20-F 1 d20f.htm FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 Form 20-F for the fiscal year ended December 31, 2003
Table of Contents

As filed with the Securities and Exchange Commission on June 28, 2004


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 20-F

 


 

¨ Registration Statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

 

x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2003

 

OR

 

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to             .

 

Commission file number 001-31914

 


 

LOGO

(Exact name of Registrant as specified in its charter)

 

China Life Insurance Company Limited

(Translation of Registrant’s name into English)

 


 

People’s Republic of China

(Jurisdiction of incorporation or organization)

 

16 Chaowai Avenue

Chaoyang District

Beijing 100020, China

(Address of principal executive offices)

 


 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each Class


 

Name of each exchange on which registered


America depositary shares   New York Stock Exchange, Inc.
H shares, par value RMB1.00 per share   New York Stock Exchange, Inc.*

 

* Not for trading, but only in connection with the listing on the New York Stock Exchange, Inc. of American depositary shares, each representing 40 H shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None.

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None.

(Title of Class)

 


 

Indicate the number of outstanding shares of each of the issuer’s class of capital or common stock as of the close of the period covered by the annual report.

 

As of December 31, 2003, 19,323,530,000 domestic shares and 7,441,175,000 H shares, par value RMB1.00 per share, were issued and outstanding. Both domestic shares and H shares are ordinary shares. H shares are listed on the Hong Kong Stock Exchange.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

 

Indicate by check mark which financial statement item the registrant has elected to follow.    ¨  Item 17    x  Item 18

 



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CHINA LIFE INSURANCE COMPANY LIMITED

 

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

   1

CERTAIN TERMS AND CONVENTIONS

   2

PART I

   4

Item 1.

   Identity of Directors, Senior Management and Advisers.    4

Item 2.

   Offer Statistics and Expected Timetable.    4

Item 3.

   Key Information.    4
          Selected Financial Data    4
          Capitalization and Indebtedness    15
          Reasons for the Offer and Use of Proceeds    15
          Risk Factors    15

Item 4.

   Information on the Company.    31
          History and Development of the Company    31
          Business Overview    39
          Organization Structure    78
          Property, Plants and Equipment    79

Item 5.

   Operating and Financial Review and Prospects.    80
          Overview    80
          Factors Affecting Our Results of Operations    83
          Operating Results    98
          Liquidity and Capital Resources    112
          Research and Development, Patents and Licenses    114
          Trend Information    114
          Off-Balance Sheet Arrangements    114
          Tabular Disclosure of Contractual Obligations    114
          Reconciliation of Hong Kong Generally Accepted Accounting Principles (H.K. GAAP) and United States Generally Accepted Accounting Principles (U.S. GAAP)    115

Item 6.

   Directors, Senior Management and Employees.    115
          Directors and Senior Officers    115
          Compensation    119
          Board Practices    121
          Employees    122
          Share Ownership    123

Item 7.

   Major Shareholders and Related Party Transactions.    123
          Major Shareholders    123
          Related Party Transactions    124
          Interests of Experts and Counsel    131

Item 8.

   Financial Information.    132
          Consolidated Financial Statements and Other Financial Information    132
          Significant Changes    135

Item 9.

   The Offer and Listing.    135

Item 10.

   Additional Information.    135
          Share Capital    135

 

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                      Articles of Association    135
                      Material Contracts    151
                      Exchange Controls    151
                      Taxation    151
                      Dividends and Paying Agents    159
                      Statement by Experts    159
                      Documents on Display    159
                      Subsidiary Information    159
           

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk.    160
           

Item 12.

   Description of Securities Other Than Equity Securities.    165
       

PART II

   165
           

Item 13.

   Defaults, Dividend Arrearages and Delinquencies.    165
           

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds.    165
                      Material Modification To The Rights Of Security Holders    165
                      Use Of Proceeds    165
           

Item 15.

   Controls and Procedures    166
                      Disclosure Controls and Procedures    166
                      Management’s Annual Report on Internal Control Over Financial Reporting    166
                      Attestation Report of the Registered Public Accounting Firm    166
                      Changes in Internal Control over Financial Reporting    166
           

Item 16A.

   Audit Committee Financial Expert.    166
           

Item 16B.

   Code of Ethics.    167
           

Item 16C.

   Principal Accountant Fees and Services.    167
           

Item 16D.

   Exemptions from the Listing Standards for Audit Committees.    167
           

Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers.    167
        PART III FINANCIAL STATEMENTS    167
           

Item 18.

   Financial Statements.    167
           

Item 19.

   Exhibits.    167

 

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FORWARD-LOOKING STATEMENTS

 

This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements state our intentions, beliefs, expectations or predictions for the future, in particular under “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”.

 

The forward-looking statements include, without limitation, statements relating to:

 

  future developments in the insurance industry in China;

 

  the industry regulatory environment as well as the industry outlook generally;

 

  the amount and nature of, and potential for, future development of our business;

 

  the outcome of litigation and regulatory proceedings that we currently face or may face in the future;

 

  our business strategy and plan of operations;

 

  the prospective financial information regarding our business; and

 

  our dividend policy.

 

In some cases, we use words such as “believe”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “plan”, “potential”, “will”, “may”, “should” and “expect” and similar expressions to identify forward-looking statements. All statements other than statements of historical facts included in this annual report, including statements regarding our future financial position, strategy, projected costs and plans and objectives of management for future operations, are forward-looking statements. Although we believe that the expectations reflected in those forward-looking statements are reasonable, we can give no assurance that those expectations will prove to have been correct, and you are cautioned not to place undue reliance on such statements. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Item 3. Key Information—Risk Factors” and elsewhere in this annual report, including in conjunction with the forward-looking statements included in this annual report. We undertake no obligation to publicly update or revise any forward-looking statements contained in this annual report, whether as a result of new information, future events or otherwise, except as required by law. All forward-looking statements contained in this annual report are qualified by reference to this cautionary statement.


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CERTAIN TERMS AND CONVENTIONS

 

Conventions

 

References in this annual report to “we”, “us”, “our” or “China Life” mean China Life Insurance Company Limited and, as the context may require, its subsidiaries. References to “CLIC” mean, prior to the restructuring described below, China Life Insurance Company and, as the context may require, its subsidiaries, and subsequent to the restructuring, China Life Insurance (Group) Company and, as the context may require, its subsidiaries, other than China Life.

 

The statistical and market share information contained in this annual report has been derived from government sources, including the China Insurance Yearbook 1999, the China Insurance Yearbook 2000, the China Insurance Yearbook 2001, the China Insurance Yearbook 2002, the China Insurance Yearbook 2003, the National Bureau of Statistics of China and other public sources. The information has not been verified by us independently. Unless otherwise indicated, market share information set forth in this annual report is based on premium information as reported by the CIRC. The reported information includes premium information that is not determined in accordance with H.K. GAAP or U.S. GAAP. Our market share information set forth in this annual report is estimated by computing the market share of our predecessor company, CLIC, and adjusting it to give effect to our restructuring, based on premiums determined in accordance with PRC GAAP. Under PRC GAAP, premiums include premiums and deposits.

 

References to “China” or “PRC” mean the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong, Macau and Taiwan. References to the “central government” mean the government of the PRC. References to “State Council” mean the State Council of the PRC. References to the “CIRC” mean the China Insurance Regulatory Commission. References to “MOF” or “Ministry of Finance” mean the Ministry of Finance of the PRC. References to “Ministry of Commerce” mean the Ministry of Commerce of the PRC, which assumed the regulatory functions of the former Ministry of Foreign Trade and Economic Cooperation of the PRC, or “MOFTEC”.

 

References to “HKSE” or “Hong Kong Stock Exchange” mean The Stock Exchange of Hong Kong Limited. References to “NYSE” or “New York Stock Exchange” mean New York Stock Exchange, Inc.

 

Unless otherwise indicated, references to an “affiliate” of a company mean any entity of, over or in which the company, alone or acting with others in concert, holds at least 30% of the issued share capital or exercises or controls the exercise of at least 30% of the voting power or has the power to elect a majority of the board of directors or otherwise exercises control.

 

References to “effective date” mean June 30, 2003, the effective date of the restructuring under the restructuring agreement between CLIC and us.

 

References to “Renminbi” or “RMB” in this annual report mean the currency of the PRC, references to “U.S. dollars” or “US$” mean the currency of the United States of America, and references to “Hong Kong dollars”, “H.K. dollars” or “HK$” mean the currency of the Hong Kong Special Administrative Region of the PRC.

 

References to “U.S. GAAP” mean the generally accepted accounting principles in the United States, references to “H.K. GAAP” mean the generally accepted accounting principles in Hong Kong, and references to “PRC GAAP” mean the PRC Accounting Rules and Regulations for Business Enterprises and PRC Accounting System for Financial Institutions. Unless otherwise indicated, our financial information presented in this annual report has been prepared in accordance with H.K. GAAP.

 

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Unless otherwise indicated, translations of RMB amounts into U.S. dollars in this annual report have been made at the rate of US$1.00 to RMB 8.2767, the noon buying rate in The City of New York for cable transfers payable in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2003. The noon buying rate on June 25, 2004 on this basis was RMB 8.2767 to US$1.00. No representation is made that Renminbi amounts could have been, or could be, converted into U.S. dollars at that rate on December 31, 2003 or at all.

 

Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

 

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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

 

Not applicable.

 

ITEM 3. KEY INFORMATION.

 

SELECTED FINANCIAL DATA

 

Selected Historical Consolidated Financial Data

 

The following tables set forth our selected consolidated financial information. We have derived the consolidated financial information as of and for the years ended December 31, 2001, 2002, 2003 from our audited consolidated financial statements included elsewhere in this annual report and as of and for the year ended December 31, 2000 from our audited consolidated financial statements not included in this annual report. As described below, the financial statements as of and for the years ended December 31, 2001 and 2002 present the financial results of our predecessor company, CLIC, and the 2003 statements of results of operations and cash flows present the results of CLIC for the nine-month period ended September 30, 2003 together with our results for the three-month period ended December 31, 2003. The financial statements are prepared and presented in accordance with H.K. GAAP. For a reconciliation of our net profit and shareholders’ equity to U.S. GAAP, see Note 30 of the notes to the financial statements included elsewhere in annual report.

 

We were formed on June 30, 2003 in connection with CLIC’s restructuring. In connection with the restructuring, CLIC transferred to us (1) all long-term insurance policies (policies having a term of more than one year from the date of issuance) issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999 and either (i) recorded as a long-term insurance policy as of June 30, 2003 in a database attached to the restructuring agreement as an annex or (ii) having policy terms for group supplemental medical insurance (fund type), (2) stand-alone short-term policies (policies having a term of one year or less from the date of issuance) issued on or after June 10, 1999 and (3) all riders supplemental to the policies described in clauses (1) and (2) above, together with the reinsurance contracts specified in an annex to the restructuring agreement. We refer to these policies as the “transferred policies”. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring”. All other insurance policies were retained by CLIC. We refer to these policies as the “non-transferred policies”. We assumed all obligations and liabilities of CLIC under the transferred policies. CLIC continues to be responsible for its liabilities and obligations under the non-transferred policies following the restructuring. The restructuring was effected through a restructuring agreement entered into with CLIC on September 30, 2003, with retroactive effect to June 30, 2003. Pursuant to PRC law and the restructuring agreement, the transferred policies were transferred to us as of June 30, 2003; however, for accounting purposes, the restructuring is treated as having occurred on September 30, 2003, the date of which all of the assets to be transferred were specifically identified. Therefore, for accounting purposes, our financial statements reflected a deemed distribution of assets to CLIC and deemed assumption of liabilities by CLIC as of September 30, 2003. To give effect to the restructuring agreement, the results of operations attributable to the timing difference between the effectiveness of the restructuring under the PRC law and the effectiveness of the restructuring for accounting purposes are reflected as a capital contribution from CLIC to us as of October 1, 2003. The business constituted by the policies and assets transferred to us and the obligations and liabilities assumed by us and the business constituted by the policies, assets, obligations and liabilities retained by CLIC were, prior to the restructuring, under common management

 

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from a number of significant aspects. Therefore, our consolidated balance sheet data as of December 31, 2000, 2001 and 2002, and the profit and loss accounts data for the years ended December 31, 2000, 2001 and 2002, present the financial results of our predecessor company, CLIC, and they will not necessarily be indicative of our future earnings, cash flows or financial position as a stand-alone company. Our consolidated balance sheet data and profit and loss accounts data as of and for the year ended December 31, 2003 reflect the restructuring as having occurred on September 30, 2003.

 

You should read this information in conjunction with the rest of the annual report, including our audited consolidated financial statements and the accompanying notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.

 

The selected historical consolidated financial information below omits data related to 1999. CLIC developed new systems during 1997, 1998 and 1999 for capturing individual policy details. These systems were completed during 1999. As a result, we are unable to prepare reliable financial information without unreasonable effort or expense for the years ended December 31, 1999 in accordance with H.K. GAAP or U.S. GAAP because we do not have complete information for policies in force at December 31, 1998 or prior years. Due to the fact that as of December 31, 1999, a premium deficiency was determined to exist under both H.K. GAAP and U.S. GAAP relating to certain insurance contracts that were written prior to such date, all assumptions were reset at such date. Under H.K. GAAP and U.S. GAAP, these revised assumptions are used for periods subsequent to December 31, 1999.

 

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     For the year ended December 31,

 
     2000

    2001

    2002

    2003

    2003

 
     RMB     RMB     RMB     RMB     US$  
     (in millions except for per share data)  

Consolidated Profit and Loss Accounts Data

      

H.K. GAAP

                              

Revenues

                              

Gross written premiums and policy fees

   44,714     56,869     68,769     69,334     8,377  

Less: premiums ceded to reinsurers

   (1,501 )   (1,655 )   (1,869 )   (1,571 )   (190 )
    

 

 

 

 

Net written premiums and policy fees

   43,213     55,214     66,900     67,763     8,187  

Net change in unearned premium reserves

   (314 )   (248 )   (476 )   (547 )   (66 )
    

 

 

 

 

Net premiums earned and policy fees

   42,899     54,966     66,424     67,216     8,121  
    

 

 

 

 

Net investment income

   4,374     6,276     8,347     9,825     1,187  

Net realized gains/(losses) on investments

   (23 )   (6 )   266     868     105  

Net unrealized gains/(losses) on investments

   298     (322 )   (1,067 )   247     30  

Other income

   827     293     338     727     88  
    

 

 

 

 

Total revenues

   48,375     61,207     74,308     78,883     9,531  
    

 

 

 

 

Benefits, claims and expenses

                              

Insurance benefits and claims

                              

Life insurance death and other benefits

   (8,467 )   (10,099 )   (7,010 )   (8,570 )   (1,035 )

Accident and health claims and claim adjustment expenses

   (2,767 )   (3,829 )   (4,053 )   (4,882 )   (590 )

Increase in future life policyholder benefits

   (27,738 )   (33,121 )   (45,374 )   (43,084 )   (5,205 )

Interest credited to policyholder contract deposits

   (4,505 )   (5,799 )   (7,095 )   (7,260 )   (877 )

Policyholder dividends and participation in profits

   (7 )   (177 )   (641 )   (1,207 )   (146 )

Amortization of deferred policy acquisition costs

   (1,745 )   (3,024 )   (3,832 )   (5,023 )   (607 )

Underwriting and policy acquisition costs

   (3,073 )   (2,176 )   (1,661 )   (1,294 )   (156 )

Administrative expenses

   (4,318 )   (5,100 )   (6,162 )   (6,862 )   (829 )

Other operating expenses

   (2,602 )   (1,110 )   (634 )   (872 )   (105 )

Interest expense on bank borrowings

   (29 )   (5 )   (7 )   (7 )   (1 )

Statutory insurance levy

   (59 )   (64 )   (73 )   (85 )   (10 )
    

 

 

 

 

Total benefits, claims and expenses

   (55,310 )   (64,504 )   (76,542 )   (79,146 )   (9,563 )
    

 

 

 

 

Profit/(loss) before income tax expense and minority interests

   (6,935 )   (3,297 )   (2,234 )   (263 )   (32 )

Income tax expense

   (14 )   (4 )   (14 )   (1,180 )   (143 )
    

 

 

 

 

Profit/(loss) before minority interests

   (6,949 )   (3,301 )   (2,248 )   (1,443 )   (174 )

Minority interests

   (41 )   6     (2 )   15     2  
    

 

 

 

 

Net profit/(loss) attributable to shareholders

   (6,990 )   (3,295 )   (2,250 )   (1,428 )   (173 )
    

 

 

 

 

Dividends

   —       —       —       —       —    

Basic and diluted loss per share

   (0.35 )   (0.16 )   (0.11 )   (0.07 )   (0.01 )
    

 

 

 

 

U.S. GAAP

                              

Revenues

   48,375     61,207     74,308     78,883     9,531  

Net profit/(loss)

   (7,026 )   (3,336 )   (2,317 )   (1,287 )   (155 )

Net profit/(loss) per share(1)

   (0.35 )   (0.17 )   (0.12 )   (0.06 )   (0.01 )

Net profit/(loss) per ADS(1)

   (14.05 )   (6.67 )   (4.63 )   (2.54 )   (0.30 )

(1) The 20,000,000,000 shares issued to CLIC in the restructuring have been given retroactive treatment for purposes of computing per share and per ADS amounts. Numbers for the year ended December 31, 2003 are based on the weighted average number of 20,249,798,526 shares in issue during such year. Each ADS represents 40 H shares. Any discrepancies in the table between the amounts per share and the amounts per ADS are due to rounding.

