China Life Insurance Co. said Sunday it expects its low-margin participating policy products, introduced at a time of low interest rates, to remain its core business driver in the coming years after its initial public offering later this month.

Ahead of the offering, valued at up to US$3.04 billion, the company completed a restructuring by removing from the listing vehicle all pre-June 1999 "negative interest spread" policies, whose high guaranteed returns offered in the 1990s became unsustainable as interest rates continued to decline. The company's planned offering has been hailed as the world's largest this year.

While taking away the historical burden, China Life is still mired in a low interest rate environment, in which the China Insurance Regulatory Commission has capped insurance policies' guaranteed rate of return at only 2.5% a year.

That significantly reduced the attractiveness of life insurers' traditional products, like long-term endowment and whole-life policies. China Life responded in 2001 by introducing participating policies - investment products that allow policyholders to share at least 70% of profits, but are characterized by thin profit margins.

The resulting exponential growth of participating policies has eclipsed the increase in insurance premiums written in the past couple of years. Participating policy deposits soared 136% on the year to 64.5 billion yuan in 2002 since they became available nationwide in the second half of 2001.

In the first half of 2003, participating policy deposits still grew 41% on the year to 61.08 billion yuan. In contrast, net premium earned and policy fees during the period rose only 5.1% during the period to 35.42 billion yuan.

"As interest rates remain low, participating policies will continue to be our direction (of growth) in the coming future," Vice President Li Liangwen said in a video conference. "This is a profitable product. Given the strong sales volume, its profitability is reliable."

Investment Return Upside

Separately, Chairman Wang Xianzhang said the company should see its investment return continue to improve as investment rules in China are gradually liberalized in the next few years.

China Life's investments are concentrated in bank deposits and government bonds, with limited portion in domestic corporate bonds and equity funds. The yield on its investment assets was 4.1% in 2001 and 3.8% in 2002.

China Life recorded a pro forma net profit of 4.52 billion yuan in 2002. Analysts generally expect the company to post a pro form net profit of about 5.3 billion yuan in 2003, net profit of 6.8 billion yuan by 2004 and 8.5 billion yuan by 2005.

Among other concerns it addressed, the country's largest life insurer said it will prioritize profitability over market share.

Another vice president, Lin Dairen, said although China Life has been overtaken by domestic rival Ping An Insurance Co. in cities like Beijing and Shanghai, it had held back from following Ping An into risky unit-link investment products.

In an effort to improve the company's efficiency and control of policy risk, Chairman Wang said the company is still in the middle of centralizing its underwriting, finance and claim-management functions.

"Consolidation at the county level has completed...and we're now moving into the exercise at the provincial level," he said.

Investor enthusiasm for China's insurance industry has guaranteed success for the life insurer's share offer. Like most China initial public offering heavyweights, it has found strong interests from Asian tycoons.

Three of Hong Kong's richest men will together invest US$500 million into the offering, about one-fifth of its institutional offer. Among them, Li Ka-shing will buy shares of $200 million via listing flagships Cheung Kong (Holdings) Ltd. and Hutchison Whampoa Ltd..

Excluding their investments, the institutional book has so far been about five times covered with another four days to go, a person involved in the deal said Sunday.

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