New China Life – fresh impetus for insurance stocks

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HONG KONG (Dow Jones Investment Banker) – New China Life Insurance Co. Ltd (NCI) is set to come to market in both Hong Kong and Shanghai in October, with an IPO of US$3 billion to US$4 billion. If successful, it would become only the fifth listed insurance company from mainland China.

The bookrunner lineup for the proposed listing is top-heavy, and the offering should also see tycoons, sovereign wealth funds and major institutions taking substantial stakes on a guaranteed allocation basis. Provided that valuation remains reasonable, the combination of fast growth and current low penetration in China’s insurance market should prove attractive to investors.

It should also represent an easier buy than the various bank and broking candidates currently on the pad for listing in Hong Kong over the next few months.

NCI was established in 1996 in Beijing and is China’s third-largest insurer as ranked by premiums, behind China Life Insurance Co. Ltd and Ping An Insurance Group Co. (a composite), both of which are listed in Hong Kong and the mainland, with market capitalizations of US$74 billion and US$56 billion respectively.

The company sells traditional protection and other products through 34 provincial branches, 181 center branches and 1,033 marketing outlets. It has 9% of the life insurance market, with a network covering almost all provinces across China. In 2010 NCI posted gross written premiums of US$13.8 billion equivalent, a profit of US$359 million and had total assets of more than US$47 billion.

China’s insurance market, already the world’s seventh largest, generated some US$215 billion in premiums last year, an increase of close to 32% over 2009. It also managed US$779 billion in assets in 2010. Insurance penetration in China remains low at only 3.8%, as compared with over 10% in Japan, 10.5% in France and 12.4% in the U.K.

US and European financial institutions have made substantial investments in the sector, moving beyond joint ventures and taking stakes in 25 of China’s 164 domestic insurers, despite an effective 20% cap for individual foreign investors. Indeed, Zurich Financial Services AG already owns 15% of NCI. It originally bought a 20% share in the business in 2000, reducing its stake to 15% last March through a sale to an undisclosed party at around book value. And last April, French insurance giant AXA SA sold a 12.02% stake in Taikang Life Insurance Co Ltd – China’s fifth-largest insurer by premiums – to Goldman Sachs for an estimated US$900 million. Taikang Life generated gross written premiums of US$13.2 billion in 2010, and will also be an IPO candidate at some stage.

Chinese insurers, particularly in the life sector where business is long-term in nature, are often valued based on their embedded value rather than on the P/E or other ratios commonly used in Western markets. Embedded value is a complex metric, equal to the present value of future profits of in-force policies, to which is added the adjusted net asset value of the business. When NCI’s advance prospectus is released it will be easier to achieve comparative valuation, but according to Credit Suisse estimates insurance companies quoted in Hong Kong currently trade, on average, at a multiple of 1.7 times embedded value.

Perhaps as a sign of the current volatile market conditions, and also reflecting the prestige of what could be one of the largest IPOs this year, the Hong Kong portion of the NCI offering will be managed by not less than eight houses, with Bank of America Merrill Lynch, BNP Paribas, China International Capital Corporation Ltd., Deutsche Bank AG, Goldman Sachs, HSBC, JPMorgan and UBS all in the running.

No doubt cornerstone investors will also feature heavily, to provide further support – and secure a share of what could possibly be one of the more interesting and sought-after deals of 2011. The timing could be auspicious – Asia’s long-term growth prospects favor the region’s stock markets when rebounds occur. A comparatively vanilla IPO such as NCI’s will be well in demand.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Investment Banker on 15 August 2011 and is reproduced with permission.]

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