 

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     As of December 31,

     2000

   2001

   2002

   2003

   2003

     RMB    RMB    RMB    RMB    US$
     (in millions)

Consolidated Balance Sheet Data

    

H.K. GAAP

                        

Assets

                        

Investments

                        

Fixed maturity securities

   37,684    53,284    76,337    70,604    8,530

Equity securities

   6,794    7,698    12,171    10,718    1,295

Term deposits

   39,653    76,083    123,675    137,192    16,576

Statutory deposits—restricted

   40    990    991    4,000    483

Investments in associated companies

   2,031    2,036    2,035    —      —  

Policy loans

   109    107    106    116    14

Securities purchased under agreements to resell

   19,840    30,480    36,388    14,002    1,692

Other

   572    336    231    —      —  

Cash and cash equivalents

   23,275    17,855    14,529    42,616    5,149
    
  
  
  
  

Total investments

   129,998    188,869    266,463    279,248    33,739
    
  
  
  
  

Other assets

                        

Accrued investment income

   3,033    3,527    4,198    2,875    347

Premiums receivable

   1,388    1,844    1,757    2,801    338

Reinsurance assets

   970    1,100    1,224    997    120

Deferred policy acquisition costs

   5,996    10,893    18,084    24,868    3,005

Property, plant and equipment, net of accumulated depreciation

   15,617    18,347    18,457    12,008    1,451

Other

   5,375    3,528    3,587    5,923    716
    
  
  
  
  

Total other assets

   32,379    39,239    47,307    49,472    5,977
    
  
  
  
  

Total assets

   162,377    228,108    313,770    328,720    39,716
    
  
  
  
  

 

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     As of December 31,

     2000

    2001

    2002

    2003

   2003

     RMB     RMB     RMB     RMB    US$
     (in millions)

Liabilities and equity

    

Liabilities

                           

Future life policyholder benefits

   226,868     259,989     305,363     82,718    9,994

Policyholder contract deposits and other funds

   89,373     105,609     156,273     154,731    18,695

Unearned premium reserves

   4,131     4,441     5,036     5,382    650

Reserves for claims and claim adjustment expenses

   716     867     879     814    98

Annuity and other insurance balances payable

   4,029     6,362     8,057     638    79

Premiums received in advance

   735     1,481     1,767     2,407    291

Policyholder deposits

   694     629     592     —      —  

Policyholder dividends payable

   2     177     688     1,916    231

Securities sold under agreements to repurchase

   90     14,608     3,602     6,448    779

Bank borrowings

   921     379     313     —      —  

Provision

   73     330     445     —      —  

Other liabilities

   3,489     4,206     4,716     6,891    833

Deferred tax liabilities

   —       —       —       3,686    445

Statutory insurance fund

   1,132     1,215     1,337     333    40
    

 

 

 
  

Total liabilities

   332,253     400,293     489,068     265,964    32,134
    

 

 

 
  

Commitments and contingencies

                           

Minority interests

   169     163     165     320    39

Shareholders’ equity

   (170,045 )   (172,348 )   (175,463 )   62,436    7,544
    

 

 

 
  

Total liabilities and equity

   162,377     228,108     313,770     328,720    39,716
    

 

 

 
  

U.S. GAAP

                           

Total assets

   162,307     227,997     313,592     328,720    39,716

Total liabilities

   332,253     400,293     489,068     265,964    32,134

Shareholders’ equity

   (170,115 )   (172,459 )   (175,641 )   62,436    7,544

 

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Unaudited Pro Forma Consolidated Profit and Loss Data

 

The unaudited pro forma consolidated profit and loss data for the year ended December 31, 2003 has been prepared in accordance with H.K. GAAP and gives effect to the restructuring as if it had occurred at the start of the year ended December 31, 2003.

 

The unaudited pro forma consolidated financial information is provided for illustrative purposes only and does not necessarily represent what our consolidated financial results actually would have been if the restructuring had in fact occurred on that date and is not necessarily representative of our financial results for any future periods. The notes to the pro forma consolidated financial data contain a more detailed discussion of how the adjustments described above are presented. The unaudited pro forma consolidated financial information should be read in connection with “Item 5. Operating and Financial Review and Prospects” and the historical consolidated financial statements and accompanying notes.

 

We were formed on June 30, 2003 in connection with the restructuring of CLIC. The restructuring was effected through a plan of restructuring, which was approved by the CIRC on August 21, 2003, and a restructuring agreement we entered into with CLIC on September 30, 2003, with retroactive effect to June 30, 2003. Pursuant to PRC law and the restructuring agreement, the transferred policies were transferred to us as of June 30, 2003; however, for accounting purposes the restructuring is treated as having occurred on September 30, 2003.

 

Under PRC law and the restructuring agreement, the restructuring was effective as of June 30, 2003, which we refer to in this annual report as the effective date. In connection with the restructuring:

 

  CLIC transferred to us (1) all long-term insurance policies (policies having a term of more than one year from the date of issuance) issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999, and either (i) recorded as a long-term insurance policy as of June 30, 2003 in a database attached to the restructuring agreement as an annex or (ii) having policy terms for group supplemental medical insurance (fund type), (2) stand-alone short-term policies (policies having a term of one year or less from the date of issuance) issued on or after June 10, 1999 and (3) all riders supplemental to the policies described in clauses (1) and (2) above, together with the reinsurance contracts specified in an annex to the restructuring agreement. We refer to these policies in this annual report as the “transferred policies”. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring”. All other insurance policies as of the effective date were retained by CLIC. We refer to these policies as the “non-transferred policies”. We assumed all of the obligations and liabilities of CLIC under the transferred policies. CLIC continues to be responsible for its liabilities and obligations under the non-transferred policies following the effective date. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets”. We refer to the insurance policies issued by us following the restructuring as the “new policies”.

 

  CLIC’s assets as of June 30, 2003 were divided between China Life and CLIC in accordance with the restructuring agreement entered into between CLIC and ourselves in connection with the restructuring. Premiums receivable were allocated to the transferred and non-transferred policies based on the specific policies to which they relate. Property, plant and equipment and other operating assets were allocated based on the terms of the restructuring agreement. Investments in respect of participating policies were allocated to the transferred policies, since all participating business has been transferred. Unlisted equity securities and investment properties were allocated to CLIC. The remaining investment assets, including term deposits, fixed maturity securities, equity securities, repurchase agreements and cash and cash equivalents, were allocated so as to

 

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ensure that the book value of China Life as of June 30, 2003 was RMB 29,608 million, as determined under PRC valuation regulations. This was equivalent to RMB 36,182 million as determined under H.K. GAAP, due to differences between PRC GAAP and H.K. GAAP. The proportions of each of these classes of assets allocated to CLIC and ourselves were similar.

 

  CLIC agreed not to, directly or indirectly through its subsidiaries and affiliates, participate, operate or engage in life, accident or health insurance businesses and any other business in China which may compete with our insurance business. CLIC also undertook (1) to refer to us any corporate business opportunity that falls within our business scope and which may directly or indirectly compete with our business and (2) to grant us a right of first refusal, on the same terms and conditions, to purchase any new business developed by CLIC. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Non-Competition Agreement”.

 

  Substantially all of the management personnel and employees who were employed by CLIC in connection with the transferred assets and businesses were transferred to us. Some management and personnel remained with CLIC. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets”.

 

  CLIC retained the trademarks used in our business, including the “China Life” name and the “ball” logo and granted us and our branches a royalty-free license to use these trademarks. CLIC and its subsidiaries and affiliates will be entitled to use these trademarks, but CLIC may not license or transfer these trademarks to other third parties. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”.

 

  CLIC’s contracts with its agents and other intermediaries were transferred to us. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets”.

 

  We entered into various agreements under which we provide policy administration services to CLIC for the non-transferred policies, manage CLIC’s investment assets and lease office space from CLIC for our branch and field offices. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”.

 

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     For the year ended December 31, 2003

 
     Historical

    Adjustments

    Note   Pro Forma

    Pro Forma

 
     RMB     RMB         RMB     US$  
     (in millions)  

Pro Forma Consolidated Profit and Loss Accounts Data

                            

H.K. GAAP

                            

Revenues

                            

Gross written premiums and policy fees

   69,334     (16,409 )   (a)   52,925     6,394  

Less: premiums ceded to reinsurers

   (1,571 )   —       (a)   (1,571 )   (190 )
    

 

     

 

Net written premiums and policy fees

   67,763     (16,409 )   (a)   51,354     6,205  

Net change in unearned premium reserves

   (547 )   —       (a)   (547 )   (66 )
    

 

     

 

Net premiums earned and policy fees

   67,216     (16,409 )   (a)   50,807     6,139  

Net investment income

   9,825     (3,035 )   (b)   6,790     820  

Net realized gains/(losses) on investments

   868     (269 )   (b)   599     72  

Net unrealised gains/(losses) on investments

   247     7     (b)   254     31  

Other income

   727     1,265         1,992     241  
           (54 )   (k)            
           1,284     (c)            
           35     (d)            
    

 

     

 

Total revenues

   78,883     (18,441 )       60,442     7,303  
    

 

     

 

Benefits, claims and expenses

                            

Insurance benefits and claims

                            

Life insurance death and other benefits

   (8,570 )   4,752     (e)   (3,818 )   (461 )

Accident and health claims and claim adjustment expenses

   (4,882 )   —       (e)   (4,882 )   (590 )

Increase in future life policyholder benefits

   (43,084 )   16,571     (f)   (26,513 )   (3,203 )

Policyholder dividends and participation in profit

   (1,207 )   —       (e)   (1,207 )   (146 )

Amortization of deferred policy acquisition costs

   (5,023 )   —           (5,023 )   (607 )

Underwriting and policy acquisition costs

   (1,294 )   472     (g)   (822 )   (99 )

Administrative expenses

   (6,862 )   536         (6,326 )   (764 )
           65     (k)            
           208     (i)            
           327     (h)            
           (64 )   (j)            

Other operating expenses

   (872 )   505     (k)   (367 )   (44 )

Interest expense on bank borrowings

   (7 )   7     (k)   —       —    

Interest credited to policyholder contract deposits

   (7,260 )   4,340     (e)   (2,920 )   (353 )

Statutory insurance levy

   (85 )   —           (85 )   (10 )
    

 

     

 

Total benefits, claims and expenses

   (79,146 )   27,183         (51,963 )   (6,278 )
    

 

     

 

Profit/(loss) before income tax expense and minority interest

   (263 )   8,742         8,479     1,024  

Income tax expense

   (1,180 )   (1,402 )   (l)   (2,582 )   (312 )

Profit/(loss) before minority interests

   (1,443 )   7,340         5,897     712  

Minority interests

   15     (15 )   (k)   —       —    
           (40 )   (m)   (40 )   (5 )
    

 

     

 

Net profit/(loss)

   (1,428 )   7,285         5,857     708  
    

 

     

 

 

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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

 

Pro Forma Consolidated Profit and Loss Accounts Data

 

(a) Reflects the exclusion of amounts attributable to the non-transferred policies from the pro forma consolidated profit and loss accounts data.

 

(b) Income from investment properties and investments in associates retained by CLIC in the restructuring has been excluded from net investment income in the pro forma profit and loss accounts data. Other investment income, including interest income and dividends, realized gains and losses and unrealized gains and losses from investments held for trading attributable to investments retained by CLIC in the restructuring, has also been excluded. Cash and investment assets were divided between CLIC and China Life based on a mechanism set forth in the restructuring agreement entered into between CLIC and China Life in connection with the restructuring. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”. Average cash and investment assets retained by CLIC for the nine months ended September 30, 2003 have been determined as if the restructuring had occurred on January 1, 2003. China Life’s pro forma shareholders’ equity on January 1, 2003 was equivalent to the amount agreed to by CLIC and China Life in the restructuring, and sufficient investments were assumed to be retained by CLIC to result in pro forma equity of this amount. The adjustment for investment income on these investments has been determined on the basis of the percentage of investment return on all of CLIC’s cash and investment assets for the nine months ended September 30, 2003.

 

(c) Reflects service fees to be paid by CLIC to China Life for the administration of the non-transferred policies under a policy management agreement to be entered into between CLIC and China Life in connection with the restructuring. For each semi-annual period, the service fee is equal to the sum of:

 

  (i) the number of in force non-transferred policies that were within their policy term as of the last day of the period, multiplied by RMB 8.0, with the number of policies in force for group insurance policies being equal to the number of individuals covered by the policies (excluding those whose policies have lapsed or matured), plus

 

  (ii) 2.5% of the actual premiums and deposits in respect of such policies collected during the semi-annual period.

 

See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”. The adjustment for the service fees reflects the fees that would be paid under this agreement, as if the agreement had been in effect on January 1, 2003.

 

(d) Reflects asset management fees to be paid by CLIC to the asset management joint venture for the management of investment assets retained by CLIC in the restructuring under the asset management agreement entered into between CLIC and the asset management joint venture in connection with the restructuring. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”. The adjustment for the asset management fees reflects the fees that would be paid under this agreement, as if the agreement had been in effect on January 1, 2003.

 

(e) Reflects the exclusion of amounts attributable to the non-transferred policies.

 

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(f) Reflects the increase in future policyholder benefits attributable to the non-transferred policies.

 

(g) Reflects the exclusion of underwriting and acquisition costs.

 

(h) Reflects the exclusion of depreciation expense for the fixed assets retained by CLIC in the restructuring.

 

(i) Reflects the exclusion of staff costs for employees and management remaining with CLIC in the restructuring.

 

(j) Reflects rental expenses to be paid by China Life to CLIC for the lease of certain fixed assets from CLIC under a property leasing agreement to be entered into between China Life and CLIC in connection with the restructuring. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”.

 

(k) Reflects the exclusion of income and expenses attributable to non-core operations retained by CLIC in the restructuring.

 

(l) Pro forma income tax has been included in the pro forma profit and loss accounts data based on the pro forma profit for the year. Since CLIC will retain the benefit of tax losses carried forward, the tax provision does not reflect any benefit in respect of those losses. In connection with the restructuring, China Life has received confirmation from the Ministry of Finance and the State Tax Bureau that certain expenses not normally deductible under current PRC tax law can be deducted by China Life in arriving at its taxable income for 2003. In the past, the deductibility of these expenses had no impact on its tax charge or net income because the business was loss-making. Taxation has been provided for on pro forma income before tax using the statutory rate of 33% and assuming that these expenses were deductible for the year ended December 31, 2003.

 

(m) Reflects CLIC’s minority interests in the asset management joint venture as if it had been incorporated on January 1, 2003.

 

Exchange Rate Information

 

We prepare our financial statements in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars, and U.S. dollars into Renminbi, at RMB 8.2767 to US$1.00, the noon buying rate on December 31, 2003 in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York. You should not assume that Renminbi amounts could actually be converted into U.S. dollars at these rates or at all.

 

The People’s Bank of China sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against the U.S. dollar in the market during the prior day. The People’s Bank of China also takes into account other factors, such as the general conditions existing in the international foreign exchange markets. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of Renminbi to U.S. dollars generally has been stable. Although Chinese governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or security, requires the approval of the State Administration for Foreign Exchange and other relevant authorities.

 

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The Hong Kong dollar is freely convertible into other currencies, including the U.S. dollar. Since October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of HK$7.80 to US$1.00. The central element in the arrangements which give effect to the link is that by agreement between the Hong Kong government and the three Hong Kong banknote issuing banks, The Hongkong and Shanghai Banking Corporation Limited, Standard Chartered Bank and the Bank of China, certificates of indebtedness, which are issued by the Hong Kong Government Exchange Fund to the banknote issuing banks to be held as cover for their banknote issues, are issued and redeemed only against payment in U.S. dollars, at the fixed exchange rate of HK$7.80 to U.S.$1.00. When the banknotes are withdrawn from circulation, the banknote issuing banks surrender the certificates of indebtedness to the Hong Kong Government Exchange Fund and are paid the equivalent U.S. dollars at the fixed rate.

 

The market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be determined by the forces of supply and demand in the foreign exchange market. However, against the background of the fixed rate which applies to the issue of the Hong Kong currency in the form of banknotes, as described above, the market exchange rate has not deviated materially from the level of HK$7.80 to US$1.00 since the link was first established. The Hong Kong government has stated its intention to maintain the link at that rate, and it, acting through the Hong Kong Monetary Authority, has a number of means by which it may act to maintain exchange rate stability. Exchange rates between the Hong Kong dollar and other currencies are influenced by the linked rate between the U.S. dollar and the Hong Kong dollar.

 

The noon buying rates in The City of New York for cable transfers payable in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York were US$1.00 to RMB 8.2767 and US$1.00 to HK$7.7976, respectively, on June 25, 2004. The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each of the periods shown:

 

     Noon buying rate

     RMB per US$

   HK$ per US$

     High

   Low

   High

   Low

December 2003

   8.2772    8.2765    7.7670    7.7628

January 2004

   8.2772    8.2767    7.7680    7.7632

February 2004

   8.2773    8.2769    7.7692    7.7845

March 2004

   8.2774    8.2767    7.7980    7.7842

April 2004

   8.2772    8.2768    7.8000    7.7870

May 2004

   8.2773    8.2768    7.8001    7.7895

June 2004 (through June 25)

   8.2768    8.2766    7.8000    7.7947

 

The following table sets forth the period-end noon buying rates and the average noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each of 1999, 2000, 2001, 2002, 2003 and 2004 (through June 25) (calculated by averaging the noon buying rates on the last day of each month of the periods shown):

 

    

Period-end noon

buying rate


  

Average noon

buying rate


     RMB per US$

   HK$ per US$

   RMB per US$

   HK$ per US$

1999

   8.2795    7.7740    8.2785    7.7599

2000

   8.2774    7.7999    8.2784    7.7936

2001

   8.2766    7.7980    8.2772    7.7996

2002

   8.2800    7.7988    8.2772    7.7996

2003

   8.2767    7.7640    8.2771    7.7864

2004 (through June 25)

   8.2767    7.7976    8.2769    7.7911

 

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CAPITALIZATION AND INDEBTEDNESS

 

Not Applicable.

 

REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not Applicable.

 

RISK FACTORS

 

Our business, financial condition and results of operations can be affected materially and adversely by any of the following risk factors.

 

Risks Relating to Our Business

 

Our growth is dependent on our ability to attract and retain productive agents

 

A substantial portion of our business is conducted through our individual agents. Because of differences in productivity, a relatively small percentage of our sales agents is responsible for a disproportionately high percentage of our sales of individual products. If we are unable to retain and build on this core group of highly productive agents, our business could be materially and adversely affected. Competition for agents from insurance companies and other business institutions may also force us to increase the compensation of our agents and sales representatives, which would increase operating costs and reduce our profitability. Although we have not had difficulty in attracting and retaining productive agents in the recent past, and do not anticipate any difficulties in the future, we cannot guarantee that this will continue to be the case.

