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Regulator takes 22% stake in New China Life

(Financial Times)
Updated: 2007-06-04 10:14

The insurance regulator is to use an industry protection fund for the first time to buy a controlling share of the country's fourth-largest life assurer.

TheChina Insurance Regulatory Commission(CIRC) said it would take a 22.53 per cent stake in New China Life Insurance from three shareholders: Longcin Group, a motorcycle and engine manufacturer, Hainan Gelindao Investment, and Orient Group Industry, a trading conglomerate.

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"One big problem for insurance companies in China is they have expanded much faster than they can afford," according to Michael Chen, insurance analyst at JPMorgan. "The industry is still very immature in China and lots of players are trying to grab market share without considering profitability."

The insurance protection fund was established in January 2005 and requires insurance companies to contribute roughly 0.5 per cent of their short-term policy premium income. The total scope of the fund was estimated at around 8 billion yuan (US$1.05 billion) at the end of the first quarter.

It was established to protect the interests of policyholders in the event of bankruptcy or serious crisis at an insurer. The CIRC is in charge of managing the fund and so has effectively become the largest shareholder in one of the largest players in the industry it is supposed to regulate.

The government is rapidly expanding the scope of investments open to insurers, who were previously restricted to low-yielding government bonds and bank deposits but are now being encouraged to transform themselves into full-service financial conglomerates.

They are now allowed to invest in the stock market,companies, real estate and even in overseas bond and equity markets. Insurers are enjoying double-digit premium growth.