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China Insurance IPO on the Horizon

Posted on Nov 30, 2011 by Sergio Ulloa ()

Published November 30, 2011

New China Life Insurance, the state-backed insurer part owned by Zurich Financial Services, yesterday embarked on its international road show, which is seeking up to US$2.3 billion for their upcoming initial public offering. While the deal size is below the US$3-4 billion the Chinese insurer was initially hoping to raise this year, the IPO range remains at the top end of expectations given current market conditions.

Last week, New China Life, Mainland China’s third largest life insurer by premium volume, obtained the final securities approval needed for their dual-listing in Hong Kong and Shanghai, with the Hong Kong portion expected to account for around 70 percent of the combined offering.

Citing their most recent IPO term sheet, New China Life plan to sell as many as 158.5 million shares in Shanghai (A-share offering) at an indicative price range of CNY23-28 (US$3.60 to US$4.39) each, and a further 358.4 million in Hong Kong (H-share) at a price ranging from HK$28.20 to HK$34.33 (US$3.62 to US$4.40), with an option to expand it by another 15 percent. According to industry analysts, the A-share market has proven to be more sensitive to New China Life’s IPO, accounting for only 5 percent of the company’s total shares, and is in part why the company has allocated a smaller share to the Shanghai bourse. The insurance company is scheduled to first list in Hong Kong on December 15th, where it aims to raise between HK$10.11 billion and HK$12.3 billion (US$1.3 billion to US$1.58 billion). The Shanghai Stock Exchange listing, is scheduled to occur a day later and could fetch CNY4.5 billion (US$698 million), based on the same pricing as the Hong Kong sale.

As the year-end approaches, many Chinese companies are attempting to sell shares in the Asia-Pacific to fund future business ambitions, braving the mounting concerns over volatile global equity markets. Indeed, China’s two largest insurance companies, Ping An Insurance and China Life Insurance, have already been listed on both overseas and domestic bourses. The Beijing-headquartered New China Life’s dual listing could push the rest of China’s insurers to market sooner that expected. According to market analysts, there may be over US$10 billion worth of new dual share offerings in Hong Kong and Shanghai coming to the market over the next few months from Mainland insurance companies alone. State-backed property insurer PICC said on Tuesday that it planned to raise about CNY5 billion (US$786.5 million) via a rights issue to strengthen its capital base and improve its solvency margin. Taikang Life Insurance, China fifth-largest insurer by premiums, is also looking to list in Hong Kong, with plans to raise between US$3 billion and US$4 billion through an IPO in the next couple years.

New China Life has already secured commitments from four cornerstone investors for a reported US$780 million worth of shares, equivalent to roughly 60 percent of the Hong Kong portion of the initial public offering. Singapore-listed insurer Great Eastern Holdings Ltd will be the biggest investors after agreeing to purchase US$380 million worth of New China Life’s shares. Hedge fund DE Shaw & Co and Malaysian sovereign wealth fund Khazanah are each committing US$150 million, while South Korean private equity firm MBK Partners will buy up US$100 million worth of H-shares. Each of the four investors has been guaranteed large allotments in exchange for agreeing to hold onto their shares for at least six months. The fact that New China Life has already received backing from a list of big-name global investors, including existing shareholders Zurich and Standard Chartered Bank, should make other potential buyers more comfortable to commit money to the stock. According to the company term sheet, 95 percent of the remaining shares to be offered will be sold to institutional investors, while 5 percent will go to Hong Kong retail investors.

New China Life will use the proceeds from the dual-listing to bolster its capital position, improving margins in order to better keep pace with the firm’s rapid business growth while adhering to stricter regulatory requirements on adequacy ratios. Indeed, addressing these declining solvency ratios has become a critical issue for the Chinese insurance industry. Shares in China Life Insurance and Ping An Insurance, New China Life’s main rivals, have fallen by about 38 percent in Hong Kong trading this year, on general concerns over a slowdown in profits and whether the continued decline in equity markets will increase mark-to-market losses on insurer balance sheets going forward. Insurance companies tend to invest a large part of their income back into financial markets.

Although share prices of listed Chinese insurers have been suffering through the tough market conditions this year, New China Life expects to benefit overall from the further expansion and development of the country’s insurance market. Last year, the Beijing-based life insurer earned CNY93.6 billion (US$14.3 billion) in premium income, equating to 9 percent share of the country’s insurance market, according to the China Insurance Regulatory Commission (CIRC). New China Life, 15 percent owned by Zurich Financial Services, has been largely successful in adapting to China’s surging demand for insurance and investment products, reporting a compound annual premium growth rate of 40 percent over the past 5 years. The insurer has been able to earn itself a competitive advantage in institutional sales and has fostered a particularly robust presence in the big cities of Beijing, Shanghai, and Guangzhou. Today, New China Life has 1,400 offices in China and serves over 24 million policyholders.

While New China Life’s dual IPO will test shareholder confidence during this time of pronounced market volatility, the Chinese life insurance industry is one of the fastest growing in the world and will continue to target investment going forward. According to the CIRC, gross premium income received by China’s life insurers has increased at a 24.9 percent compound annual growth rate over the past 10 years. The country is undergoing a series of economic and demographic transformations, including widespread healthcare reform and a quickly aging population, and this will present significant growth opportunities for insurance companies.

In order to further capitalize on this considerable market potential, China’s insurers will need to build greater reserves and continue to evolve their business and risk management practices to succeed, a view now shared by not only industry analysts but the country’s top insurance regulator as well. This week CIRC launched a crackdown on rogue insurance agents in the midst of rising complaints of fraud and cheating from policy holders. According to the regulator, around CNY 80.66 million (US$12.66 million) has been taken illegally by insurers or agents from policyholder premiums so far this year, and the misdeed involved over 50 insurance companies and agents. “The main problem is the false, and non-transparent relationship between insurance institutions and agents,” the CIRC said in a statement. Going forward these problems will need to be addressed.

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