 

If we are unable to develop other distribution channels for our products, our growth may be materially and adversely affected

 

Banks and post offices are rapidly emerging as some of the fastest growing distribution channels in China. We do not have exclusive arrangements with any of the banks and post offices through which we sell insurance and annuity products, and thus our sales may be materially and adversely affected if one or more banks or post offices choose to favor our competitors’ products over our own. If we are unable to continue to develop our alternative distribution channels, our growth may be materially and adversely affected.

 

Agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs

 

Agent or employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:

 

  engaging in misrepresentation or fraudulent activities when marketing or selling insurance policies or annuity contracts to customers;

 

  hiding unauthorized or unsuccessful activities, resulting in unknown and unmanaged risks or losses; or

 

  otherwise not complying with laws or our control policies or procedures.

 

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We cannot always deter agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective in all cases. We cannot assure you that agent or employee misconduct will not lead to a material adverse effect on our business, results of operations or financial condition.

 

Our business is dependent on our ability to attract and retain key personnel, including senior management, underwriting personnel, actuaries, information technology specialists, investment managers and other professionals

 

The success of our business is dependent to a large extent on our ability to attract and retain key personnel who have in-depth knowledge and understanding of the life insurance market in China, including members of our senior management, qualified underwriting personnel, actuaries, information technology specialists and experienced investment managers. We do not carry key personnel insurance for any of these personnel. We compete to attract and retain these key personnel with other life insurance companies and financial institutions, some of which may offer better compensation arrangements. The number of new domestic and foreign-invested insurers is increasing at a significant pace, existing insurers are expanding their operations and the number of other financial institutions is growing. As the insurance and investment businesses continue to expand in China, we expect that competition for these personnel will increase in the future. Although we have not had difficulty in attracting and retaining qualified key personnel in the past, and while to our knowledge no member of our senior management has plans to retire or leave our company in the near future, we cannot guarantee that this will continue to be the case. If we were unable to continue to attract and retain key personnel, our financial performance could be materially and adversely affected.

 

We are Exposed to Changes in Interest Rates

 

Changes in interest rates may affect our profitability.

 

Our profitability is affected by changes in interest rates. We currently are experiencing the lowest interest rate environment in several years. However, due to China’s recent fast growing economy, the Chinese government may take certain measures, including raising interest rates, in an effort to ensure sustainable economic growth. If interest rates were to increase in the future, surrenders and withdrawals of insurance and annuity policies and contracts may increase as policyholders seek other investments with higher perceived returns. This process may result in cash outflows requiring that we sell investment assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which may result in realized investment losses. If interest rates were to decline, the income we realize from our investments may decline, affecting our profitability. In addition, as instruments in our investment portfolio mature, we might have to reinvest the funds we receive in investments bearing lower interest rates.

 

For many of our long-term life insurance and annuity products, we are obligated to pay a minimum interest or crediting rate to our policyholders or annuitants, which is established when the product is priced. These products expose us to the risk that changes in interest rates may reduce our “spread”, or the difference between the rates that we are required to pay under the policies and the rate of return we are able to earn on our investments intended to support our insurance obligations. Our historical results and financial position included in this annual report, which present the historical results of CLIC through September 30, 2003, reflect the continuing performance of policies that were issued prior to June 10, 1999. Many of these policies paid guaranteed fixed rates of return that, due to declining interest rates, came to be significantly higher than the rates of return on investment assets. From 1996 through 1999, the People’s Bank of China made a series of reductions in the interest rates Chinese commercial banks could pay on their deposits. The interest rate on one-year term deposits, a key benchmark rate, was reduced

 

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seven times, from 10.98% in April 1996 to 2.25% in June 1999. As a result, CLIC experienced a significant negative spread on its guaranteed rate policies and CLIC’s results of operations continue to be adversely impacted by the effect of those interest rate cuts.

 

On June 10, 1999, the CIRC reduced to 2.50% the maximum guaranteed rate which life insurance companies could commit to pay on new policies and in response, CLIC adopted new pricing policies which reduced the guaranteed rates on its products to a range of between 1.50% and 2.50%. We also have shifted our mix of products to emphasize products that lessen the impact from interest rate changes, including traditional policies that are not as sensitive to interest rates and participating policies under which our customers receive a portion of our distributable earnings from participating products, as well as products having shorter terms to better match the duration of our investment portfolio. Furthermore, we have made use of the relaxation of investment restrictions applicable to us to diversify our investments. We and CLIC have not incurred negative spread on policies issued since June 10, 1999, as the average investment returns we and CLIC have been able to generate have been higher than their guaranteed rates. However, if the rates of return on our investments fall below the minimum rates we guarantee, our profitability would be materially and adversely affected.

 

Because of the general lack of long-term fixed income securities in the Chinese capital markets and the restrictions on the types of investments we may make, we are unable to match closely the duration of our assets and liabilities, which increases our exposure to interest rate risk

 

Like other insurance companies, we seek to manage interest rate risk through managing, to the extent possible, the average duration of our investment assets and the insurance policy liabilities they support. Matching the duration of our assets to their related liabilities reduces our exposure to changes in interest rates, because the effect of the changes largely will be offset against each other. However, restrictions under the PRC insurance law on the asset classes in which we may invest, as well as the limited availability of long-duration investment assets in the markets in which we invest, have resulted in the duration of our assets being shorter than that of our liabilities, particularly with respect to liabilities with durations of more than 20 years. Furthermore, the financial markets currently do not provide an effective means for us to hedge our interest rate risk through financial derivative products. We believe that, with the gradual easing of the investment restrictions imposed on insurance companies in China, our ability to match the duration of our assets to that of our liabilities will improve. We also seek to manage the risk of duration mismatch by focusing on product offerings whose maturity profiles are in line with the duration of investments available to us in the prevailing investment environment. However, if we are unable to match more closely the duration of our assets and liabilities, we will continue to be exposed to interest rate changes, which may materially and adversely affect our earnings.

 

Our Investments are Subject to Risks

 

We are exposed to potential investment losses if there is an economic downturn in China

 

Under the current PRC insurance law, we may invest the premiums, deposits and other income we receive only in China. In particular, 49.1% of our total investment assets as of December 31, 2003 consisted of term deposits with Chinese banks, and of these deposits, 42.5% were placed with the four largest state-owned commercial banks. A serious downturn in the Chinese economy may lead to investment losses, which would reduce our earnings. Due to China’s recent fast growing economy, the Chinese government may take certain measures to slow down the economic growth, which could have an adverse impact on our earnings.

 

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Defaults on our fixed maturity investments may materially and adversely affect our profitability

 

25.3% of our investment assets as of December 31, 2003 were comprised of fixed maturity securities. The issuers whose fixed maturity securities we hold may fail to pay or otherwise default on their obligations due to bankruptcy, a lack of liquidity, a downturn in the economy, operational failures or other reasons. Losses due to these defaults could reduce our profitability.

 

Unless we are permitted to invest in a broader range of asset classes, our ability to improve our rate of investment return will be limited

 

Our premiums and deposits have grown rapidly during the last three years. As a Chinese life insurance company we are subject to significant restrictions under current PRC insurance law and regulations on the asset classes in which we are permitted to invest. Chinese life insurance companies may invest their funds only in Chinese bank deposits, government bonds, domestic corporate bonds and securities investment funds. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. These asset classes historically have yielded a comparatively low return on investment. If the asset classes in which we are permitted to invest do not expand in the future, we will be limited in our ability to improve our rate of return, which may materially and adversely impact our profitability. Our investment yields have been decreasing for the past three years, resulting in a decrease in the amount distributed for our participating products. Continued declines could adversely affect the attractiveness of our investment-type products, which compose a large portion of our business.

 

The PRC securities markets are still emerging markets, which may expose us to risks of loss from our investments there

 

We had RMB 10,718 million (US$1,295 million) invested in securities investment funds as of December 31, 2003. These securities investment funds are primarily invested in equity securities that are issued by Chinese companies and traded on China’s securities exchanges. Many of our investments in securities investment funds are publicly traded, but we also invest in non-publicly traded securities investment funds. The PRC securities markets are characterized by companies with relatively small market capitalizations and low trading volumes, and by evolving regulatory, accounting and disclosure requirements. This may from time to time result in significant price volatility, unexpected losses, lack of liquidity or difficulties in the settlement of transactions. These factors could cause us to incur losses on our publicly traded investments. In addition, as one of the largest institutional investors in China, we hold significant positions in many securities in which we invest, and any decision to sell or any perception in the market that we are a major seller of a security could adversely affect the liquidity and market price of that security.

 

Differences in future actual claims results from the assumptions used in pricing and establishing reserves for our insurance and annuity products may materially and adversely affect our earnings

 

Our earnings depend significantly upon the extent to which our actual claims results are consistent with the assumptions used in setting the prices for our products and establishing the liabilities in our financial statements for our obligations for future policy benefits and claims. Our assumptions include those for investment returns, mortality, morbidity, expenses and persistency, as well as macro-economic factors such as inflation. To the extent that trends in actual claims results are less favorable than our underlying assumptions used in establishing these liabilities, and these trends are expected to continue in the future, we could be required to increase our liabilities. Any such increase could have a material adverse effect on our profitability and, if significant, our financial condition. Any material impairment in our solvency level could change our customers’ or our business associates’ perception of our financial health, which in turn could adversely affect our sales, earnings and operations.

 

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We establish the liabilities for obligations for future policy benefits and claims based on the expected payout of benefits, calculated through the use of assumptions for investment returns, mortality, morbidity, expenses and persistency, as well as certain macroeconomic factors such as inflation. These assumptions are based on judgments made by the management. These assumptions may deviate from our actual experience, and, as a result, we cannot determine precisely the amounts which we will ultimately pay to settle these liabilities or when these payments will need to be made. These amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future. We evaluate our liabilities periodically, based on changes in the assumptions used to establish the liabilities, as well as on our actual policy benefits and claims results. We record changes in our liabilities to expenses in the period the liabilities are established or re-estimated. If the liabilities originally established for future policy benefits prove inadequate, we must increase our liabilities established for future policy benefits, which may have a material adverse effect on our earnings and our financial condition.

 

We have data available for a shorter period of time than do insurance companies operating in some other countries and, as a result, less claims experience on which to base some of the assumptions used in establishing our reserves. For a discussion of how we establish our assumptions for mortality, morbidity and lapses, see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Critical Accounting Policies—Insurance Claims and Reserves”. Given the limited nature of this experience, it is possible that our actual claims could vary significantly from the assumptions used.

 

Our risk management and internal reporting systems, policies and procedures may leave us exposed to unidentified or unanticipated risks, which could materially and adversely affect our businesses or result in losses

 

Our policies and procedures to identify, monitor and manage risks may not be fully effective. Many of our methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics based on historical models. As a result, these methods may not predict future exposures, which could be significantly greater than what the historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, customers or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. In addition, a significant portion of business information needs to be centralized from our many branch offices. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. Failure or the ineffectiveness of these systems could materially and adversely affect our business or result in losses.

 

We are likely to offer a broader and more diverse range of insurance and investment products in the future as the insurance market in China continues to develop. At the same time, we anticipate that the relaxing of regulatory restraints will result in our being able to invest in a significantly broader range of asset classes. The combination of these factors will require us to continue to enhance our risk management capabilities and is likely to increase the importance of our risk management policies and procedures to our results of operations and financial condition. If we fail to adapt our risk management policies and procedures to our changing business, our business, results of operations and financial condition could be materially and adversely affected.

 

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Catastrophes could materially reduce our earnings and cash flow

 

We could in the future experience catastrophic losses that may have an adverse impact on the business, results of operations and financial condition of our insurance business. Catastrophes can be caused by various events, including terrorist attacks, earthquakes, hurricanes, floods, fires and epidemics, such as severe acute respiratory syndrome, or SARS.

 

We establish liabilities for claims arising from a catastrophe only after assessing the exposure and damages arising from the event. We cannot be certain that the liabilities we establish after the assessment will be adequate to cover actual claims. We do not currently carry catastrophe reinsurance to reduce our catastrophe exposure. Such an event could have a material adverse effect on us.

 

Current or future litigation and regulatory procedures could result in financial losses or harm our businesses

 

CNAO Audit

 

On January 30, 2004, the Audit General of the National Audit Office of China (the “CNAO”) announced that it had carried out an audit review of the financial statements of CLIC, our predecessor. The CNAO audit decision, dated March 30, 2004, which covers the balance sheet and income statement of CLIC for 2002, found that (i) there had been irregular use of RMB 2,368 million of insurance funds, and irregular operations involving RMB 2,374 million in the use of agents that was not in compliance with regulations and overpayment of surrender value by some branches of CLIC, including the use of agents not legally qualified in the insurance business, changes in premium rates and the scope of coverage without proper approval, and overpayment of surrender value and annuity payments when due; (ii) certain branches of CLIC had overstated or understated expenses and income resulting in the underpayment of taxes in the amount of RMB 1.3 million; (iii) certain branches of CLIC maintained “unauthorized reserves” which involved an accumulated amount of RMB 32.3 million, among which RMB 11.1 million had been accumulated after 2001; and (iv) CLIC had failed to pay taxes when due in an amount of RMB 43.1 million.

 

CLIC was directed to pay a total of approximately RMB 67.5 million (approximately US$8.15 million), including RMB 9.2 million of business taxes and surcharges, RMB 10.0 million of income taxes, RMB 37.3 million of other taxes and RMB 11.1 million in fines. The decision requires CLIC to rectify the irregular use of insurance funds and irregular operations described in section (i) above, and to submit a report on such rectification to the CNAO. The audit decision also requires CLIC make such changes to its books and accounts described in sections (ii) and (iii) above to correct accounting entries regarding overstatement and understatement of expenses and income addressed in the report, and to submit reports on such adjustments to the CNAO. We have reviewed the issues referred to in the CNAO audit decision and believe that such issues will not have a material impact on our results of operations, cash flows or financial position.

 

Class Action Litigations

 

As of June 21, 2004, there have been nine complaints filed in the United States District Court for the Southern District of New York against China Life and certain of its officers and directors. Eight of the nine complaints allege that China Life and the other named persons violated Section 10(b) and Section 20(a) of the U.S. Securities Exchange Act of 1934 and Rule 10b-5 under the Exchange Act by failing to disclose the audit review by the CNAO of CLIC. On the basis of similar allegations, the remaining complaint alleges that China Life and the other named persons violated Section 11 and Section 15 of the U.S. Securities Act of 1933 by distributing a prospectus containing materially misleading statements. Each complaint seeks to recover damages on behalf of a purported class of persons who purchased the

 

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China Life’s publicly traded securities and seeks an award of damages in an unspecified amount, plus expert and attorneys’ fees. The plaintiffs have filed motions for the consolidation of the complaints, selection of a lead plaintiff and approval of counsel appointed by the lead plaintiff. These motions are still pending. We expect that the complaints will be consolidated and that a consolidated amended complaint will be filed. In connection with these actions, we have engaged U.S. counsel to contest the complaints vigorously on our behalf.

 

SEC Informal Inquiry

 

We have received an informal inquiry, dated April 26, 2004, from the U.S. Securities and Exchange Commission requesting us to produce documents and other relevant information on certain matters. The SEC has advised us that the informal inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, or as a reflection upon any person, entity or security. We intend to cooperate fully with the SEC on a voluntary basis.

 

Other

 

We are involved in litigation involving our insurance operations on an ongoing basis. In addition, the CIRC, as well as other PRC governmental agencies, including tax, commerce and industrial administration, audit and communication bureaus, from time to time make inquiries and conduct examinations or investigations concerning our compliance with PRC laws and regulations. These litigation and administrative proceedings have in the past resulted in damage awards, settlements or administrative sanctions, including fines, which have not been material to CLIC or ourselves. We currently have control procedures in place to monitor our litigation and regulatory exposure, and take appropriate actions against the individuals involved. See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Regulatory Proceedings”. While we cannot predict the outcome of any pending or future litigation, examination or investigation, we do not believe that any pending legal matter will have a material adverse effect on our business, financial condition or results of operations. However, we cannot assure you that any future litigation or regulatory proceeding will not have an adverse outcome, which could have a material adverse effect on our operating results or cash flows. See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Regulatory Proceedings”.

 

We do not possess the title certificates in respect of some of the properties owned by us

 

In connection with the restructuring CLIC transferred 3,443 properties, including our headquarters in Beijing, China, to us. At the time of the restructuring CLIC held land use right certificates and building ownership certificates for all but a small number of these properties and is in the process of applying for certificates that it does not yet hold. As part of the restructuring, CLIC has undertaken to have the land use right certificates and building ownership certificates in respect of all the properties and land it owns to be registered in our name as soon as possible and to indemnify us against all losses, claims, charges or expenses arising from any failure to obtain these certificates. Due to the large number of properties acquired by us as a result of the restructuring and the fact that we were only incorporated on June 30, 2003, not all of the properties or parcels of land have been registered in our name. At the time of the restructuring, our PRC legal counsel, King & Wood, advised us that it was not aware of any material legal impediment to the transfer from CLIC to us of the land use right certificates and building ownership certificates. Upon completion of the transfer of all such land use right certificates and building ownership certificates to us, we will have lawful rights to occupy, let, transfer and mortgage all of these parcels of land and properties. If we and/or CLIC cannot obtain the relevant land use right certificates and/or building ownership certificates, our management believes that there will be no material financial impact on us as CLIC has undertaken to indemnify us against all losses or expenses arising out

 

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of or in connection with a failure to obtain the relevant land use right certificates and/or building ownership certificates. However, we cannot predict with certainty how our rights as owner of these properties, and our operations carried out on or from these properties, may be adversely affected as a result of the absence of the certificates as described above.

 

Risk Relating to the PRC Life Insurance Industry

 

We expect competition in the Chinese insurance industry to increase, which may materially and adversely affect the growth of our business

 

We face competitive pressures from both domestic and foreign-invested life insurance companies operating in China, as well as from property and casualty insurance companies, which may compete with our accident and short-term health insurance businesses, and other financial institutions that sell other financial investment products in competition with ours. If we are not able to adapt to these increasingly competitive pressures in the future, our growth rate may decline, which could materially and adversely affect our earnings.

