Broader investment pipeline could raise insurers' returns

A broader investment pipeline for China's 4.5 trillion yuan ($661 billion) insurance industry could boost insurers' long-term investment returns, revitalize the commercial property market and benefit cash-strapped private companies, but the short-term impact will be limited, analysts said.

Chinese insurers are allowed to invest up to 5 percent of their total assets in private equity and related financial products and 10 percent in real estate and related financial products, according to detailed rules published by the China Insurance Regulatory Commission (CIRC) over the weekend.

"The launch of detailed rules, which set a clear practical guideline for insurers, is good news for the commercial sector, especially for the en-bloc sales market," said Grant Ji, director of the investment department of real estate service provider Savills (Beijing).

Though the revised insurance law, which took effect on Oct 1, 2009, has allowed insurers to invest into the real estate sector, the absence of detailed rules has caused insurers to postpone their property investment plans.

According to the detailed rules, insurers are prohibited from investing in commercial residential homes, participating in real estate development and establishing property companies.

Most insurers are interested in investing in office buildings, retirement communities and affordable housing.

"How fast insurers' influence grows depends on the market situation and the maturity of their investment teams. We are expecting a growing number of en-bloc deals in the commercial sector in the fourth quarter and the first half of 2011," Ji said.

Industry analysts estimated that new investment channels could increase insurers' long-term investment returns by 50 basis points to 5 percent annually.

But as the change has long been priced into insurers' share prices, the launch of detailed rules is unlikely to affect insurers' earnings or share prices.

Hao Yansu, an insurance professor at the Central University of Finance and Economics, said the regulator set a reasonable ceiling for these two types of investment, attaching priority to risk controls.

"While expanding the investment channels, the regulator also strengthened its supervision over insurers' solvency capacities to reduce relevant risks," he added.

For instance, only insurers whose solvency capacity is well above 150 percent and net assets are higher than 100 million yuan are allowed to invest in the real estate sector.

For those who intend to invest in private equity companies, the threshold for their net assets is 1 billion yuan.

"Though insurers may benefit from the expanded investment channels, the effect will not be felt immediately," said Hao.

Statistics from the CIRC show that the industry's assets totaled 4.5 trillion yuan at the end of the second quarter, indicating insurers may invest as much as 450 billion yuan in real estate and 220 billion yuan in private equity.

"But given insurers' demand for liquidity and the operational costs, a total of 30 to 40 percent of the permitted capital may invest in these two fields," said Hao.

Source: China Daily