China Life seeking foreign strategic investors
By Zhao Renfeng (China Business Weekly)
Updated: 2004-07-07 16:16

China Life Insurance Co Ltd, the nation's largest life insurer, is seeking foreign strategic investors to further improve its shareholding structure, according to the company's top executives.

"We have been active in seeking a partnership with foreign institutional investors and are currently in talks with several potential institutions," Miao Fuchun, vice-president of China Life, told China Business Weekly, on the sidelines of a press conference late last month, but did not reveal the names of the foreign institutions.

According to the Economic Observer newspaper, China Life had been in talks with 19 foreign institutional investors before the company was listed in Hong Kong and New York last December. These companies include the HSBC Group, the Germany-based Alliance Group and French insurance company AXA.

The newspaper said that China Life is still negotiating deals with some of these investors and it is hoped that China Life will select two to three foreign strategic investors in the future.

Experts said teaming up with foreign investors is a step in the right direction for China Life amid the industry's increasingly competitive market since China has allowed foreign insurers easier access to domestic markets.

The move will help the former State-owned company quickly improve its corporate governance to help it maintain its market lead amid fierce competition with both foreign rivals and domestic players.

Ping An Insurance Co Ltd, the country's No 2 life insurer, made a market debut in Hong Kong and New York late last month. HSBC has become the company's largest foreign strategic investor, owning 10 per cent of Ping An.

Another major insurer New China Life is also eyeing a domestic A-share listing.

"I think they are aiming to use the power of the market to help restructure their own companies," said Han Yi, an industry observer.

According to China Life officials, it is still too early to make a decision on any new financing channels since introducing strategic investors, one of the core issues for China Life in building its shareholding structure, has yet to be finalized.

They said they have not made any prompt plans to go for a listing in domestic A-share market as they have to contemplate their financing channels in a comprehensive way.

"We are still considering new financing channels. We have to deliberate financing costs" said Li Liangwen, vice-president of China Life.

Earlier, Wang Xianzhang, chairman of China Life, said in Hong Kong that it will not consider A-share listing in 2005 as the domestic market dampened their expectations.

"The mainland capital market is not mature and the stock market performance is not as good as we had expected," said Wang.

Li said that the company has sufficient funds and currently bears no solvency risks.

He said that the company did not see listings in overseas capital markets as merely a channel for financing. Rather, they deemed it an effective approach to improve corporate governance.

"We are not short of capital at the current stage," said Li.

In its annual report, which was released last month, incomes from negotiable bank deposits account for almost half of the insurer's total income.

Li said they have obtained favourable interest rates on negotiable deposits, which are higher than the average rates because they are long-term, three-to-five-year contracts and deposits volumes are normally above 50 million yuan (US$6.02 million).

Miao told China Business Weekly that the current hotly debated issue of increasing interest rates is likely to bring more benefits for China Life in case the government takes strong action to cool down the economy.

On the one hand, according to Miao, an interest rate rise may divert some funds from investment-oriented insurance products to other investment channels such as bank deposits or bonds.

But on the other hand, a rate rise will also mean the increase in the interest rate for negotiable bank deposits.

"We have studied this issue and we think it would be more beneficial than harmful," he said.

The company said that its market share in China's mainland market expanded quickly during the past two years, reaching 45 per cent by the end of first quarter from 37 per cent in 2001.

The company's executives said they are noticing the increasingly fierce competition from foreign insurers, but they believe that foreign insurers pose no immediate threat to China Life in keeping its market-leading position.

Class action

Asked about the class action China Life is being faced with after its overseas listing, the company executives said that they are confident the company would win the lawsuit as it has committed no wrongdoing.

In February, China's National Audit Office disclosed it had found accounting irregularities involving 5.4 billion yuan (US$654 million) at China Life before it was restructured for its mid-December stock listing.

China Life was then hit by a class-action lawsuit by investors who complained the company failed to disclose that information before its shares were listed. Attorneys said the lawsuit demands damages for losses incurred by investors who bought shares before the audit office announced the allegations on February 4.

China Life has responded to the audit office's allegations saying that its listed company, China Life Holdings, and the parent company, China Life Group, are two separate entities.

Lin Dairen, vice-president of China Life, told China Business Weekly that the company has hired the New York-based Sidley Austin as its legal agent and is ready to take on the suit.

According to him, a new development in the case is that law firms representing investors in the United States against China Life are requested to endorse one firm to take the final lead in the legal action, with the whole process expected to take "four to five months."

Moody's report

Moody's Investors Service said China's insurance sector had strong growth prospects in two reports released last week.

Economic growth is set to drive demand, and deregulation is encouraging product expansion and differentiation -- and the entrance of foreign insurers will force domestic insurers to bring their own operations in line with global standards, Moody's said.

"Disciplined companies will look to approaches such as product differentiation, alternative distribution channels and improved service levels," said Donovan North, Moody's assistant vice-president/analyst and author of the reports.

"This, and the influx of experienced foreign insurers, will bring innovation into this evolving market."

Life insurance product diversification started off successfully with investment-linked lines, but initial marketing involved optimistic investment return illustrations -- actual returns were not as high as originally estimated, a result of declining stock markets. This illustrated the low levels of agent training by global standards, which Moody's notes is set to change.

"China's accession to the WTO will put pressures on domestic insurers, who are currently the major market players, to improve their risk management and capitalization," said North. "Insurers should benefit from this over the longer term."

"We expect the already highly competitive environment to intensify with the influx of foreign insurers into new areas."

He said with greater financial flexibility and technical resources than domestic insurers, foreign insurers are likely to create a strong presence, especially in non-traditional lines where the domestic operators are less experienced.

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