 

Competition among domestic life insurance companies is increasing

 

Our nearest competitors are Ping An Insurance Company of China, Ltd., or Ping An, and China Pacific Life Insurance Co. Ltd., or China Pacific. Together, Ping An, China Pacific and our predecessor accounted for more than 90% of the individual and group life insurance premiums in China in 2002. Each of Ping An and China Pacific has operated in the Chinese insurance market for more than ten years, and each has a recognized brand name. Ping An had a greater market share than CLIC did in Beijing and Shanghai in 2002. We also face competition from smaller insurance companies, which may develop strong positions in various regions in which we operate, and new entrants to the health insurance industry, following adoption by the Chinese government of policies that encourage the development of health insurance and improved health care in China.

 

Competition from foreign-invested life insurance companies is likely to increase in the future, as restrictions on their operations in China are relaxed

 

Foreign-invested life insurance companies are insurance companies in which foreign entities hold at least a 25.0% interest. Under current Chinese law, foreign-invested life insurance companies are permitted to operate only in specified cities and may not offer group life insurance, health insurance and annuities or other pension-like products. As a result of these and other restrictions on foreign-invested life insurance companies operating in China, foreign-invested insurers only accounted for less than 2% of the nationwide market share of life insurance products in 2002, although some already have gained significant market shares in the life insurance market in some areas in China. In Shanghai, Guangzhou and Shenzhen, where foreign-invested insurers have been allowed to operate since 1992, 1995 and 1999, they had respective life insurance market shares of approximately 14%, 13% and 5% in 2002. These barriers to foreign insurers’ entry into the Chinese insurance market are being phased out as a result of China’s accession to the World Trade Organization, or WTO, in December 2001, which will allow foreign insurers to sell health, annuity and group life insurance products nationwide by December 2004. We believe that the relaxation of the restrictions on foreign-invested insurers will increase the competitive pressures we will face in the future. Foreign-invested life insurance companies, through their shareholders, may have access to greater financial, technological or other resources than we do.

 

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We are likely to face increasing competition from property and casualty insurance companies and other companies offering products that compete with our own

 

In addition to competition from life insurance companies, we face competition from other companies that may offer products that compete with our own, including:

 

  Property and casualty companies. As a result of recent changes in the insurance law, beginning on January 1, 2003, property and casualty insurance companies were permitted to sell accident and short-term health insurance products, but only with regulatory approval. There were 23 property and casualty insurers as of December 31, 2002. We believe property and casualty insurers have the competitive advantage of being able to bundle, or cross-sell, accident and health products with the other non-life insurance products that they are currently selling to their existing and potential customers. We believe this will lead to greater competition in the accident and health insurance sectors, especially for the group accident and short-term health insurance products we offer.

 

  Mutual fund companies and other financial services providers. We face competition from other financial services providers, primarily licensed mutual fund companies, trust companies and securities brokerage firms licensed to manage separate accounts. Recent changes in Chinese investment regulations relaxing rules on the formation of mutual funds and sales of securities have led to greater availability and variety of financial investment products. These products may prove to be attractive to the public and thereby adversely affect the sale of some products we offer, including participating life insurance policies and annuities.

 

All of our agents are required to be qualified and to be registered as business entities. If these qualification and registration requirements are enforced or result in policyholders canceling their policies, our business may be materially and adversely affected

 

Life insurance agents are required to obtain a qualification certificate from the CIRC in order to conduct insurance agency business. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries”. Approximately 36.5% of our individual agents had not obtained such a certificate as of December 31, 2003. To date, we do not believe the CIRC has taken any action against an insurance company or its agents for failing to be so qualified. However, in May 2004, the CIRC issued a circular requiring insurance companies to take effective measures in carrying out the qualification certification requirement. If the CIRC were to enforce this regulation in the future, and if a substantial number of our agents do not become licensed, or if a substantial number of our policyholders who bought insurance policies through our unqualified exclusive agents were to cancel the policies because of this regulation, our business may be materially and adversely affected. Moreover, we may be subject to fines and other administrative proceedings for the failure of our insurance agents to obtain the necessary CIRC qualification certificate. Any such fines or administrative proceedings could materially and adversely affect our business, financial condition and results of operations.

 

Under the PRC insurance law, life insurance agents are required to be registered with and obtain business licenses from the local administrative bureaus of industry and commerce. Historically, this requirement has not been generally enforced, and it is our understanding that the State Administration of Industry and Commerce, or SAIC, does not have procedures in place to effect the registration and licensing of individual insurance agents. Consequently, as we believe it is also the case with other insurance companies operating in China, substantially all of our individual agents are not in compliance with this requirement. To date, this noncompliance has not had a material adverse effect on CLIC or

 

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ourselves. We do not know whether the local bureaus of the SAIC will enforce this requirement in the future. If it were to be enforced in the future, our agents would be required to register and obtain business licenses. We cannot assure you that all of our agents would obtain such licenses, and the enforcement of this requirement could adversely affect the composition and effectiveness of our individual agent distribution system, which could have a material adverse effect on our business.

 

The further development of regulations in China may impose additional costs and restrictions on our activities

 

We operate in a highly regulated industry. The CIRC supervises and administers the insurance industry in China. In exercising its authority, it is given wide discretion to administer the law. China’s insurance regulatory regime is undergoing significant changes toward a more transparent regulatory process and a convergent movement toward international standards. Some of these changes may result in additional costs or restrictions on our activities. Among other things, recent changes to determinations of statutory reserves and solvency requirements have affected adversely our income under PRC GAAP and the amount of capital we are required to maintain. In addition, because the terms of our products are subject to regulations, changes in regulations may affect our profitability on the policies and contracts we issue. For instance, under guidelines issued by the CIRC, the dividends on our participating products must be no less than 70% of the distributable earnings from participating products in accordance with CIRC requirements. If this level were to be increased in the future, our profitability could be materially and adversely affected.

 

Our ability to comply with minimum solvency requirements is affected by a number of factors, and our compliance may force us to raise additional capital, which could be dilutive to our existing investors own, or to reduce our growth

 

We are required by CIRC regulation to maintain our solvency at a level in excess of minimum solvency levels. Our minimum solvency is affected primarily by the policy reserves we are required to maintain which, in turn, are affected by the volume of policies and contracts we sell and by regulations on the determination of statutory reserves. Our solvency also is affected by a number of other factors, including the profit margin of our products, returns on our investments, underwriting and acquisition costs and policyholder and shareholder dividends. If we continue to grow rapidly in the future, or if the required solvency level is raised in the future, we may need to raise additional capital to meet our solvency requirement, including through additional issuances of shares, which would be dilutive to our existing investors. If we are not able to raise additional capital, we may be forced to reduce the growth of our business.

 

Risks Relating to the Restructuring

 

CLIC has incurred substantial losses on the policies retained by it in the restructuring. If CLIC is unable to meet its obligations to its policyholders, it may seek to increase the level of dividends we pay, sell the China Life shares it owns or take other actions which may have a material adverse effect on the value of the shares our existing investors own

 

In connection with the restructuring, CLIC transferred to us (1) all long-term insurance policies (policies having a term of more than one year from the date of issuance) issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999 and either (i) recorded as a long-term insurance policy as of June 30, 2003 in a database attached to the restructuring agreement as an annex or (ii) having policy terms for group supplemental medical insurance (fund type), (2) stand-alone short-term policies (policies having a term of one year or less from the date of issuance) issued on or after June 10, 1999 and (3) all riders supplemental to the policies described in clauses (1) and (2)

 

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above, together with the reinsurance contracts specified in an annex to the restructuring agreement. All other insurance policies were retained by CLIC. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring”. CLIC has incurred substantial losses on these non-transferred policies, primarily because the guaranteed rates it had committed to pay on these policies are higher than the investment return it was able to generate on its investment assets. This negative spread on non-transferred policies created substantial losses for CLIC and a resulting negative net worth. As of September 30, 2003, CLIC’s shareholders’ equity was a deficit of RMB 181,064 million (US$21,876 million). CLIC is expected to continue to incur losses on the retained policies at least for the near term.

 

In connection with the restructuring, CLIC has established, together with the MOF, a special purpose fund for the purpose of paying claims under the non-transferred policies. The special purpose fund will be funded by investment assets retained by CLIC; renewal premiums paid on the non-transferred policies over time; all of the tax payments made by CLIC, China Life and the asset management joint venture, as recently approved by the MOF; profits from the investments of the special purpose fund; shareholder dividends paid in cash to CLIC by China Life; proceeds from the disposition of China Life shares by CLIC over time; and funds injected by the MOF in the event of a deficiency in the special purpose fund, as described below. The fund will be co-administered by CLIC and the MOF. The special purpose fund will be available to satisfy CLIC’s operating expenses, including the payment of benefits and claims obligations arising from the non-transferred policies, as well as expenses incurred in operating the special purpose fund, including third-party management fees and professional fees, and such other purposes as the management committee of the fund may agree. The special purpose fund will be dissolved when all claims and benefits under the non-transferred policies have been paid, or sooner if the management committee so agrees.

 

The MOF’s approval of the special purpose fund issued to CLIC provides that in the event there is any deficiency in the special purpose fund for so long as the fund is in existence, as described above, to meet any payment obligation arising out of the non-transferred policies, the MOF will provide support through the injection of funds to ensure the payments of benefits and claims to the policyholders of the non-transferred policies. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets—Insurance policies retained by CLIC”. We have been advised by our PRC legal counsel, King & Wood, that (1) the MOF has the authority to issue this approval regarding the special purpose fund, (2) the approval is valid and effective, and (3) it has no reason to believe that the MOF will revoke the approval. We cannot assure you, however, that a court would decide in a manner consistent with King & Wood’s conclusions.

 

We cannot predict the amount of funds that will be available to the special purpose fund from CLIC’s own operations to satisfy its obligations to its policyholders as they become due. CLIC’s cash requirements and available cash resources will be affected by several factors which are subject to uncertainty, including prevailing interest rates and the returns on investment generated by CLIC’s assets, as well as the claims, expenses and persistency experience with respect to CLIC’s insurance policies. The cash resources available to CLIC will also depend in part on our profitability, which will affect the amount of our tax payments and hence the amount of refund contributed to the fund, the timing and amount of our dividend payments and the market prices of our shares and ADSs, which will affect the proceeds to CLIC from dispositions of our shares. If it is unable to satisfy its obligations to its policyholders from other sources, CLIC may seek, subject to our articles of association and applicable laws, to increase the amount of dividends we pay in order to satisfy its cash flow requirements. Any such increase in our dividend payments would reduce the funds available for reinvestment in our business. In addition, if we are unable to pay dividends in amounts sufficient to satisfy these requirements, CLIC may seek to sell its shareholdings in us or take other actions in order to satisfy these needs. The sale of these holdings or even the market perception of such a sale may materially and adversely affect the price of our shares.

 

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CLIC does not meet the minimum solvency requirements under CIRC solvency regulations. The CIRC has broad powers under these regulations and the insurance law in the event an insurance company fails to meet its minimum solvency requirements. These may include ordering the sale of the assets or transfer of the insurance business of an insurance company in default under these requirements to a third party and appointing a receiver to take over the management of the insurance company. We believe that, in light of the MOF’s approval described above, it is unlikely that the CIRC will take these actions. However, we cannot assure you that the CIRC will not take actions against CLIC, which could have a material adverse effect on us.

 

The transfer of policies to us by CLIC and/or the separation of assets between CLIC and us may be subject to challenge

 

We have been advised by our PRC legal counsel, King & Wood, that (1) the transferred policies have been legally and validly transferred to China Life and (2) following the restructuring, we will not have any continuing obligations to holders of the non-transferred policies who remain policyholders of CLIC and that there is no legal basis on which holders of the non-transferred policies can make a claim against China Life. We also have been advised by King & Wood that, although there is no specific law applicable to restructurings, these conclusions are supported by, among other things, the approval of the restructuring and various related matters by the State Council, the MOF and the CIRC; the support provided by the MOF with respect to the non-transferred policies as described above; and contract and other law. We cannot assure you that policyholders of CLIC, holders of transferred policies or other parties will not seek to challenge the transfer of the transferred policies or the separation of assets occurring as a consequence of the restructuring, or that a court would decide in a manner consistent with King & Wood’s conclusions. If the transfer of policies to us or the separation of assets were challenged successfully, our financial condition and results of operations would likely be materially and adversely affected.

 

We do not hold exclusive rights to the trademarks in the “China Life” name (in English and Chinese), the “ball” logos and other business related slogans and logos, and CLIC, which owns these trademarks, may take actions that would impair the benefits we derive from their use

 

We conduct our business under the “China Life” brand name, the “ball” logos and other business related slogans and logos. CLIC owns these trademarks and has registered one of the “ball” logo trademarks in the PRC. CLIC has filed applications to register the trademarks in the “China Life” name (in English and Chinese), the other ball logo and other business related slogans and logos with the Trademark Office of the State Administration for Industry and Commerce, or the SAIC. CLIC has entered into a trademark license agreement with us, under which CLIC has agreed to grant us and our branches a royalty-free license to use these trademarks.

 

Although CLIC has undertaken in a non-competition agreement with us not to compete with us in China in any life, accident and health insurance and any other businesses in China which may compete with our insurance business, CLIC, its subsidiaries and affiliates are permitted to use the brand name and logo in their own businesses, including life insurance business outside China and any other businesses they may enter into in the future within China, including property and casualty (other than businesses that compete with our accident and health businesses) and asset management businesses. In addition, they are not precluded from taking actions that may impair the value of the brand name, which could harm our business. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Trademark License Agreement” and “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Non-Competition Agreement”. The China Life brand name and our reputation could be materially harmed if CLIC fails to make payments when due on outstanding policies retained by CLIC in the restructuring or new policies written by CLIC after the restructuring, if CLIC reduces the rates of return payable on policies retained by CLIC or if CLIC is placed into receivership.

 

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As our controlling shareholder, CLIC will be able to exert influence on our affairs and could cause us to make decisions or enter into transactions that may not be in your best interests

 

We are controlled by CLIC, whose interests may conflict with those of our other shareholders. As at the date of this annual report, CLIC holds 72.2% of our share capital. In addition, our president and chairman of the board of directors is also the president of CLIC. As a result of these factors, CLIC, which is wholly-owned by the PRC government, will, so long as it holds the majority of our shares, effectively be able to control the composition of our board of directors and, through the board, exercise a significant influence over our management and policies. In addition, subject to our articles of association and applicable laws, CLIC will, so long as it holds the majority of our shares, effectively be able to determine the timing and amount of our dividend payments and approve increases or decreases of our share capital, the issuance of new securities, amendments of our articles of association, mergers and acquisitions and other major corporate transactions. CLIC may also be able to prevent us effectively from taking actions to enforce or exercise our rights under agreements to which we are a party, including the agreements we entered into with CLIC in connection with the restructuring. See “Item 7. Major Shareholders and Related Party Transactions”. As majority shareholder, CLIC may be able to take these actions without your approval. In addition, CLIC’s control could have the effect of deterring hostile takeovers or delaying or preventing changes in control or changes in management that might be desirable to other shareholders.

 

CLIC may direct business opportunities elsewhere

 

CLIC has other business interests, including the run-off of the insurance policies retained by it in the restructuring. Notwithstanding a general undertaking pursuant to a non-competition agreement with us not to compete with us in our principal areas of business in China, CLIC is permitted to sell riders to these retained policies and enter into other businesses, including life insurance businesses outside of China and property and casualty (other than businesses that compete with our accident and health businesses) and asset management businesses, both inside and outside of China. CLIC also is engaged in the life insurance business in Shanghai through its joint venture with Colonial Mutual Group, an Australian financial services company, of which CLIC owns 51.0% and which CLIC has agreed to dispose of prior to December 18, 2006. It also may engage in insurance business in other regions outside China in the future. Although it is required under the non-competition agreement to give us a right of first refusal over any business opportunities it develops in these areas, we may not be in a position to take advantage of these opportunities at that time, which could harm our business. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Non-Competition Agreement”.

 

In addition, while we provide policy administration and other services to CLIC for the policies retained by CLIC in the restructuring, and provide investment management services to CLIC through our asset management subsidiary, these agreements can be terminated with notice or upon expiration in a limited number of years. If CLIC were to terminate its policy administration and asset management arrangements with us, our loss of fees could materially and adversely affect us.

 

Our historical financial information includes the results of the businesses retained by CLIC, and thus is not indicative of our future results

 

Our consolidated financial statements present the results of the insurance polices and assets transferred to us in the restructuring, as well as, through September 30, 2003, the assets, liabilities and operations retained by CLIC. See “Item 5. Operating and Financial Review and Prospects—Overview—Restructuring” and “Item 5. Operating and Financial Review and Prospects—Operating Results”. As a

 

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result, they will not necessarily be indicative of our future earnings, cash flows or financial position as an independent company. Historical performance is not necessarily representative of our financial results for any future periods.

 

As a newly established independent entity, we face additional uncertainties in our management, business and operations

 

Prior to our restructuring, the insurance policies and assets transferred to us were owned and operated by CLIC, a state-owned enterprise. Most of our current directors and executive officers are former officers and employees of CLIC who have no prior experience in operating an independent, publicly traded company or in carrying out the arrangements under our restructuring and related agreements. Our newly established management structure and management information systems may need further adjustments and development to meet the challenges of a public company.

 

Risks Relating to the People’s Republic of China

 

China’s economic, political and social conditions, as well as government policies, could affect our business

 

Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant degree, to economic, political and legal developments in China. The economy of China differs from the economies of most developed countries in many respects, including:

 

  the extent of government involvement;

 

  its level of development;

 

  its growth rate; and

 

  its control of foreign exchange.

 

The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industrial development. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

 

While China’s economy has experienced significant growth in the past twenty years, growth has been uneven across both geographic regions and the various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China but may have a negative effect on us. For example, our operating results and financial condition could be materially and adversely affected by government monetary policies, changes in interest rate polices, tax regulations or policies and regulations affecting the securities markets and asset management industry. In addition, due to China’s recent fast growing economy, the Chinese government is expected to take certain measures to slow down economic growth. A slowdown in Chinese growth rates could adversely affect us by impacting sales of our products, reducing our investment returns, or otherwise.

