Nov. 7 (Bloomberg) -- Chinese insurers' investment returns dropped in the third quarter as they boosted fixed-income holdings and trimmed equities to curb losses from a stock market that has plunged almost 70 percent this year.

Investments averaged a 2.1 percent yield for the first nine months, down from 2.4 percent in the first half, China Insurance Regulatory Commission Assistant Chairman Yuan Li said today in Beijing. That compares with a historic high of 10.9 percent in 2007, when the stock market surged.

China's slumping stock market has eroded insurers' investment returns and crimped profit growth even as premiums kept expanding. Third-quarter profit at China Life Insurance Co., the nation's biggest insurer, fell by 70 percent, while Ping An Insurance (Group) Co. reported a 7.8 billion yuan ($1.1 billion) loss for the three months.

``The drop was no surprise, and it could have been negative if all the unrealized losses on the companies' balance sheets were also calculated,'' said Liu Peng, a Nanjing-based analyst at Huatai Securities Co.

Insurers held 407.6 billion yuan in equities and stock funds at the end of September, 14.2 percent of total investments, compared with 17.6 percent three months earlier, CIRC said. Bond holdings were boosted to 1.66 trillion yuan, representing a 57.6 percent share, 4 percentage points up from the end of June.

Insurers had combined losses in stock funds, while the investment risk was ``within controllable range,'' Yuan said.

Widened Investment Scope

The State Council, or cabinet, has approved a plan to let insurers invest in unlisted companies including infrastructure projects, Yuan said today without giving more details. The regulator is drafting implementation rules and will pick insurers that are ``better-managed and with strong investing abilities'' for a pilot program, he added.

``A wider investment scope will certainly help boost insurers' returns,'' Huatai Securities' Liu said. ``More infrastructure investments will also make their assets better match the long-term maturities of their liabilities.''

The CIRC won't restrict insurers' investments overseas because of losses that have been incurred, but will urge the companies to improve their investment mechanisms and be more ``prudent'' with decisions, Yuan said today. Ping An posted a 15.7 billion yuan impairment charge in the third quarter on its investment in Fortis, bailed out by BNP Paribas SA and three governments.

`Double-Edged Sword'

``We've fully realized that broadening the investment scope is a double-edged sword,'' Yuan said, adding the regulator will gradually allow insurers to put more money in infrastructure projects.

Chinese insurers paid out 222.7 billion yuan in the first nine months of the year, a 35.5 percent increase from a year earlier, the industry regulator said in a statement today. Life insurers had policy surrenders equivalent to 2.9 percent of sales in that period, unchanged from last year.

The companies earned a record 279.2 billion yuan from investment returns last year, exceeding the previous five years combined. Investments totaled 2.88 trillion yuan at the end of September, up 7.6 percent from the end of 2007.

To contact the reporter for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net

Last Updated: November 7, 2008 00:56 EST