The relationship between state-owned China Life Insurance (Group) Company (CLIC) and China Life Insurance (China Life) may affect the latter's bottom line. According to China Life's recent Global Offering prospectus, CLIC has incurred significant losses on the policies retained by it after the transfer under the restructuring process, and if it is unable to meet its obligations to its policyholders, its actions may eat into China Life's revenues. Formed in January 1999 after a State Council decision to rename PICC Life (People's Insurance Company of China Life), CLIC was before this year the only wholly state-owned insurance company licensed to operate life insurance business in China. That changed when China Life was formed on June 30 as a joint stock company and assumed policies under the restructuring plan approved by the China Insurance Regulatory Commission on August 21. According to China Life's prospectus, all approved long-term and standalone short-term insurance policies issued on or after June 10, 1999 as well as 'riders supplemental to the policies described' were transferred to China Life. All other policies were retained by CLIC. This created substantial losses for CLIC because of the negative spread on non-transferred policies, resulting in a negative net worth. According to official figures, CLIC's owners' equity was a deficit of 176.35 billion yuan as of June 30 this year and 175.46 billion yuan as of December 31 last year. This resulted in significant net losses for CLIC, including 714 million yuan for the six months to June 30. Together with the Ministry of Finance, CLIC established a special-purpose fund to pay claims under the non-transferred policies. This fund will be backed by investment assets retained by CLIC as well as tax payments made by China Life and shareholder dividends paid in cash to CLIC by China Life. If more cash is needed for this fund, CLIC can increase the amount of dividends paid by China Life. According to the prospectus, such a move may limit the funds available for reinvestment for China Life. Furthermore, if China Life is unable to provide the dividends, CLIC can sell its stake in China Life, which will definitely affect the latter's share price. Another area of contention includes the rights to use the 'China Life' name and 'ball' logos. The problem is that China Life as a company does not hold exclusive rights to the name and the logo. According to the prospectus, CLIC has filed applications to register the trademark and logo with the Trademark Office of the State Administration for Industry and Commerce (SAIC). To use both trademark and logo, China Life has inked a trademark licence agreement with CLIC. Although the agreement restricts CLIC from using either trademark and logo to affect China Life's business, it is not restricted from using them in life insurance business outside China or in other forms of insurance within China. This, as indicated in the prospectus, can affect and possibly harm China Life's business, and becomes especially crucial if CLIC 'is placed into receivership'. There can also be a conflict of interest between CLIC and China Life. Upon completion of the global offering, CLIC will hold 75 per cent of share capital. In addition, the president and chairman of China Life is also the president of CLIC. This means that CLIC, as a major shareholder, may hold sway over management decisions and company direction, including the timing and amount of dividend payments and approval of mergers and acquisitions, the prospectus says. This could deter possible suitors and may even affect changes in the management structure. The restructuring has also allowed most of CLIC's former employees to become China Life directors and executive officers - all of whom 'have no prior experience in operating an independent, publicly traded company or in carrying out the arrangements under the restructuring and related agreements,' the prospectus says, adding that this may lead to future 'adjustments and development' of the management structure.