 

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The PRC legal system has inherent uncertainties that could limit the legal protections available to you

 

We are organized under the laws of China and are governed by our articles of association. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited precedential value. Since 1979, the Chinese legislative bodies have promulgated laws and regulations dealing with such economic matters as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.

 

Holders of H shares and ADSs generally are required to resolve disputes with us, our senior management and holders of our domestic shares only through arbitration in Hong Kong or China

 

In accordance with the rules applicable to Chinese overseas listed companies, our articles of association provide that, with certain limited exceptions, all disputes or claims based on our articles of association, PRC company law or other relevant laws or administrative rules, and concerning matters between holders of H shares and holders of domestic shares, us, or our directors, supervisors, president, vice presidents or other senior officers, must be submitted for arbitration at either the China International Economic and Trade Arbitration Commission or the Hong Kong International Arbitration Centre. If an applicant chooses to have the dispute arbitrated at the Hong Kong International Arbitration Centre, either party may request that the venue be changed to Shenzhen, a city in China near Hong Kong. The governing law for any such disputes or claims is Chinese law, unless Chinese law itself provides otherwise. Pursuant to an arrangement of mutual enforcement of arbitration awards between the PRC courts and the Hong Kong courts, Hong Kong arbitration awards are enforceable in China. However, to our knowledge, no action has been brought in China by any holder of shares issued by a Chinese company to enforce an arbitral award. As a result, we are uncertain as to the outcome of any action brought in China to enforce an arbitral award made in favor of holders of H shares.

 

The laws in China differ from the laws in the United States and may afford less protection to our minority shareholders

 

Unlike laws in the United States, the applicable laws of China do not specifically allow shareholders to sue the directors, supervisors, officers or other shareholders on behalf of the company to enforce a claim against these parties that the company has failed to enforce itself, and class action lawsuits are generally not available in China. In addition, PRC company law imposes few obligations on a controlling shareholder with respect to protection of minority shareholders, although overseas listed joint stock companies, such as ourselves, are required to adopt certain provisions in their articles of association that are designed to protect minority shareholder rights. These mandatory provisions provide, among other things, that the rights of any class of shares, including H shares, may not be varied without a resolution approved by holders of shares in the affected class holding not less than two-thirds of the shares of the affected class entitled to vote, and provide that in connection with a merger or division involving our company, a dissenting shareholder may require us or the consenting shareholders to purchase the dissenters’ shares at a fair price. Disputes arising from these protective provisions would likely have to be resolved by arbitration. See “—Holders of H shares and ADSs generally are required to resolve disputes with us, our senior management and holders of our domestic shares only through arbitration in Hong Kong or China”.

 

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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based on U.S. or other foreign laws against us, our management and some of the experts named in the annual report

 

We are a company incorporated under the laws of China, and substantially all of our assets are located in China. In addition, most of our directors, supervisors, executive officers and some of the experts named in this annual report reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our directors, supervisors or executive officers or some of the experts named in this annual report, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our Chinese counsel, King & Wood, has advised us that China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom, Japan or many other countries. Our Hong Kong legal adviser, Allen & Overy, has also advised us that Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, recognition and enforcement in China or Hong Kong of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter may be difficult or impossible. Furthermore, an original action may be brought in the PRC against us, our directors, supervisors, executive officers or the experts named in this annual report only if the actions are not required to be arbitrated by PRC law and our articles of association, and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court may award civil liability, including monetary damages.

 

Holders of H shares may be subject to PRC taxation

 

Under the PRC’s current tax laws, regulations and rulings, dividends paid by us to holders of H shares outside the PRC currently are exempted from PRC income tax. In addition, gains realized by individuals or enterprises upon the sale or other disposition of H shares currently are exempted from PRC income tax. If the exemptions are withdrawn in the future, holders of H shares may be required to pay withholding taxes on dividends, which are currently imposed at the rate of 20%, or capital gains tax, which currently may be imposed upon individuals at the rate of 20%. See “Item 10. Additional Information—Taxation—The People’s Republic of China”.

 

Government control of currency conversion and the fluctuation of the Renminbi may materially and adversely affect our operations and financial results

 

We receive substantially all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of these revenues must be converted into other currencies to allow us to make payments on declared dividends, if any, on our H shares.

 

Under China’s existing foreign exchange regulations, we are able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange by complying with various procedural requirements. The Chinese government, however, may, at its discretion, restrict access in the future to foreign currencies for current account transactions. If this were to occur, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

The value of the Renminbi against the U.S. dollar and other currencies fluctuates and is affected by, among other things, changes in China’s political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official

 

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exchange rate for the conversion of Renminbi to U.S. dollars generally has been stable. Any devaluation of the Renminbi, however, may materially and adversely affect the value of, and any dividends payable on, our H shares in foreign currency terms, since we will receive substantially all of our revenues, and express our profits, in Renminbi. Our financial condition and results of operations also may be affected by changes in the value of certain currencies other than the Renminbi.

 

Payment of dividends is subject to restrictions under Chinese law

 

Under Chinese law, dividends may be paid only out of distributable profits. Distributable profits means our after-tax profits as determined under PRC GAAP or H.K. GAAP, whichever is lower, less any recovery of accumulated losses and allocations to statutory funds that we are required to make. Any distributable profits that are not distributed in a given year are retained and available for distribution in subsequent years. However, ordinarily we will not pay any dividends in a year in which we do not have any distributable profits.

 

The calculation of distributable profits for an insurance company under PRC GAAP differs in many respects from the calculation under H.K. GAAP. As a result, we may not be able to pay any dividend in a given year if we do not have distributable profits as determined under PRC GAAP, even if we have profits for that year as determined under H.K. GAAP. A strengthening in the statutory reserve requirements applicable to life insurance companies operating in China, which came into effect on December 31, 2003, led to a one-time adjustment to our PRC GAAP earnings in 2003. We do not expect to declare dividends in respect of 2003, and our ability to pay dividends in respect of 2004 is likely to be constrained. Payment of dividends by us is also regulated by the PRC insurance law. See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Policy on Dividend Distributions”.

 

ITEM 4. INFORMATION ON THE COMPANY.

 

HISTORY AND DEVELOPMENT OF THE COMPANY

 

On October 20, 1949, the People’s Insurance Company of China, or PICC, was established by the Chinese government as a nationwide wholly state-owned insurance company offering various types of insurance services. PICC achieved monopoly status in China’s insurance market by the mid-1950s, by which time all foreign insurance companies had withdrawn operations from China. The Chinese government suspended virtually all of PICC’s domestic insurance business, however, in 1958, lasting until the advent of economic reform in 1979, when PICC’s domestic property and casualty insurance business was resuscitated. PICC’s life insurance business resumed operations in 1982, with PICC being the only life insurance provider in China.

 

In 1996, PICC was reorganized as a holding company. The business of PICC was transferred to its four subsidiary companies: Zhongbao Property Insurance Company Limited, or PICC Property; Zhongbao Life Insurance Company Limited, or PICC Life; Zhongbao Reinsurance Company Limited, or PICC Reinsurance; and China Insurance H.K. (Holdings) Company Limited, or China Insurance H.K.

 

In January 1999, the holding structure of the PICC group of companies was dissolved. After this restructuring the original PICC Property inherited the PICC brand and was renamed People’s Insurance Company of China; the original PICC Life was renamed China Life Insurance Company; the original PICC Reinsurance was renamed China Reinsurance Company, which was recently restructured into China Reinsurance (Group) Company, China Property & Casualty Reinsurance Co, Ltd., China Life Reinsurance Company and China Continent Property & Casualty Insurance Company Ltd.; and all overseas business institutions and operations owned by the former PICC group of companies were allocated to, and administered by, China Insurance H.K. After 1999 and prior to the restructuring described below, CLIC was the only wholly state-owned insurance company licensed to operate life insurance business in China.

 

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CLIC has experienced rapid development in recent years. In 2002, its total insurance premiums represented 57% of the total life insurance premiums in China.

 

We were formed as a joint stock company pursuant to the PRC company law on June 30, 2003 under the corporate name of LOGO in connection with the restructuring.

 

On November 23, 2003, we established an asset management joint venture with our predecessor, CLIC, in connection with the restructuring. The asset management joint venture manages our investment assets and, separately, substantially all of those of CLIC.

 

We and our predecessor incurred capital expenditures of RMB2,285 million, RMB1,814 million and RMB2,371 million in 2003, 2002 and 2001. These capital expenditures mainly comprised the addition of buildings.

 

Our Restructuring

 

Restructuring Plan and Governmental Approval

 

Upon the approval of the State Council and the CIRC, we were formed on June 30, 2003 as a joint stock company in connection with the restructuring by CLIC, our sole owner. The restructuring was effected through a plan of restructuring, which was approved by the CIRC on August 21, 2003, and a restructuring agreement we entered into with CLIC on September 30, 2003, with retroactive effect to June 30, 2003, which we refer to in this annual report as the effective date. Pursuant to PRC law and the restructuring agreement, we enjoyed the rights and benefits and assumed the obligations and liabilities arising from the restructuring from and after the effective date.

 

In connection with the restructuring:

 

  CLIC transferred to us (1) all long-term insurance policies (policies having a term of more than one year from the date of issuance) issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999 and either (i) recorded as a long-term insurance policy as of June 30, 2003 in a database attached to the restructuring agreement as an annex or (ii) having policy terms for group supplemental medical insurance (fund type), (2) stand-alone short-term policies (policies having a term of one year or less from the date of issuance) issued on or after June 10, 1999 and (3) all riders supplemental to the policies described in clauses (1) and (2) above, together with the applicable reinsurance contracts specified in an annex to the restructuring agreement. We refer to these policies in this annual report as the “transferred policies”. All other insurance policies were retained by CLIC. We refer to these policies as the “non-transferred policies”. We assumed all obligations and liabilities of CLIC under the transferred policies. CLIC continues to be responsible for its liabilities and obligations under the non-transferred policies following the effective date. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets”.

 

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  Cash, specified investment assets and various other assets were transferred to us. CLIC retained cash, specified investment assets and various other assets, including all assets relating to the non-insurance businesses carried out by CLIC prior to the restructuring. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets”.

 

  CLIC agreed not to, directly or indirectly through its subsidiaries and affiliates, participate, operate or engage in life, accident and health insurance businesses and any other business in China which may compete with our insurance business. CLIC also undertook (1) to refer to us any corporate business opportunity that falls within our business scope and which may directly or indirectly compete with our business and (2) to grant us a right of first refusal, on the same terms and conditions, to purchase any new business developed by CLIC. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Non-Competition Agreement”.

 

  Substantially all of the management personnel and employees who were employed by CLIC in connection with the transferred assets and businesses were transferred to us. Some management and personnel remained with CLIC. See “Item 4. Information on the Company—History and Development of the Company—Restructuring—Transfer of Insurance Policies and Related Assets”.

 

  CLIC retained the trademarks used in our business, including the “China Life” name in English and Chinese and the “ball” logos, and granted us and our branches a royalty-free license to use these trademarks. CLIC and its subsidiaries and affiliates will be entitled to use these trademarks, but CLIC may not license or transfer these trademarks to any other third parties. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Trademark License Agreement”.

 

  CLIC’s contracts with its agents and other intermediaries were transferred to us. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets”.

 

  We entered into various agreements under which we provide policy administration services to CLIC for the non-transferred policies, manage CLIC’s investment assets and lease office space from CLIC for our branch and field offices. See “Item 7. Major Shareholders and Related Party Transactions”.

 

The net assets transferred to us had a carrying value at June 30, 2003 of RMB 29,608 million, as determined under PRC valuation regulations. This is equivalent to RMB 36,182 million, as determined under H.K. GAAP. In consideration of this transfer, and pursuant to an approval issued by the MOF in 2003, we issued 20,000,000,000 domestic shares comprising the entire registered and paid-up capital of our company. As of the date of this annual report, CLIC owned approximately 72.2% of our issued share capital.

 

CLIC has committed to pay some of its retired employees a pension supplement through December 31, 2007. The present value of the aggregate estimated future payments to be made by CLIC, amounting to RMB 185 million, has been recognized as an expense to CLIC and a corresponding capital contribution to China Life in the 2003 financial statements. Payments made to similar former employees during the three-year period ended December 31, 2002 were expensed as paid. The amounts paid were RMB 51 million in 2000, RMB 55 million in 2001, RMB 56 million in 2002 and RMB 23 million in 2003. Obligations relating to these retired employees were retained by CLIC. Accordingly, these payments will be the responsibility of CLIC following the restructuring under the restructuring agreement entered into between CLIC and us.

 

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Transfer of Insurance Policies and Related Assets

 

In connection with the restructuring, CLIC transferred to us the transferred policies. The non-transferred policies were retained by CLIC. We assumed all obligations and liabilities of CLIC under the transferred policies. CLIC continues to be responsible for its liabilities and obligations under the non-transferred policies following the effective date.

 

We chose June 10, 1999 as the date for the separation between the transferred policies and the non-transferred policies because CLIC adopted new pricing policies as an immediate response to an emergency notice issued by the CIRC on June 10, 1999, as more fully described below:

 

  The CIRC was established as the industry regulator in 1998. The People’s Bank of China was the industry regulator prior to the CIRC’s establishment.

 

  Immediately prior to June 10, 1999, the pre-determined rate of all policies sold by CLIC was 5.00%. The maximum pre-determined rate which life insurance companies could commit to pay on policies was 5.00%, as set by the People’s Bank of China, the insurance regulator at the time.

 

  These events were set against the background of low and declining investment returns available to life insurance companies in the PRC at the time. The interest rate on one-year term deposits, a key benchmark rate, was 2.25% on June 10, 1999.

 

  To address the systemic risks to the industry arising from the “negative spread” problem (high pre-determined rates on policies against low investment return), the CIRC issued an emergency notice on June 10, 1999 whereby the maximum pre-determined rate which life insurance companies could commit to pay on new policies was reduced to 2.50% per annum.

 

  To comply with the requirements of the CIRC’s emergency notice, CLIC ceased to sell policies filed with or approved by the People’s Bank of China or the CIRC before June 10, 1999, and from then onwards started to sell new policies with pre-determined rates which were equal to or below 2.50% in the new industry environment.

 

The change in pricing policy made by CLIC on June 10, 1999 as an immediate response to the emergency notice issued by CIRC, differentiates the transferred policies and the non-transferred policies.

 

In connection with the restructuring, CLIC’s assets as at June 30, 2003 were divided between CLIC and ourselves in accordance with the restructuring agreement entered into between CLIC and ourselves. Premiums receivable were allocated to the transferred and non-transferred policies based on the specific policies to which they relate. Property, plant and equipment and other operating assets were allocated based on the terms of the restructuring agreement. Investments in respect of participating policies were allocated to the transferred policies, since all participating business has been transferred. Unlisted equity securities and investment properties were allocated to CLIC. The remaining investment assets, including term deposits, fixed maturity securities, equity securities, repurchase agreements and cash and cash equivalents, were allocated so as to ensure that the book value of China Life as of June 30, 2003 was RMB 29,608 million, as determined under PRC valuation regulations. This is equivalent to RMB 36,182 million as determined under H.K. GAAP, due to differences between PRC GAAP and H.K. GAAP. The proportions of each of these classes of assets allocated to CLIC and ourselves were similar.

 

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Insurance policies

 

Under the plan of restructuring, on the effective date, CLIC transferred to us the transferred policies.

 

We have been advised by our PRC legal counsel, King & Wood, that: (1) the transferred policies have been legally and validly transferred to us and (2) following the restructuring we will not have any continuing obligations to holders of the non-transferred policies and that there is no legal basis on which holders of the non-transferred policies can make a claim against China Life. See “Item 3. Key Information—Risk Factors—Risks Relating to the Restructuring”.

 

Investment and other business assets

 

In the restructuring, CLIC transferred to us cash and investment assets, various intellectual property rights and various other business assets, including the software system for operating our business. CLIC retained cash and specified investment assets, as well as assets relating to the non-core, non-insurance business carried out by CLIC prior to the restructuring.

 

For information about CLIC’s investment assets and the investment assets that were transferred to us in connection with the restructuring, see “Item 4. Information on the Company—Business Overview—Investments”.

 

Investment assets

 

All investment assets in respect of participating policies were transferred to us, since all participating business has been transferred to us. The remaining investment assets, including term deposits, fixed maturity securities, equity securities, repurchase agreements and cash and cash equivalents, but excluding unlisted equity securities and investment properties which were retained by CLIC, were allocated between CLIC and ourselves so as to ensure that the book value of China Life as of June 30, 2003 was RMB 29,608 million, as determined under PRC valuation regulations. The proportions of each of these classes of assets allocated to CLIC and ourselves were similar.

 

Real properties

 

In connection with the restructuring, land use rights relating to 2,978 parcels of land with an aggregate site area of approximately 3,145,000 m2 were transferred to us.

 

In addition, 3,443 completed buildings, including our headquarters in Beijing, and various ancillary structures, with an aggregate total gross floor area of approximately 3,997,000 m2, and 65 buildings and structures which were under construction, with an aggregate total gross floor area of approximately 350,000 m2 upon completion, were transferred to us. Of the 3,443 buildings, 372 properties with an aggregate gross floor area of approximately 66,800 m2 were leased to independent third parties.

 

Receivables, chattels, etc.

 

Accounts receivable associated with the transferred policies and other accounts receivable which accrued on or after June 30, 1999 and which remained on the books as of June 30, 2002, as well as specified deferred assets, prepaid expenses, low cost consumables and other assets as of the same date, were transferred to us.

 

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Intellectual property and business assets

 

The following intellectual property and business assets were transferred to us:

 

  All original and duplicate policies, business records, financial and accounting records, business data, statistical information, training manuals, technical records, information, data, know-how and manuals and research and development information relating to the businesses constituted by the transferred policies.

 

  All of CLIC’s rights and licenses relating to software used in its insurance businesses, including its core business processing system, customer service center system, comprehensive inquiry system, individual agency management system, customer support system, accounting and financial management system, participating policy monitoring system, analysis system, business file imaging system and individual agency marketing support system.

