proved significant.

In spite of the relaxation of the policies, many joint venture insurance companies do not appear interested in investing in infrastructure. Though the returns can be quite high, liquidity is very low, as huge projects tend to tie up money for a long time.
 
On October 22, the CIRC published the Regulation Regarding Investment in Bonds, effectively readjusting the policy toward bond investments for insurance institutions. Among the changes: the end of the requirement that the issuer must make a profit in the previous three fiscal years. Now insurance companies are able to invest as long as the issuer's average annual net profit for the previous three fiscal years is not lower that the total interest on the bond for the entire year. 

This policy allowed insurance companies to buy 20 billion yuan in 10-year bonds issued by the Ministry of Railways on the same day. Even though the Ministry has a very high credit rating, it ran a deficit over the previous fiscal year and could not meet the requirement of three years' profitability. After the policy change, insurance companies purchased the railway bonds.

CIRC policy adjustments also included a stipulation that raised the amount that insurance companies could invest in corporate bonds, from a maximum of 30 percent of total assets from the end of the previous quarter to 40 percent.  Moreover, in order for insurance companies to invest in large state-owned enterprises, H-shares on the Hong Kong Exchange and red-chip companies that issued bonds and convertible bonds on the Hong Kong market, CIRC lowered the qualifying rating from an international rating institution from A to BBB.

As for unsecured credit products, their relatively high profit yields have made them increasingly attractive to investors. The impeccable "credit risk management capability" records of China Life, Ping An, PICC and Taikang Life Asset Management Company have allowed them to be among the first asset management companies in the industry to have the right to invest in unsecured bonds. In the near future, insurance institutions will start to invest in unsecured bonds, primarily medium-term ones.

As the year progresses, insurance companies will find themselves able to invest in an ever broadening range of products—from relatively safe ones like corporate bonds to riskier ones, like unsecured loans. With more than 3.5 trillion yuan to play with, the industry will concentrate on two main themes: expanding investments in the areas that promise the highest return, while at the same time guarding against excessive risk. It promises to be a fascinating year.

Full Article in Chinese: http://magazine.caing.com/chargeFullNews.jsp?id=100108414&time=2010-01-15&cl=115