Private equity enters the insurance market

There are only five insurance companies listed in the PRC; Ping An, PICC, China Life, China Pacific and China New Life. This means there are around 160 insurance companies waiting to be listed. In addition, insurance agencies, brokerage companies, loss adjuster companies, insurance fund management companies and reinsurance companies would bring that number to well over 1,000.

Private equity investors can also bring their financing, taxation and investment know-how to insurance companies under the new Circular. It is hoped this will prove a valuable commodity for the insurance industry.

Eligibility requirements

The Circular lays out certain requirements for a limited partnership equity investment enterprise to invest in an insurance company:

To make investment in an insurance company, a limited partnership equity investment enterprise shall comply with the following requirements:

· The insurance company to be invested shall have a controlling shareholder or actual controller, a reasonable equity structure and sound and stable corporate governance;

· The limited partnership equity investment enterprise shall truthfully disclose the sources of funding and the background of its partners, including their names, nationalities, business scope or occupations and contribution amount;

· The general partner responsible for executing the affairs of the limited partnership enterprise shall have favorable integrity and tax payment records, have no record of major illegalities and irregularities, undertake that the sources of funding are not in violation of the provisions on anti-money laundering and bear corresponding liabilities for the investment in the insurance company by the equity investment enterprise;

· A single limited partnership equity investment enterprise shall not contribute more than 5% of the total capital of a single insurance company or hold more than 5% of its shares; and the total capital contribution made to a single insurance company, or the total number of shares held in a single insurance company, by all investing limited partnership equity investment enterprises shall not exceed 15%;

· The limited partnership equity investment enterprise may not become the largest shareholder of the insurance company, may not become its controlling shareholder or actual controller, or may not participate in the operation and management of the insurance company;

· Where the limited partnership equity investment enterprise has an existence period, it shall transfer all held equity of the insurance company before the expiration of the existence period; and

· The limited partnership equity investment enterprise shall satisfy other conditions prescribed by the CIRC.

“It is certain that private equity enterprises will take to investing in insurance companies. This is a big development for the market,” said Zhan.

To make investments into insurance companies, private equity enterprises have to submit their applications in writing to the CIRC. These include the audited financial and accounting reports of the previous year and tax payment record of the past three years.

In order to control risk, the CIRC has limited the role of PE funds by barring them from participating in the daily management of the insurance companies they invest in. This is further seen in the fact that each partnership PE fund can hold no more than 5% of an insurance company, and their combined shareholding in the insurer must not exceed 15%.

By David Tring

Further reading:

Circular on Issues Relevant to the Regulation of the Investment and Acquisition of Equity Stakes in Insurance Companies by Limited Equity Investment Partnerships

Private funds finally given regulatory system

What China's IPO crisis means for PE investors