 

  All permits, licenses, approvals, certificates, authorizations and other like instruments related to the operation of the assets transferred to us.

 

  All claims, rights to setoff, cause of action and similar rights held by CLIC against third parties arising from the transferred assets and policies.

 

Insurance agency contracts

 

As of June 30, 2003, CLIC had agency contracts with approximately 650,000 individual agents and other insurance agencies. CLIC has transferred to us all of its rights and obligations under these contracts. The restructuring agreement provides that commissions due under these contracts in connection with the transferred polices, the accrued amount of which was RMB 1,098 million as of June 30, 2003, will be borne by us, and commissions due in connection with non-transferred policies, the accrued amount of which was RMB 40 million as of June 30, 2003, will be borne by CLIC.

 

Assumed liabilities

 

We assumed the future benefit liabilities relating to the transferred policies.

 

In addition, the accounts payable and other accounts payable incurred on or after June 30, 1999 associated with the transferred policies were transferred to us, and those associated with the non-transferred policies were retained by CLIC.

 

CLIC previously entered into securities repurchase agreements in connection with the management of its investment assets. See “Item 4. Information on the Company—Business Overview—Investments”. We assumed a portion of CLIC’s obligations to repurchase securities sold to third parties under these repurchase agreements.

 

Management personnel and employees

 

CLIC transferred approximately 67,000 employees to us, including approximately 9,000 management personnel.

 

We did not assume any obligations for the welfare benefits of the employees retained by CLIC and of the transferred employees for any period while they were employed by CLIC. These obligations,

 

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including obligations in respect of some employees whose employment contracts were terminated or who were asked to retire prior to the restructuring in exchange for these benefits, will be borne by CLIC and are not our obligations.

 

Assets retained by CLIC

 

CLIC retained the remaining assets it held at the time of the restructuring. These include:

 

  Specified fixed assets and intangible assets, including real properties with associated land use rights and the trademarks in the “China Life” name (in English and Chinese) and the “ball” logos.

 

  Accounts receivable and other receivables accrued before June 30, 1999 or accrued after June 30, 1999 and associated with the non-transferred policies or other businesses retained by CLIC. CLIC also retained a portion of the assets associated with construction-in-progress projects.

 

  Assets relating to CLIC’s non-core, non-insurance businesses (principally investments in property, hotels and other operations through subsidiaries).

 

Insurance policies retained by CLIC

 

CLIC has incurred substantial losses on these non-transferred policies, primarily because the pre-determined rates built into these policies and hence the implied rates at which CLIC was obligated to pay or accrue reserves on these policies are higher than the investment return it was able to generate on its investment assets. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Regulation of insurance and annuity products generally”. This outcome, which has been experienced by other major life insurers in China, is called a “negative spread”. From 1996 to 1999, the central bank of China made several cuts in interest rates, reducing the income CLIC was able to generate on its investment assets to below the guaranteed rate it was required to pay on its policies. In 1999, the CIRC reduced the maximum guaranteed rate insurers were allowed to pay and, as a result, CLIC has not experienced a “negative spread” on policies issued thereafter.

 

Shareholders’ equity of our predecessor, CLIC, was a deficit of RMB 181,064 million (US$21,876 million) as of September 30, 2003 and a deficit of RMB 175,463 million (US$21,200 million) as of December 31, 2002. The net losses incurred by our predecessor were RMB 3,101 million (US$375 million) for the nine months ended September 30, 2003 and RMB 6,990 million RMB 3,295 million and RMB 2,250 million (US$272 million) for 2000, 2001 and 2002, respectively. These losses were attributable to losses incurred by our predecessor on policies retained by CLIC in the restructuring, which have offset the profitability of the policies transferred to us. Our pro forma net profit was RMB 5,857 million (US$708 million) for 2003.

 

In connection with the restructuring, CLIC has established, together with the MOF, a special purpose fund for the purpose of paying claims under the non-transferred policies. The special purpose fund will be funded by investment assets retained by CLIC; renewal premiums paid on the non-transferred policies over time; a portion of the tax payments made by China Life under the tax rebate mechanism described below; profits from the investments of the special purpose fund; shareholder dividends paid in cash to CLIC by China Life; proceeds from the disposition of China Life shares by CLIC over time; and funds injected by the MOF in the event of a deficiency in the special purpose fund, as described below. The special purpose fund is co-administered by CLIC and the MOF. The special

 

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purpose fund will be available to satisfy CLIC’s operating expenses, including the payment of benefits and claims obligations arising from the non-transferred policies, as well as expenses incurred in operating the special purpose fund, including third-party management fees and professional fees, and such other purposes as the management committee of the fund may agree. A management committee comprised of two to three representatives from the Ministry of Finance and two to three representatives from CLIC will oversee the management of the fund, with specified material items subject to the approval of the MOF. The special purpose fund will be dissolved when all claims and benefits under the non-transferred policies have been paid, or sooner if the management committee so agrees.

 

The MOF’s approval of the special purpose fund issued to CLIC provides that in the event there is any deficiency in the special purpose fund for so long as the fund is in existence as described above to meet any payment obligation arising out of the non-transferred policies, the MOF will provide support through the injection of funds to ensure the payments of benefits and claims to the policyholders of the non-transferred policies. We have been advised by our PRC legal counsel, King & Wood, that (1) the MOF has the authority to issue this approval regarding the special purpose fund, (2) the approval is valid and effective and (3) it has no reason to believe that the MOF will revoke the approval.

 

In accordance with generally applicable tax laws and regulations, CLIC, ourselves and the asset management joint venture formed with CLIC will file income tax returns and pay our respective income taxes as separate and independent taxpayers. According to a circular recently issued by the MOF, all of the income tax payments made by CLIC and us during the period of January 1, 2003 to December 31, 2010 will be rebated to CLIC. All of the income tax payments made by the asset management joint venture may also be rebated to CLIC, if the current shareholding structure of the asset management joint venture remains unchanged. This tax rebate policy is different from the tax rebate mechanism we expected to be approved at the time of our IPO last year, and indicates MOF’s strong support to CLIC.

 

CLIC does not meet the minimum solvency requirements under CIRC solvency regulations. The CIRC has broad powers under these regulations and the insurance law in the event an insurance company fails to meet its minimum solvency requirements. These may include ordering the sale of the assets or transfer of the insurance business of an insurance company in default of these requirements to a third party and appointing a receiver to take over the management of the insurance company. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Solvency requirements”. We believe that, in light of the MOF approval described above, it is unlikely that the CIRC will take these actions. However, we cannot assure you that the CIRC will not take actions against CLIC, which could have a material adverse effect on us.

 

We have been advised by our PRC legal counsel, King & Wood, that following the restructuring we will not have any continuing obligations to holders of the non-transferred policies and that there is no legal basis on which holders of the non-transferred policies can make a claim against China Life. King & Wood based its conclusion on, among other things, the following factors: (1) after the restructuring, China Life was established as a separate legal entity and China Life’s assets and liabilities should be regarded as distinct and separate from those of CLIC; (2) there is no contractual relationship, direct or indirect, between the holders of the non-transferred policies and China Life; (3) the restructuring (including the transfer of the transferred policies to China Life) has been approved by the CIRC and has been conducted without infringing upon the rights of the holders of non-transferred policies; (4) the arrangements made under the restructuring agreement, in particular the MOF’s support as described above, are expected to enable CLIC to satisfy its obligations under the non-transferred policies; and (5) PRC regulatory authorities have no legal power to direct China Life to assume CLIC’s obligations under the non-transferred policies or to indemnify the holders of the non-transferred policies.

 

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See “Item 3. Key Information—Risk Factors—Risks Relating to the Restructuring”.

 

In December 2003, we successfully completed our initial public offering of H shares, including H shares in the form of American depositary shares, or ADSs, and raised approximately RMB 24,707 million in aggregate net proceeds for us. Upon completion of our initial public offering, our H shares became listed on the Hong Kong Stock Exchange and ADSs each representing 40 of our H shares became listed on the New York Stock Exchange.

 

General Information

 

Our principal executive offices are located at 16 Chaowai Avenue, Chaoyang District, Beijing 100020, China. Our telephone number is (86-10) 8565-9999. Our website address is www.e-chinalife.com. The information on our website is not a part of this annual report. We have appointed CT Corporation System at 111 Eighth Avenue, New York, New York 10011 as our agent for service of process in the United States.

 

BUSINESS OVERVIEW

 

Unless the context otherwise indicates, all company data for periods ending on or prior to December 31, 2003 provided in this section, including data concerning premiums, deposits, policy fees, insurance policies, annuity contracts, agents, personnel, offices, distribution channels and investment assets, only include data relating to the policies, contracts and investment assets that were transferred to us in connection with the restructuring and do not include those that are included in our historical consolidated financial statements but were retained by CLIC in connection with the restructuring. For further information on the restructuring, see “—History and Development of the Company—Our Restructuring”. Policies, contracts and investment assets retained by CLIC are not ours and their results of operations will not be reflected in our consolidated financial statements for future periods. Unless otherwise indicated, market share information set forth in this section is based on premium information as reported by the CIRC, which is not determined in accordance with H.K. GAAP or U.S. GAAP. Our market share information set forth in this annual report is estimated by computing the market share of our predecessor company, CLIC, and adjusting it to give effect to our restructuring, based on premiums determined in accordance with PRC GAAP. The policies, contracts and assets retained by CLIC are not ours and will not be available to generate revenues for us in the current or future periods. Therefore, to reflect our business more accurately as it will be operated following the restructuring, unless we otherwise state, all company data provided in this section relate only to the policies, contracts and assets transferred to us in the restructuring.

 

We had more than 48 million individual and group life insurance policies, annuity contracts and long-term health insurance policies in force as of December 31, 2003. We also offer accident and short-term health insurance policies to individuals and groups. The guaranteed rate of return for life insurance products has been capped at 2.50% by the CIRC since June 1999.

 

Individual Life Insurance

 

We are the leading provider of individual life insurance and annuity products in China. We offer life insurance and annuity products to individuals, primarily through a distribution force comprised of approximately 655,000 exclusive agents operating in approximately 8,200 field offices throughout China, as well as other non-dedicated agencies located at branch offices of banks, post offices and other

 

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organizations. Gross written premiums and policy fees generated by our individual life insurance and annuity products totaled RMB 42,288 million (US$5,109 million) for the year ended December 31, 2003 and RMB 37,662 million for the year ended December 31, 2002, constituting 79.9% and 80.0% of our total gross written premiums and policy fees for those periods. The figure for 2003 represented a 12.3% increase over 2002. First-year gross written premiums from individual life insurance products in 2003 were RMB 13,284 million (US$1,605 million), representing a 26.1% decrease over 2002. First-year single gross written premiums for the same period were RMB 4,349 million (US$526 million), representing 32.7% of first-year individual life insurance gross written premiums. Deposits generated by our individual life insurance and annuity products totaled RMB 77,319 million (US$9,342 million) for the year ended December 31, 2003 and RMB 52,340 million for the year ended December 31, 2002, constituting 88.4% and 89.4% of our total deposits for those periods. The figure for 2003 represented a 47.7% increase over 2002.

 

The following table sets forth selected financial and other data regarding our individual life insurance business as of the dates or for the periods indicated.

 

    

As of or for the year ended

December 31,


   Compound
annual
growth rate


 
     2001

   2002

   2003

   2003

   (2001-2003)

 
     RMB    RMB    RMB    US$       
     (in millions, except as otherwise indicated)  

Individual life gross written premiums and policy fees

   24,806    37,662    42,288    5,109    30.6 %

First-year single gross written premiums

   4,986    8,590    4,349    525    (6.6 )%

First-year regular gross written premiums

   9,826    9,383    8,935    1,080    (4.6 )%
    
  
  
  
  

First-year gross written premiums

   14,812    17,973    13,284    1,605    (5.3 )%

Individual life insurance deposits

   15,162    52,340    77,319    9,342    125.8 %

First-year single deposits

   10,598    43,679    63,098    7,624    144.0 %

First-year regular deposits

   2,798    5,246    6,330    765    50.4 %
    
  
  
  
  

First-year deposits

   13,396    48,925    69,428    8,388    127.7 %

Future life policyholder benefits

   29,839    54,745    81,658    9,866    65.4 %

Policyholder contract deposits

   21,443    65,629    135,090    16,322    151.0 %

 

Products

 

We offer a wide variety of life insurance and annuity products to individuals, providing a wide range of coverage for the whole length of a policyholder’s life. Our individual life insurance and annuity products consist of whole life and term life insurance, endowment insurance and annuities.

 

We offer both non-participating and participating products. There were approximately 25.8 million non-participating policies and 13.5 million participating policies as of December 31, 2003. Net premiums earned and policy fees of participating policies represent approximately 44% of total net premiums earned and policy fees of transferred policies. Non-participating products provide a fixed rate of return with a guaranteed benefit. We and CLIC have not incurred negative spread on these and other policies transferred to us in the restructuring, as the average investment returns we have been able to generate have been higher than their guaranteed rates. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—We are Exposed to Changes in Interest Rates”. The holder of a participating product is entitled to share a portion of our distributable earnings from participating products, as determined by us based on formulas prescribed by the CIRC. Under guidelines issued by the CIRC, the dividends must be no less than 70% of the distributable earnings from participating products. Participating life insurance and annuity products, which were first introduced in 2000, have become our fastest-growing individual life insurance and annuity products.

 

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The following table sets forth selected financial information regarding our individual life insurance and annuity products for the periods indicated.

 

     For the year ended December 31,

     2001

   2002

   2003

   2003

     RMB    RMB    RMB    US$
     (in millions)

Whole life and term life insurance:

                   

Gross written premiums

   9,111    12,289    16,292    1,968

First-year gross written premiums

   4,347    4,491    4,606    557

Total single gross written premiums

   331    211    202    24

Endowment:

                   

Gross written premiums

   11,925    18,169    16,998    2,054

First-year gross written premiums

   9,222    11,431    7,001    846

Deposits

   9,839    50,428    75,619    9,136

First-year deposits

   8,225    47,259    67,916    8,206

Annuities:

                   

Gross written premiums

   1,883    3,129    3,618    437

First-year gross written premiums

   1,243    2,051    1,677    203

Deposits

   5,323    1,912    1,700    205

First-year deposits

   5,171    1,666    1,512    183

 

Whole Life and Term Life Insurance

 

Non-participating whole life and term life insurance

 

We offer non-participating whole life and term life insurance products.

 

Non-participating whole life insurance products provide a guaranteed benefit, pre-determined by the contract, upon the death of the insured, in return for the periodic payment of fixed premiums over a predetermined period. Premium payments may be required for the length of the contract period, to a specified age or for a specified period, and are typically level throughout the period.

 

The guaranteed rate of return in China for non-participating whole life insurance products has been capped at 2.50% by the CIRC since June 1999. We believe that, if the Chinese economy continues to operate in a low interest rate environment such as the one we are in today, the insurance market will continue to move away from non-participating whole life insurance products to participating whole life insurance products.

 

Non-participating term life insurance products provide a guaranteed benefit upon the death of the insured within a specified time period in return for the periodic payment of fixed premiums. Specified coverage periods range from 5 to 20 years or expire at specified ages. Death benefits may be level over the period or increasing. Premiums are typically at a level amount for the coverage period. Term life insurance products are sometimes referred to as pure protection products, in that there are normally little or no savings or investment elements. Unlike endowment products, term life insurance policies expire without value at the end of the coverage period if the insured person is still alive.

 

Participating whole life insurance

 

We also offer participating whole life insurance products, which are traditional whole life insurance policies that also provide a participation feature in the form of dividends. The policyholder is entitled to share a portion of the distributable earnings from participating products, as determined by us based on formulas prescribed by the CIRC. Under guidelines issued by the CIRC, the dividends must be no less than 70% of the distributable earnings from participating products. Policyholders may receive dividends in cash or apply them to increase death benefits or cash values available upon surrender.

 

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Endowment

 

Non-participating endowment products

 

Non-participating endowment products provide to the insured various guaranteed benefits if the insured survives specified maturity dates or periods stated in the policy, and provide to a beneficiary designated by the insured guaranteed benefits upon the death of the insured within the coverage period, in return for the periodic payment of premiums. Specified coverage periods range from 5 to 20 years or end at specified ages. Premiums are typically at a level amount for the coverage period.

 

Although non-participating endowment products have historically been among the most popular individual life insurance products in China, we believe that, if the prevailing permitted guaranteed rate in China remains capped at the current level of 2.50% as it has been for the past several years, the market is likely to shift away from these products in favor of participating endowment products.

 

Participating endowment products

 

We also offer participating endowment products, which are endowment policies that also provide a participation feature in the form of dividends. Policyholders are entitled to share a portion of the distributable earnings from participating products, as determined by us based on formulas prescribed by the CIRC. Under guidelines issued by the CIRC, the dividends must be no less than 70% of the distributable earnings from participating products. Policyholders may receive dividends in cash or apply them to increase death benefits or cash values available upon surrender.

 

Participating endowment products are among our fastest growing and most successful product lines. Hong Tai Endowment, Hong Rui Endowment and Qian Xi Wealth Management have had the highest level of sales of our investment-type and risk-type participating endowment products. Hong Tai Endowment had RMB 34,536 million (US$4,173 million) of deposits in 2003, representing 44.7% of total deposits of our individual life insurance business. First-year deposits of Hong Tai Endowment for the year ended December 31, 2003 were RMB 30,697 million (US$3,709 million), representing an 31.7% decrease over 2002 and 39.7% of total first-year deposits of our individual life insurance business. Qian Xi Wealth Management had RMB 8,876 million (US$1,072 million) of gross written premiums in 2003, representing 21.0% of total gross written premiums and policy fees of our individual life insurance business. First-year gross written premiums of Qian Xi Wealth Management for the year ended December 31, 2003 were RMB 4,304 million (US$520 million) of deposits, representing a 56.6% decrease from the year before, or 32.4% of total first-year gross written premiums of our individual life insurance business. Deposits and gross written premiums for these two products declined in 2003 as compared to those in 2002, following the introduction of two new similar products, Hong Rui and Hong Xin. Total deposits from our participating products in 2003 increased by 53.4%, to RMB 80,376 million from RMB 52,390 million in 2002. Total net premiums from our risk-type participating products decreased by 7.8%, to RMB 13,417 million in 2003 from RMB 14,548 million in 2002.

