The parent may be tempted to use dividends as compensation for taking on load A report by Moody's Investors Service yesterday openly questioned China Life Insurance's repeated assertion that it had cast off massive negative spread policies written before June 1999. China Life Insurance (Group) Co (Clic), the parent company of the mainland's largest life insurer, might be tempted to influence the listed vehicle's dividend payments as compensation for taking on the traded firm's unprofitable businesses, the international ratings agency warned. In the report on the mainland life insurance sector, Moody's said China Life remained 72.2 per cent owned by Clic and shared key management personnel. 'This majority shareholder may use its influence over the board and management,' it said. 'Therefore, issues such as the timing and amount of dividend payments to the parent company and the amount of share capital maintained in the new company can enable the majority shareholder to address issues elsewhere in the group, such as the non-transferred and unprofitable businesses.' In a controversial restructuring to make China Life's US$3.5 billion global initial public offering last year more attractive, its parent retained unprofitable policies written before June 10, 1999. Those policies promised policyholders an average return of 5 per cent while the insurance industry's investment earnings had declined as interest-rate cuts reduced the benchmark one-year term deposit rate to 2.25 per cent as of that date. Without the move, China Life would have been stuck with a 714 million yuan loss in the first half of last year, rather than the 3.1 billion yuan profit seen in the prospectus. The degree of China Life's separation from the negative spread policies has been hotly debated among analysts. However, Cao Qingyang, principal of China Life's investor relations department, yesterday dismissed such concerns. 'The worries are unjustified,' Mr Cao said. 'From the corporate governance perspective, our two companies are completely separate.' Mr Cao said the negative spread policies had been well taken care of through a special-purpose fund during the restructuring backed by Clic and the Ministry of Finance. 'There is no need to use our money to plug that hole. The ministry is providing a guarantee, so we don't have to worry about it.' China Life would contribute to the fund through dividends distributed to Clic, and part of its tax payments, it said in its prospectus. Moody's further warned the solvency measure used by the Chinese insurance industry might be flawed as it did not accurately reflect insurers' asset and liability risks. The 2002 requirement forces insurers to maintain assets in excess of liabilities as a certain percentage of net premiums of different types of policies in many cases. 'There is no explicit allowance for asset and credit risk,' Moody's said. Risks ignored included the credit risk of bond investment and reinsurance, and the duration mismatch of assets and liabilities, said Moody's analyst Donovan North.