China Social Security Fund Buys Into PICC

Posted on Jun 22, 2011 by Sergio Ulloa (G+)

China's National Social Security Fund has acquired an 11 percent stake in the People's Insurance Co of China (PICC Group) for RMB10 billion (US$1.55 billion) to become the sole investor ahead of the insurer's planned dual listing in Shanghai and Hong Kong. In a statement issued on Tuesday by PICC Chairman Wu Yan, the nation's second largest insurer heralded the involvement of the National Social Security Fund (NSSF), claiming that their RMB10 billion investment would buy about an 11 percent stake and had moved PICC a big step closer to their planned IPO. PICC is seeking a public listing in order to address their declining solvency ratio, restructure the company and to help generate the necessary capital required for the rapid expansion of its subsidiaries, including their life insurance and property & casualty divisions. Wu added that PICC will "prudently" time the initial public offering, which has met requirements for dual A-share and H-share listings, but still awaits approval by the China Insurance Regulatory Commission (CIRC). In April, PICC Group posted their annual report, revealing a 37 percent year-on-year increase in revenues to RMB264.7 billion (US$40.9 billion), with premium income of RMB246.4 billion (US$38.1 billion). PICC and its subsidiaries reported a record net profit in 2010 of RMB5.2 billion (US$804 million), representing a noteworthy annual increase of RMB3.4 billion (US$525 million), 2.9 times that of 2009's figures. As of 31 December 2010, the total assets of PICC and its subsidiaries totaled RMB201.7 billion (US$31.2 billon) with shareholders' equity amounting to RMB24.8 billion (US$3.8 billion). The Group's property & casualty subsidiary is the largest non-life insurer in China and is aiming to make underwriting profits again this year, after premium rates rebounded and improvements to the company's claims management processes have been implemented. PICC's life insurance business is the sixth largest in the Chinese market in terms of premiums written. PICC's fast growth has however diminished its solvency ratio, an insurance company's available capital relative to their premiums written. The CIRC sets a 100 percent requirement by listing. Market observers assert that the NSSF's injection of new capital will improve PICC's solvency margins and enable them to remain stable prior to going public. After the deal is signed off by the CIRC, PICC will present their listing plan to the China Securities Regulatory Commission. Analysts familiar with the deal predict that the Hong Kong and Shanghai listings will occur in the fourth quarter of 2011 at the soonest, as it will take time for PICC to go through all the necessary procedures. The planned investment was first announced in a joint press conference on June 15 by the NSSF and the Ministry of Finance, the previous exclusive owner of PICC. At the time however, no details were disclosed regarding the timing or size of the stake the US$130 billion pension fund would hold. The Chinese State Council initially approved the PICC restructuring and listing plans in 2009, the first year the integrated insurer turned a profit. Under Chinese law, domestic companies are required to have at least two shareholders before they may go public. PICC's decision to select a national pension fund as a strategic investor should aid the listing process. The NSSF has close times with other government agencies and industry regulators and should enable the insurer to better address the regulatory obstacles on its way to going public. New China Life Insurance, the nation's third-largest life insurance firm with RMB93 billion (US$14.38 billion) in premium income for 2010, has also recently applied to the Hong Kong stock exchange for a dual listing. The insurer is aiming to raise up to HK$31.2 billion (US$4 billion) in fresh funds by the end of the year, according to industry reports. The CIRC has also been active this week in granting approval for a wholly owned Chinese subsidiary of Liberty Mutual Insurance Co., permitting the American insurer to increase its registered capital in the country by US$17.5 million, its fourth such capital increase since 2007. Liberty Mutual, which first entered China in 1996, has around 72,000 automobile policyholders in the country. The company has expanded to four branches and needed to raise capital to meet the country's regulatory solvency requirements. Total written premiums in China's insurance market reached RMB1,452.8 billion (US$221.4 billion) in 2010, a year on year increase of 30.4 percent. Increases in per capita income, further urbanization, an improved social security system, enhanced distribution reforms and service level optimization coupled with stronger insurance awareness in the population, are all positive factors contributing to the brisk development of the domestic Chinese insurance industry and a demand for its products. As interest rates rise, profitability for insurance companies will also see further improvement. The Chinese insurance market has been seen as a lucrative investment opportunity for many large multinational insurance companies as well as investors from the financial-services sector. However, while the emerging superpower is technically open to foreign insurers participating in their market, they are faced with more restrictions and a more active regulatory authority than in many other countries. Foreign insurance companies have normally found success in China through investing and operating as joint venture partners alongside major local insurance and finance conglomerates. Some major current multinational Chinese insurance company joint ventures include the Sun Life Everbright and the Aviva-Cofco partnerships. Other notable foreign insurers with partnering agreements in China include Zurich and Generali, with associations involving both New China Life Insurance and China National Petroleum Corporation respectively. Earlier this month, Bermuda-based private insurance holding company, Starr International acquired a 20 percent stake in the Chinese property insurer Dazhong Insurance Co Ltd. This followed Goldman Sachs successful purchase of a 12.02 percent stake in Taikang Life Insurance Co Ltd, China's fifth-largest insurer by premiums, earlier in the year. The acquisition gave the US Investment bank a long-sought-after foothold in the world's largest insurance market. Merger and acquisition activity throughout the rest of Asia is set to continue at a fervent pace in 2011 due to stronger investor confidence in the market. Insurance business growth in Asia is expected to outperform that of other more mature markets, with India, Indonesia and China leading the way. Insurance Companies Mentioned PICC People's Insurance Company of China (PICC) is a state-owned holding company in the PRC, founded in 1949, that sponsors its subsidiaries: PICC Asset Management Company Limited and PICC Property and Casualty Company Limited (PICC P&C) among others. PICC P&C was established in 2002 and is now China's largest non-life insurer. The insurer remains the designated agent within the People's Republic of China for most major international insurance companies. In 2005, PICC announced a life-insurance joint venture with Sumitomo Life Insurance Co called PICC Life Insurance Co., which is now the sixth largest life insurer in the country. New China Life New China Life Insurance Co.,Ltd (NCI?has headquarters in Beijing and was established in 1996 It is a large national insurance company, with products including traditional protection products, bonus products as well as the products that have a strong financial management function. With sustained, healthy and harmonious development of the company, the brand value of NCI is a valuable asset. Liberty Mutual Group Liberty Mutual Group offers a wide range of insurance products and services, including personal automobile, homeowners, workers compensation, commercial multiple peril, commercial automobile, general liability, global specialty, group disability, assumed reinsurance, fire, and surety. Liberty Mutual Group employs over 45,000 people in more than 900 offices throughout the world.