 

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Annuities

 

Annuities are used for both asset accumulation and asset distribution needs. Annuitants make deposits or pay premiums into our accounts, and receive guaranteed level payments during the payoff period specified in the contracts. We offer both non-participating and participating annuities. For non-participating annuity products, risks associated with the investments are borne entirely by us. A significant portion of our non-participating annuity products imposes charges upon an early surrender or withdrawal of the contract.

 

Participating annuity products are annuities that provide a participation feature in the form of dividends. The dividends are determined by us in the same manner as our life insurance policies. Annuitants may receive dividends in cash or apply them to increase annuity benefits or reduce the premiums or deposits required to maintain the contract in force. Like non-participating annuities, a significant portion of our participating annuity products imposes charges upon an early surrender or withdrawal of the contract.

 

Marketing and Distribution

 

We have historically sold most of our individual life insurance and annuity products to the mass market and will continue to actively serve this market. However, we believe our core individual customer base will evolve as China’s economy develops. We will seek to capitalize on the market opportunities in the growing affluent segment of China’s population by focusing our marketing efforts on individuals residing in urban and economically developed coastal areas of China, where disposable income is relatively higher and, we believe, demand for life insurance and annuity products is greater. In addition, we are implementing a new customer segmentation sales approach which targets individuals of various income and education levels with different products. Under this sales approach, individuals in different periods of their lives are marketed with different life insurance and annuity products, with these products in many cases supplemented by our individual accident and health products.

 

We distribute our individual life and annuity products nationwide through multiple channels. Our primary distribution system is comprised of approximately 655,000 exclusive agents operating in approximately 8,200 field offices throughout China. We have implemented our customer-oriented market segmentation sales initiatives initially through approximately 100,000 of our more productive exclusive agents. We plan to expand this sales approach to all exclusive agents nationwide this year on a trial basis. While continuing to invest in our exclusive agent force, we have also expanded into other distribution channels, primarily non-dedicated agencies located in approximately 78,000 outlets of commercial banks, post offices and savings cooperatives, to diversify our distribution channels and to achieve higher growth. See “—Distribution Channels”.

 

Group Life Insurance

 

We are a leading group life insurance company in China, providing group life insurance and annuity products to the employees of many of China’s largest companies and institutions, including many of the Fortune Global 500 companies operating in China. We offer life insurance and annuity products to the employees of companies and institutions through approximately 10,000 direct sales representatives operating in more than 4,000 branch offices as well as insurance agencies and insurance brokerage companies. Gross written premiums and policy fees generated from our group life insurance and annuity products totaled RMB 432 million (US$52 million) for the year ended December 31, 2003 and RMB 477 million for the year ended December 31, 2002, constituting 1.0% of our total gross written premiums and policy fees for each respective year. The figure for 2003 represented a 9.4% decrease from 2002. First-year gross written premiums from group life insurance and annuity products for 2003 were RMB 221

 

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million (US$26.7 million), representing a 29.4% decrease from 2002. First-year single gross written premiums for 2003 were RMB 204 million (US$24.6 million), representing 92.3% of first-year group life insurance gross written premiums. Deposits generated by our group life insurance and annuity products totaled RMB 10,117 million (US$1,222 million) for the year ended December 31, 2003 and RMB 6,232 million for the year ended December 31, 2002, constituting 11.6% and 10.6% of our total deposits for those periods. The figure for 2003 represented a 62.3% increase from 2002.

 

The following table sets forth selected financial and other data regarding our group life insurance business as of the dates or for the periods indicated.

 

    

As of or for the year ended

December 31,


   Compound
annual
growth rate


 
     2001

   2002

   2003

   2003

   (2001-2003)

 
     RMB    RMB    RMB    US$       
     (in millions, except as otherwise indicated)  

Group life gross written premiums and policy fees

   1,085    477    432    52    (36.9 )%

First-year single gross written premiums

   955    306    204    24.6    (53.8 )%

First-year regular gross written premiums

   77    7    17    2    (53.0 )%

First-year gross written premiums

   1,032    313    221    26.7    (53.7 )%
    
  
  
  
      

Group life insurance deposits

   5,706    6,232    10,117    1,222    33.2 %

First-year single deposits

   5,676    6,231    10,070    1,217    33.2 %

First-year regular deposits

   30    1    31    4    1.7 %
    
  
  
  
      

First-year deposits

   5,706    6,232    10,101    1,220    33.1 %

Future life policyholder benefits

   1,130    1,143    1,060    128    (3.1 )%

Policyholder contract deposits

   8,135    12,369    19,641    2,373    55.4 %

 

Products

 

We offer annuity products and whole life and term life insurance products to our companies and institutions. We bundle these products to serve as part of our group customers’ overall employee benefit plans. We also market each group product as an independent product. We believe we are the market leader in the development of group annuity products. We introduced the first non-participating group annuity product in China in June 1983. In 1998, we were the first insurance company to introduce group participating annuity products in China, at first regionally on a trial basis, and later nationwide in 2001.

 

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The following table sets forth selected financial information regarding our group life insurance and annuity products for the periods indicated.

 

     For the year ended December 31,

     2001

   2002

   2003

   2003

     RMB    RMB    RMB    US$
     (in millions)

Group annuities:

                   

Premiums

   53    —      —      —  

Deposits

   5,698    6,229    10,117    1,222

Group whole life and term life insurance:

                   

Premiums

   985    344    255    31

 

Group annuities

 

In our non-participating group annuities, interest on an annuitant’s deposits is credited to each participating employee’s personal account. Annuity payments are calculated based on an interest rate derived from the interest rate on deposits for a fixed two-year term as adopted by the People’s Bank of China.

 

We also offer participating group annuities. In our participating group annuities, interest on an annuitant’s deposits is either credited to the participating employee’s personal account or credited to the participating employee’s personal account as well as the employer’s group account, depending on the source of the deposits, calculated at a guaranteed interest rate set at the time the product is priced, subject to a cap fixed by the CIRC, which currently is 2.50%. The annuitant is entitled to share a portion of our distributable earnings derived from our participating products, as determined by us based on formulas prescribed by the CIRC, in excess of the rate we guarantee to participating employees.

 

Group participating annuity products, including Yong Tai Annuity and Group Annuity (Retirement Supplement), are among our fastest growing product lines. For the year ended December 31, 2003, total combined deposits of Yong Tai Annuity and Group Annuity (Retirement Supplement) were RMB 9,128 million (US$1,103 million), constituting 90.2% of total deposits of our group life insurance business for that year, representing a 54.5% increase from the year before.

 

The following table sets forth total combined deposits of our Yong Tai Annuity and Group Annuity (Retirement Supplement) products for the periods indicated.

 

     For the year ended December 31,

     2001

   2002

   2003

   2003

     RMB    RMB    RMB    US$
     (in millions)

Yong Tai Annuity and Group Annuity (Retirement Supplement):

                   

Deposits

   4,425    5,910    9,128    1,103

 

Group whole life and term life insurance

 

We offer group non-participating whole life insurance products and group non-participating term life insurance products. All of our group whole life and term life insurance products insure against death, while some also insure against injuries due to accidents and dismemberment or disabilities due to illnesses.

 

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Marketing and distribution

 

We target our group life insurance and annuity products to large institutional customers in China, including branches of foreign companies, which we believe have the greatest awareness of and need for group life insurance and annuity products. We have long-term customer relationships with many of China’s largest companies and institutions. We provide large group customers with products having flexible fee and dividend structures, as well as enhanced real-time customer service. While continuing to focus on large institutional clients, we also target small- to medium-sized companies in economically developed regions to supplement our growth and to increase our profits.

 

We market our group life insurance and annuity products primarily through our direct sales representatives. We also market our group life insurance and annuity products through insurance agency companies and insurance brokerage companies. We believe our sales network has a geographic reach unparalleled by any other life insurance company in China, serving almost every county in China. See “—Distribution Channels”.

 

The revenues attributable to our five largest customers were less than 1% of our total revenues for the year ended December 31, 2002 and 2003.

 

Accident and Health Insurance

 

We are the leading accident insurance and a leading health insurance provider in China.

 

The following table sets forth selected financial and other data regarding our accident insurance and health insurance businesses as of the dates or for the periods indicated.

 

    

As of or for the year ended

December 31,


   Compound
annual
growth rate


 
     2001

   2002

   2003

   2003

   (2001-2003)

 
     RMB    RMB    RMB    US$       
     (in millions, except as otherwise indicated)  

Accident insurance premiums

   5,097    5,174    4,880    590    (2.2 )%

Health insurance premiums

   2,687    3,764    5,325    643    40.8 %

Accident and health reserves for claims and claim adjustment expenses (gross)

   867    879    814    98    (3.1 )%

Accident and health insurance unearned premium reserves (net)

   3,553    4,028    4,575    553    13.5 %

 

Accident insurance

 

We are the leading accident insurance provider in China. Our accident insurance gross written premiums totaled RMB 4,880 million (US$590 million) for the year ended December 31, 2003 and RMB 5,174 million for the year ended December 31, 2002, constituting 9.2% and 11.0% of our total gross written premiums and policy fees for those periods. According to the CIRC, premium income of accident insurance in China was RMB 7,951 million (US$961 million) in 2002.

 

Products

 

We offer a broad array of accident insurance products to both individuals and groups.

 

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Individual accident insurance

 

Individual accident insurance products provide a benefit in the event of death or disability of the insured as a result of an accident, or a reimbursement of medical expenses to the insured in connection with an accident. Typically, a death benefit is paid if the insured dies within 180 days of the accident, and a disability benefit is paid if the insured is disabled, with the benefit depending on the extent of the disability. If the insured receives medical treatment at a medical institution approved by us as a result of an accident, individual accident insurance products also may provide coverage for medical expenses. We offer a broad array of individual accident insurance products, such as insurance for students and infants against death and disability resulting from accidental injury and comprehensive coverage against accidental injury. We also offer products to individuals requiring special protection, such as accidental death and disability insurance for commercial air travel passengers and automobile passengers and drivers. The terms of individual accident insurance products range from a few hours to one year.

 

Group accident insurance

 

We offer a number of group accident insurance products and services to businesses, government agencies and other organizations of various sizes. We also offer products targeted at specific industry groups, such as construction-related accident insurance to construction companies, and accident insurance to various law enforcement agencies.

 

Marketing and distribution

 

We market our individual accident insurance products through our direct sales force and our exclusive agent sales force, as well as intermediaries, such as non-dedicated agencies located at outlets of commercial banks, post offices, savings cooperatives, travel agencies, hotels and airline sales counters and insurance agency and insurance brokerage companies. We market our group accident insurance products primarily through our direct sales representatives and the same intermediaries we use to sell our individual accident products. See “—Distribution Channels”.

 

We use our individual and group product distribution channels to market our accident products either as primary products, as riders or as supplementary products packaged with our life, annuity or health products. We have entered into cooperative agreements and memoranda of understanding with airline companies, international medical, emergency and evacuation assistance companies and other companies and institutions to promote our accident insurance products. Our direct sales representatives market our individual health products to employees of our institutional customers.

 

Health insurance

 

We are a leading health insurance provider in China. We offer a broad array of health insurance products and services to both individuals and groups, including disease-specific insurance, medical expense insurance and defined benefit insurance. We sell health insurance products to individuals and groups through the same distribution channels we use to sell our life insurance products. Our health insurance gross written premiums totaled RMB 5,325 million (US$643 million) for the year ended December 31, 2003 and RMB 3,764 million for the year ended December 31, 2002, constituting 10.1% and 8.0% of our total gross written premiums and policy fees for those periods. The figure for 2003 represented a 41.5% increase from 2002.

 

Our health insurance business shares our nationwide life insurance sales force and distribution network of exclusive agents. Our policy review and claim adjustment processes are facilitated through a team of supporting personnel with medical training.

 

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Products

 

We offer health insurance products to both individuals and groups. We classify our health insurance products as short-term products, having policy terms of less than or up to one year, and long-term products, having policy terms longer than one year. We offer both short-term and long-term defined health benefit plans, medical expense reimbursement plans and disease-specific plans to individuals and groups.

 

Defined health benefit plans

 

These plans provide a fixed payment based on the number of days of hospitalization or the specific type of medical or surgical operation. Policyholders either pay premiums in a single payment or on a periodic basis.

 

Medical expense reimbursement plans

 

These plans provide for the reimbursement of a portion of the participant’s outpatient or hospitalization treatment fees and expenses. Policyholders either pay premiums in a single payment or on a periodic basis or, for certain group medical expense reimbursement plans, irregularly as determined by the policyholder.

 

Disease-specific plans

 

These plans provide a fixed payment benefit for various diseases. Premium payments for disease-specific plans are paid either in a single payment or on a periodic basis.

 

Marketing and distribution

 

We offer our health insurance products to both individuals and groups through the same distribution channels we use to market our life insurance products. We market our individual health insurance products through our exclusive agent sales force. We market our group health insurance products primarily through our direct sales representatives. See “—Distribution Channels”.

 

We use our individual and group product distribution channels to market our health products either as primary products, as riders or as supplementary products packaged with our life, annuity or accident insurance products. We conduct extensive health insurance related training programs for our direct sales representatives and our exclusive agents.

 

Distribution Channels

 

In connection with our restructuring, CLIC transferred its entire distribution force to us. After giving effect to our restructuring, we believe we have the largest distribution force with the most extensive geographic reach compared with any of our competitors. Our distribution network reaches almost every county in China. Throughout China, we have approximately 655,000 exclusive agents operating in approximately 8,200 field offices for our individual products and more than 10,000 direct sales representatives in more than 4,000 branch offices for group products. We have a multi-channel distribution network selling individual and group insurance products through intermediaries, primarily non-dedicated agencies located in approximately 78,000 outlets of commercial banks, post offices and savings cooperatives. Commission rates vary by product, based on such factors as the payment terms and period over which the premiums are paid for the product, as well as CIRC regulations. We support our agents and representatives through training programs, sales materials and information technology systems.

 

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Exclusive agent force

 

Our exclusive agent force of approximately 655,000 agents is the primary distribution channel for our individual life and health insurance products.

 

The following table sets forth information relating to our exclusive agent force as of the dates indicated.

 

     As of December 31,

     2001

   2002

   2003

Number of exclusive agents (approximately)

   450,000    600,000    655,000

Number of field offices

   4,873    7,295    8,200

 

Our exclusive agent force is among our most valuable assets, allowing us to more effectively control our distribution and build and maintain long-term relationships with our individual customers. From December 31, 2001 to December 31, 2003, the number of our exclusive agents increased from approximately 450,000 to approximately 655,000. We believe that our customers and prospective customers prefer the personal approach of our exclusive agents, and, therefore, we believe our exclusive agent force will continue to serve as our core distribution channel.

 

Under the PRC insurance law, an individual agent for an insurance company is required to obtain a qualification certificate from the CIRC, as well as to register with, and obtain a business license from, the agent’s local bureau of industry and commerce. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries”. Essentially all of the agents in our exclusive agent sales force do not qualify as “individual agents” within the meaning of the insurance law because they do not meet the dual requirements of holding a CIRC qualification certificate and a business license from the local bureau of industry and commerce. We believe this situation is shared by all major life insurance companies in China. Approximately 63.5% of our exclusive agents hold a CIRC qualification certificate, and essentially none has a business license. In May 2004, the CIRC issued a circular requiring insurance companies to take effective measures in carrying out the qualification certification requirement. Furthermore, no insurance company may issue a company certificate to any person identifying that person as its sales representative, if the person does not have a CIRC qualification. Pursuant to the circular, we are also required to take appropriate measures to improve both participation of our agents taking the qualification examination and their success rate, and to report to the CIRC on a quarterly basis the percentage of our agents holding a CIRC qualification certificate. We are working with our agents who are not yet CIRC-qualified to obtain the CIRC certification. It is our understanding that the SAIC does not have procedures in place to effect the registration and licensing of individual insurance agents, although some local bureaus of industry and commerce have had on occasions required our agents to register. To date, this noncompliance has not had a material adverse effect on us. If these registration and qualification requirements are enforced, or if they result in a substantial number of policyholders canceling their policies, our business may be materially and adversely affected. See “Item 3. Key Information—Risk Factors—Risk Relating to the PRC Life Insurance Industry—All of our agents are required to be qualified and to be registered as business entities. If these qualification and registration requirements are enforced or result in policyholders canceling their policies, our business may be materially and adversely affected.”

 

We supervise and provide training to our exclusive agents through more than 100,000 field manager agents, more than 7,000 supervisors and more than 1,200 full-time trainers. We set product management and customer service standards which we require all of our field offices and agents to meet,

 

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and conduct field tests with a view to ensuring quality. We also have an extensive training program. We compensate our exclusive agent force through a system of commissions and bonuses to reward performance. Our agents are compensated based on a commission rate that generally decreases over the premium period. For short-term insurance products, our exclusive agents are generally compensated with fixed agent fees. We also motivate our agents by rewarding them with performance-based bonuses and by organizing sales-related competitions among different field offices and sales units.

 

We believe we have the largest exclusive agent sales force in China. We intend to improve the quality and productivity of our individual exclusive agent force and reduce the attrition rate of our agents by taking the following actions:

 

  improving the overall productivity of our exclusive agents by expanding our customer-oriented market segmentation sales approach from high-productivity agents to all agents nationwide;

 

  improving the efficiency of our exclusive agents by developing a standardized agent management system, which provides detailed guidance on matters relating to agent time management, customer relations and agent supervision;

 

  improving the quality of our exclusive agent force by expanding our recruitment program and standardizing our recruitment procedures and admission requirements;

 

  building a more professional exclusive agent force by improving our training programs and increasing the number of qualified exclusive agents;

 

  motivating our exclusive agents with an improved performance-based compensation scheme; and

 

  equipping our more productive exclusive agents with personal electronic devices to further enhance their marketing, time management and customer service capabilities.

 

Direct sales force

 

Our direct sales force is our primary distribution system for our group life insurance and annuities, group accident insurance and group health insurance products, as well as our individual accident insurance products.

