China Life Insurance said yesterday that the country's State auditor found its predecessor company had breached insurance laws, but the newly-listed firm would be spared any liability.

China Life, which raised US$3.5 billion from the world's biggest IPO last year, still faces a lawsuit on behalf of US shareholders that accuses it of not adequately disclosing the State audit report. It is also reported that the Hong Kong stock exchange is conducting an investigation into the issue.

"To a certain extent, the announcement has helped remove investor worries," said Ben Kwong, associate director at brokers KGI Asia.

Traders said investors used the news as an excuse to buy into China Life shares, which had given up much of their post-IPO gains due to recent market weakness and worries about accounting irregularities.

The insurer's Hong Kong-listed shares closed 5.64 per cent higher at HK$5.15.

China's top life insurer said it had received a copy of a report from the National Audit Office of China on its State-owned predecessor, China Life Insurance (Group) Co (CLIC), up to 2002.

China Life was formed in June 2003 by plucking healthier assets from CLIC to pave the way for the listing. CLIC is still China Life's controlling shareholder with a 72-per-cent stake.

The audit report, dated March 30, found that CLIC had made investments not permitted by the nation's insurance laws and used agents that were not legally qualified, while some CLIC branches had mis-stated expenses and income, leading to underpayment of taxes. The firm had also failed to pay some taxes on time.

China Life said in a statement that CLIC would have to pay 67.5 million yuan (US$8 million) in taxes and fines.

China's State auditor said in February it had found accounting irregularities worth about 5.4 billion yuan (US$652 million) at CLIC.

The listed company, which has said it will "vigorously" contest the US lawsuit, did not mention the amount of accounting irregularities in its statement yesterday.

China Life shares are 46 per cent above their IPO price of HK$2.59 each, but way off their all-time high of HK$7.05.

China Life took over from CLIC life policies sold in or after June 10, 1999, ahead of the listing.

But the restructuring left CLIC with substantial losses, as the guaranteed rates it had committed to pay on the retained policies were higher than the investment returns it was able to generate on its investment assets.