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China: new rules allow insurers to buy stakes in two insurers which operate the same line of business

Anna Elshafei

16 April 2014
On 21 March 2014, China's insurance regulator, the China Insurance Regulatory Commission (the "CIRC"), issued the Administrative Measures on Insurance Company Mergers and Acquisitions (in Chinese: 中国保险公司收购合并管理办法).

The new measures now allow an acquiring party to take controlling interests in two insurance companies that engage in the same type of business activities – subject to the CIRC's approval.

Prior to these new measures taking effect, investors were not permitted to hold controlling interests in two insurers in China whose activities are of the same type and which are therefore in in competition with each other or give rise to conflicts of interest.

The new rules apply to both foreign and domestic investors in China's insurance industry.

Other changes effected by these new measures include permitting investors in Chinese insurance companies to use loan financing to carry out mergers and acquisitions – again subject to CIRC approval, and also to the proviso that the amount of loan financing must not exceed half of the consideration to be paid for the merger/acquisition transaction. Previously, financing was not permitted for these purposes: investors were required to use only their own funds for investing in Chinese insurers.

The CIRC, in a set of written Responses to Journalists' Questions on the new measures, said that the reason for now allowing investment in two insurers that carry the same type of business is that it believes that insurance companies that have a high degree of risk will benefit from being acquired by others in the same line of business. It said that loan financing will now be permitted for mergers and acquisitions in order to facilitate capital flow - it had found that, without loan capital, even large, financially healthy investors find it difficult to gather the large capital sums required for such transactions within a short period of time.

These are significant changes and we expect to see an increase in merger and acquisition activity in China in the coming months as both foreign and domestic insurance industry players take advantage of the new rules.

The new measures take effect on 1 May 2014.

Anna Elshafei

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