Motivating insurance M&A

On March 21, the China Insurance Regulatory Commission (CIRC) issued the Measures for the Administration of Acquisitions and Mergers of Insurance Companies (保险公司收购合并管理办法) (M&A Measures), which came into force on June 1. The move is welcomed by the insurance market as it helps to promote the merger and acquisition (M&A) of insurance companies and break down barriers for insurance transactions.

Competition among insurance companies in the PRC has become increasingly fierce. Recent statistics indicate there are about 150 insurance companies in China (excluding insurance asset management companies). Every insurer in the PRC has a unique understanding and strategy. Some insurance companies which have operated for more than ten years are still suffering from loss of profit. With the ever-increasing underwriting deficit, some insurance companies are unable to take proper measures to deal with the plight. Some shareholders of insurance companies are therefore seeking equity transferees to get themselves out of trouble, while some are also looking for ways to get themselves off the hook through M&A. But for potential investors, both domestic and foreign, the PRC insurance market is a new territory with huge hopes and possibilities. Compared with the difficulties and time-consuming procedures that come with setting up a new insurance company, M&A presents an easier method of entering the insurance market.

The M&A Measures were released shortly after the State Council adopted the Opinions on Further Optimising the Market Environment for Enterprise Mergers and Restructurings (国务院关于进一步优化企业兼并重组市场环境的意见) (Opinions) on March 7 2014. The CIRC's M&A Measures are actually a response to the Opinions, and aim to optimise the market environment for the M&A of insurance companies by further relaxing M&A regulations.

The five chapters

The M&A Measures consist of five chapters: General Provisions, Acquisition, Merger, Supervision and Administration, and Supplementary Provisions.

General Provisions

The General Provisions chapter provides the rules on the definition of insurance companies under the M&A Measures, disclosure requirements during the M&A activities, requirements of the management level of insurance companies and duties of professional agencies. Article 2 provides that the M&A Measures apply to transactions in which the target company is a Chinese insurance company, which include both domestic and foreign-invested insurance companies.

Article 4 of the M&A Measures further states that the mergers and acquisitions of insurance companies which involve industry entry require application for the concentration review of business operators, the transfer of state-owned equity and other matters that require state approval. The M&A will proceed after obtaining approval.

This highlights the cooperation between the CIRC and other regulatory agencies regarding the supervision of M&A. For instance, application for the concentration of business operators is stipulated under the PRC Anti-monopoly Law when certain conditions are met. The honesty, integrity and due diligence of directors, supervisors and senior managers of an insurance company is covered by the PRC Company Law and the ethics of professional agencies or intermediaries during M&A activities can be found in other laws and regulations.

Acquisition

Article 8 is most important in this chapter as it renders the definition of an “acquisition,” which refers to the activities whereby a buyer (including the investor, its affiliated parties and the parties acting in concert) acquires, at one time or in a cumulative manner, over one-third (one-third excluded) of the equity of an insurance company and becomes the largest shareholder of the insurance company or achieves actual control over the insurance company despite acquiring only one-third or less of the company. It can therefore be inferred that the M&A Measures do not apply when a party obtains less than one-third of the equity of an insurance company and does not become the largest shareholder and achieve an actual controlling position.

The definition provided by the M&A Measures will prove practical and useful as there is no clear and detailed definition of an acquisition under the current PRC legal framework.

Merger

The third chapter on mergers among insurance companies touches on two types: merger by absorbing another insurance company and merger by establishing a new insurance company. However, the PRC Insurance Law demands separate operation of the property insurance and personal insurance businesses. Apart from additional insurance policies, the succession of claims and liabilities by surviving or newly-established insurance companies is the same as that during the mergers of other types of companies.

Supervision and administration

The CIRC maintains a strong control over M&A activities. Although there is a deregulation on the M&A of insurance companies, the CIRC supervises the entire process, before, during and after the transaction. It oversees the approval procedure and the quarterly report mechanism and also imposes administrative penalties over illegal acts during the M&A.

Supplementary provisions

The last chapter further interprets the definitions of the relationship of the affiliation and the parties acting in concert. It also elaborates on the various means of fundraising in M&A as well as other matters.

Deregulation and clarification

The general aim of the M&A Measures is to deregulate control over the mergers and acquisitions of insurance companies.

Firstly, Article 8 provides that a buyer may at one time acquire more than one-third of the equity of an insurance company. This proportion of equity has been broken by the CIRC's Measures for the Administration of the Equity of Insurance Companies (保险公司股权管理办法) (Equity Measures), which was issued on May 4 2010 and later amended on April 15 2014, and the Circular on Issues Relevant to Article 4 of the «Measures for the Administration of the Equity of Insurance Companies» (关于《保险公司股权管理办法》第四条有关问题通知) (Circular), which was issued on April 9 2013.

Article 4 of the Equity Measures prohibits the capital contribution made or shares held by a shareholder from exceeding 20% of the insurance company's registered capital. The exception to the 20% limit requires the satisfaction of Article 15 and approval by the CIRC. Further requirements have been imposed on the exception as Article 2 of the Circular lists five conditions, including one where the shareholder must have been investing in the insurance company for three years or longer. This means that if a shareholder wants to hold more than 20% of shares of an insurance company, he can only increase his shareholding after having held the shares for at least three years.

Nevertheless, Article 8 of the M&A Measures has broken the 20% limitation with the approval of the CIRC since it allows the buyer to acquire more than one-third of the equity of an insurance company at one time. Despite this breakthrough, attention needs to be paid to the fact that the 51% upper limit on insurance company shareholding is still present in Article 1 of the Notice. Also, Article 3 provides that, to hold more than 20% at one time, the buyer must choose a target insurance company that has been established for more than three years.

Secondly, Article 21 of the M&A Measures states that, “Subject to the approval of the CIRC, an acquirer may, after the completion of an acquisition, control two insurance companies engaging in the same type of business.” Before the issuance of the M&A Measures, Article 5 of the Equity Measures provided that, two or more insurance companies, controlled by the same institution or one of which controls the other, should not operate the same type of insurance business which will give rise to conflict of interest or competition unless otherwise stipulated by the CIRC. The issuance of the new M&A Measures actually reflects the deregulation of the Equity Measures over one investor's acquisition of two insurance companies involving the same type of business, such as life insurance or general insurance.

However, Article 5 of the Equity Measures still does not allow for one insurance company to control another if they engage in the same type of insurance business. The newly-issued M&A Measures only relax the control of the same insurance company over two companies involved in the same type of insurance business. This presents a tricky situation.

Thirdly, Article 30 states, “Subject to the approval of the CIRC, an investor may, in insurance company acquisition and merger activities, take financing measures such as an acquisition loan provided that the amount thereof does not exceed 50% of the total monetary consideration.” This means that investors are no longer restricted only to the proprietary funds to make an investment (such restrictions are provided for in Article 7 of the Equity Measures), but are also able to use bank loans for the investment.

The CIRC actually intends to encourage private capital investment in the insurance industry, as it believes this will stimulate creativity and vitality within the industry.

All in all, despite the strict supervision and disclosure requirements that the CIRC still has over the M&A activities of insurance companies, the tone of deregulation that rings throughout the new M&A Measures will certainly motivate insurance companies to engage in mergers and acquisitions. A new tide of equality transfer is just around the corner.


Zhan Hao, AnJie Law Firm, Beijing


More from CLP:
Measures for the Administration of Acquisitions and Mergers of Insurance Companies
Measures for the Administration of the Equity of Insurance Companies (Revised)