 

Our direct sales force of approximately 10,000 direct sales representatives are our full time employees and operate in more than 4,000 branch offices across China. We believe our sales network has a geographic reach unparalleled by any other life insurance company in China, serving almost every county in China.

 

We believe our direct sales force allows us to more effectively control our distribution and build and maintain long-term relationships with our group customers and, therefore, will continue to serve as our primary distribution system for our group products. We believe maintaining our leading position in the group insurance market depends on a professional and qualified direct sales force, and we have devoted substantial resources to the training and supervision of our direct sales force in recent years. We set product management and customer service standards which we require all of our branch offices and direct sales representatives to meet, and conduct field tests to centralize quality control and management. We also have an extensive training program.

 

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As full time employees, our direct sales representatives are compensated through fixed salaries. We motivate our direct sales representatives by rewarding them with performance-based bonuses and by organizing sales and services-related competitions among different branch offices and sales units.

 

Intermediaries

 

We also offer individual and group products through intermediaries. Our distribution channels are primarily comprised of non-dedicated agencies located in approximately 78,000 outlets of commercial banks, post offices and savings cooperatives, as well as insurance agencies and insurance brokerage companies.

 

Bancassurance

 

We have bancassurance arrangements with major banks, savings cooperatives and post offices in China, and currently generate a significant portion of our total sales through bancassurance. Bancassurance is a fast growing channel, and we will continue to dedicate substantial resources, through our intermediary department, to develop our bancassurance business, with a focus on key cities. We are dedicated to explore strategic alliances with one or more banks. We intend to improve the attractiveness of our products by providing products and services tailored to each major bank and providing training and integrated systems support to our banking partners.

 

Other non-dedicated agencies

 

In addition to bancassurance, we also sell individual life insurance products through other non-dedicated agencies. Currently, we have non-dedicated agencies operating at outlets of travel agencies, hotels and airline sales counters. We expect non-dedicated agencies to become an increasingly important distribution channel for individual products.

 

Other intermediaries

 

We also market group products through dedicated insurance agencies and insurance brokerage companies. Dedicated insurance agencies and insurance brokerage companies work with companies primarily to select group insurance providers and group products and services in return for commission fees.

 

Currently, the market of dedicated insurance agencies and insurance brokerage companies in China remains generally underdeveloped. We expect the dedicated insurance agencies and insurance brokerage companies to become more effective distribution channels in the medium term. In the long run, we expect other channels, such as direct mail, direct telephone and the Internet, to become valuable distribution channels for our products.

 

Competition

 

Our nearest competitors are Ping An and China Pacific.

 

  In the individual life insurance market, after giving effect to our restructuring, Ping An, China Pacific and we collectively represented 78% of total individual life insurance premiums in 2002. We primarily compete based on the nationwide reach of our sales network and the level of services we provide, as well as our strong brand name.

 

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  In the group life insurance market, after giving effect to our restructuring, Ping An, China Pacific and we collectively represented 83% of total group life insurance premiums in 2002. We primarily compete based on the nationwide reach of our sales network and the services we provide, as well as our relationships and reputation among large companies and institutions in China.

 

  In the accident insurance market, after giving effect to our restructuring, Ping An, China Pacific and we collectively represented 93% of total accident premiums in 2002. We primarily compete based on the nationwide reach of our sales network and the services we provide and our strong brand name, as well as our cooperative arrangements with other companies and institutions.

 

  In the health insurance market, after giving effect to our restructuring, Ping An, China Pacific and we collectively represented 79% of total health premiums in 2002. We primarily compete based on the nationwide reach of our sales network, the services we provide, our multi-layered managed care scheme and systems of policy review and claim management, as well as our strong brand name.

 

The following table sets forth market share information for the year ended December 31, 2002 in all segments of the life insurance market in which we do business.

 

     Individual
life
premiums
market share


    Group life
premiums
market share


    Accident
premiums
market share


    Health
premiums
market share


    Total
premiums
market share


 

CLIC(1)

   67 %   18 %   69 %   35 %   57 %

Ping An Insurance Company of China, Ltd.

   18 %   44 %   15 %   37 %   24 %

China Pacific Life Insurance Co. Ltd.

   9 %   21 %   9 %   8 %   11 %

New China Life Insurance Co. Ltd.

   1 %   11 %   1 %   14 %   4 %

Tai Kang Life Insurance Co. Ltd.

   3 %   3 %   1 %   3 %   3 %

Others(2)

   2 %   4 %   4 %   4 %   3 %

Total

   100 %   100 %   100 %   100 %   100 %
    

 

 

 

 

China Life(3)

   51 %   18 %   69 %   34 %   45 %

(1) Information concerning CLIC, our predecessor, does not give effect to the restructuring.
(2) Others include China United Property Insurance Co., Taiping Life Insurance Co. Ltd., Tianan Insurance Co. Ltd. of China, American International Assurance Co., Ltd., Shanghai, Guangzhou, Shenzhen, Beijing and Suzhou branches, Manulife-Sinochem Life Insurance Co. Ltd., Pacific-Antai Life Insurance Co. Ltd., Allianz-Dazhong Life Insurance Co., AXA-Minmetals Assurance Co., Ltd., China Life-CMG Life Insurance Co., Ltd., Citic-Prudential Life Insurance Co., Ltd., John Hancock-Tianan Life Insurance Co. Ltd., Sun Life Everbright Life Insurance Co. Ltd. and Generali China Life Insurance Co. Ltd.
(3) Adjusted to give effect to the restructuring.

Source: China Insurance Yearbook 2003

 

We face competition not only from domestic life insurance companies, but also from non-life insurance companies and foreign-invested life insurers. The number of life insurance companies licensed in China has been growing steadily, which we believe will lead to greater competition in the life insurance industry. There were 17 licensed life insurance companies in China as of December 31, 2001, 23 as of December 31, 2002 and 27 as of June 30, 2003. Recent changes in the insurance law have allowed property and casualty insurers to sell accident and short-term health insurance products with regulatory approval starting from January 2003, which we believe will lead to greater competition in the accident and health insurance sectors, especially in the group accident and group health insurance products. In addition, existing limitations on foreign-invested insurance companies are gradually being relaxed, which we believe will further increase competition in China’s life insurance market.

 

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See “Item 3. Key Information—Risk Factors—Risk Relating to the PRC Life Insurance Industry—We expect competition in the Chinese insurance industry to increase, which may materially and adversely affect the growth of our business”.

 

We face competition from other financial services providers, primarily licensed mutual fund companies, trust companies and brokerage houses licensed to manage separate accounts. These financial services providers may be permitted to manage employer-sponsored defined contribution pension plans, which we believe will compete directly with our group annuity products. We also face competition in the sale of our individual participating policies and annuities from financial institutions which offer investment products to the public.

 

Asset Management Business

 

On November 23, 2003 we established an asset management joint venture with our predecessor, CLIC, in connection with the restructuring for the purpose of operating the asset management business more professionally in a separate entity and to better attract and retain qualified investment management professionals. The joint venture manages our investment assets and, separately, substantially all of those of CLIC. For a description of our investment assets, see “—Investments”.

 

The asset management joint venture is our subsidiary, with us owning 60% and CLIC owning the remaining 40%. The initial board comprises five members, Wang Xianzhang, the chairman of our board of directors and president, Miao Fuchun, our vice president, Wu Yan, one of our directors, and two other members. Directors of the asset management joint venture are appointed by the shareholders in general meeting. Accordingly, we, as the controlling shareholder, effectively control the composition of its board of directors.

 

Customer Support Management

 

We seek to provide quality services to our customers and potential customers and to be responsive to their needs, both before and after a sale, through an extensive customer support network. Our customer service network is managed by a specialized customer service department, which is responsible for setting uniform standards and procedures for providing policy-related services to customers, handling inquiries and complaints from customers and training customer services personnel.

 

We deliver customer services primarily through customer service units operating in our branch offices and in field offices throughout China and a sophisticated telephone call center network. We provide customer support to more remote areas by mail and other means. We also take advantage of alternative customer services channels, such as wireless telephone networks and the Internet, complementing the customer services provided by our customer service units and the call center network.

 

Customer service units

 

We provide customer support through approximately 3,000 customer service units nationwide. We provide more than 40 different types of policy-related services to our customers, which include collecting regular premiums, renewing policies, purchasing supplemental policies, reinstating lapsed policies, processing surrenders, increasing insured amounts, processing policy loans, paying benefits and updating information regarding holders and beneficiaries of policies. We require our customer service units to provide these policy-related services in accordance with procedures and standards that we implement on a nationwide basis, helping to ensure the quality of the services we provide.

 

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Telephone call center network

 

Our telephone call centers allow customers to make product and service inquiries, file complaints, report claims and losses and make appointments. They also provide call-back and greeting message services to customers. We intend to broaden over time the services we offer through these call centers. With our dedicated, nationwide inquiry line, “95519”, our customers can reach us by a local telephone connection on a “24 hours/7 days” basis in key cities. The call centers are supported by our web-based “95519” Support System, which contains customer and service information.

 

We believe our call centers have become popular with our customers because of the quality of services they provide. We seek to ensure that we have a sufficient number of lines and staff to service the increasing utilization of our call centers.

 

We have established system-wide standards for our call centers, which we monitor periodically through test calls to the call centers. We are in the process of implementing a more technically advanced customer service system based on Internet protocol technology that is capable of delivering content-rich customer services. The new system also uses the popular “95519” access number and can be directly monitored by personnel at our company headquarters. The new system has been installed and is fully functional at seven provincial level branch offices. We plan to complete the implementation of the new system at most of our branch offices by the end of 2004.

 

Wireless telephone services

 

We utilize wireless telephone services to make instant contact with our agents and customers. Through special service codes (95519 for China Unicom and 6295519 for China Mobile), we may send short messages to our customers, conveying such information as birthday and holiday greetings, premium payment notices and premium payment confirmations. We have installed this wireless telephone service system in a number of our branch offices, and plan to complete the implementation of this system at most of our branch offices by the end of 2004.

 

Internet-based services

 

Our customers can also utilize our Internet-based services for inquiries, complaints and service requests through our website (www.e-chinalife.com).

 

Future Policy Benefits and Reserves

 

For all of our product lines, we establish, and carry as liabilities, actuarially determined amounts that are calculated to meet our obligations under our insurance policies and annuity contracts.

 

Financial statement reserves

 

In accordance with H.K. GAAP, our reserves for financial reporting purposes are based on actuarially recognized methods for estimating future policy benefits and claims. We expect these reserve amounts, along with future premiums to be received on policies and contracts and investment earnings on these amounts, to be sufficient to meet our insurance policy and contract obligations.

 

We establish the liabilities for obligations for future policy benefits and claims based on assumptions that are uncertain when made. Our assumptions include assumptions for mortality, morbidity, persistency, expenses, and investment returns, as well as macroeconomic factors such as inflation. These assumptions may deviate from our actual experiences and, as a result, we cannot

 

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determine precisely the amounts which we will ultimately pay to settle these liabilities or when these payments will need to be made. These amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future. We evaluate our liabilities periodically, based on changes in the assumptions used to establish the liabilities, as well as our actual policy benefits and claims experience. We expense changes in our liabilities in the period the liabilities are established or re-estimated. To the extent that trends in actual claims results are less favorable than our underlying assumptions used in establishing these liabilities, and these trends are expected to continue in the future, we could be required to increase our liabilities. This increase could have a material adverse effect on our profitability and, if significant, our financial condition. Any material impairment in our solvency level could change our customers’ or business partners’ perception of our financial health, which in turn could affect our sales, earnings and operations.

 

Statutory reserves

 

We are required under China’s insurance law to report policy reserves for regulatory purposes. The minimum levels of these reserves are based on methodologies and assumptions mandated by the CIRC. We also maintain assets in excess of policy reserves to meet the solvency requirements under CIRC regulations.

 

See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Differences in future actual claims results from the assumptions used in pricing and establishing reserves for our insurance and annuity products may materially and adversely affect our earnings”.

 

Underwriting and Pricing

 

Our individual and group insurance underwriting involves the evaluation of applications for life, accident and health insurance products by a professional staff of underwriters and actuaries, who determine the type and the amount of risk that we are willing to accept. We have established qualification requirements and review procedures for our underwriting professionals. We employ detailed underwriting policies, guidelines and procedures designed to assist our underwriters to assess and quantify risks before issuing a policy to qualified applicants.

 

Our underwriters generally evaluate the risk characteristics of each prospective insured. Requests for coverage are reviewed on their merits, and generally a policy is not issued unless the particular risk or group has been examined and approved for underwriting.

 

We have different authorization limits and procedures depending on the amount of the claim. We also have authorization limits for personnel depending on their level of qualifications.

 

In order to maintain high standards of underwriting quality and consistency, we engage in a multilevel series of ongoing internal underwriting audits, and our reinsured business is subject to external audits by our reinsurers.

 

Individual and group product pricing reflects our insurance underwriting standards. Product pricing on insurance products is based on the expected payout of benefits, calculated through the use of assumptions for mortality, morbidity, persistency, expenses and investment returns, as well as certain macroeconomic factors such as inflation. Those assumptions include a margin for expected profitability and are based on our own experience and published data from other Chinese life insurance companies. For more information on regulation of insurance products, see “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation”.

 

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We primarily offer products denominated in RMB.

 

Claims Management

 

We manage the claims we receive from policyholders through our claims management staff located in our headquarters and branch offices. Typically, claims are received by our employees or agents, who make a preliminary examination and forward them to our claims settlement team for further verification. If the claim is verified, the amount payable is calculated and, once approved, is distributed to the policyholder.

 

We manage claims management risk through organizational controls and computer systems controls. Our organizational controls include specified authorization limits for various operating levels, periodic and ad hoc inspections at all levels of our organization, expense mechanisms linking payout ratios with expenses for short-term life insurance policies and requirements that each claims examination be performed by two staff members. We also impose stringent requirements on the qualification and employment of claims management staff. Our claims management control procedures are supported by a computer processing system which is used for the verification and processing of claims.

 

Reinsurance

 

Statutory reinsurance

 

Under China’s insurance law and CIRC regulations, our predecessor was required to reinsure 20% of our insurance risks, other than those arising from life insurance products, with China Reinsurance (Group) Company, formerly known as China Reinsurance Company, as statutory reinsurer. The statutory reinsurance requirement is now being phased out. At the beginning of 2003, the percentage of accident and health insurance risks that our predecessor had to reinsure decreased by 5%, from 20% to 15%, and it is scheduled to decrease by a further 5% per year until it is phased out completely at the beginning of 2006. Although there is no statutory reinsurance requirement for life insurance, our predecessor also entered into various reinsurance agreements with China Life Re for the reinsurance of individual risks, group risks and defined blocks of business.

 

Commercial reinsurance

 

In addition to our statutory reinsurance requirements since 1997 we have entered into various reinsurance agreements with China Life Reinsurance Company, or China Life Re, formerly known as China Reinsurance Company, for the reinsurance of individual risks, group risks and defined blocks of business. In general, death risks are primarily reinsured on a surplus basis, in which we are reinsured for losses above a specified amount. Under our internal reinsurance policy, we reinsure risks over RMB 1 million per person for life insurance, RMB 1 million per person for accident insurance and RMB 0.3 million per person for health insurance. Our group risks are reinsured on a percentage basis, and we decide which group policies are to be reinsured on a case by case basis. In general, our reinsurance agreements with China Life Re do not have a definite term, but may be terminated by either party at the end of a calendar year with advance notice of three to six months.

 

These reinsurance agreements spread the risk and reduce the effect on us of potential losses. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the insured, or ceded, amount in the event the claim is paid. However, we remain liable to our policyholders for the ceded amount if the reinsurer fails to meet the obligations assumed by it.

 

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For the year ended December 31, 2003, the amount of premiums ceded to our reinsurers, primarily China Re, totaled RMB 1,571 million (US$190 million).

 

As part of our life insurance business we also reinsure policies issued by other insurers. We have entered into three reinsurance agreements with three affiliated branches of a United States life insurance company in China that cover individual life insurance risks and risks of death and disability from accidental injuries.

 

Investments

 

As of December 31, 2003, we had RMB 279,248 million (US$33,739 million) of investment assets. As required by China’s insurance law, we invest insurance premiums, deposits and other funds we receive primarily in bank term deposits; fixed maturity securities, including government securities, bonds issued by the central bank and state-owned policy banks of the Chinese government and corporate bonds; and policy loans and securities investment funds primarily invested in equity securities issued by Chinese companies and traded on China’s securities exchanges. We also participate in bond repurchase activities through inter-bank repurchase markets and repurchase exchange markets. We are prohibited from investing in other securities without the CIRC’s approval.

 

We direct and monitor our investment activities through the application of investment guidelines. Our investment guidelines include: (1) performance goals for the investment fund; (2) specified asset allocations and investment scope based on regulatory provisions, level of indebtedness and market forecasts; (3) specified goals for investment duration and asset-liability matching requirements based on asset-liability matching strategies; (4) specified authorization levels required for approval of significant investment projects; and (5) specified risk management policies and prohibitions. The investment guidelines are reviewed and approved by the investment committee annually.

 

Investment proposals typically originate from our investment management department, which is in charge of all of our investment assets, other than our investments in real estate properties and other investment projects made prior to the enactment of China’s insurance law, which are being retained by CLIC after our restructuring. Investment proposals are reviewed by our risk management department for risk assessment and submitted to the investment committee for final approval. An investment committee approval is typically required for investments in primary markets. Secondary market trading decisions are typically made within the investment management department under our general investment guidelines.

 

The asset management joint venture established by us and our predecessor, CLIC, manages our investments following the restructuring and, separately, substantially all of the investments retained by CLIC. See “—Asset Management Business”. In connection with the restructuring, CLIC transferred to us a portion of its investment assets and specified other assets, and retained the remaining investment and other assets. See “Item 4. Information on the Company—History and Development of the Company” and “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”. The information presented in this section as of December 31, 2001 and 2002 sets forth the investment assets of CLIC. The information presented in this section as of December 31, 2003 sets forth our investment assets.

 

We own 60% of the asset management joint venture, with CLIC owning the remaining 40%. The initial board comprises five members, including Wang Xianzhang, the chairman of our board of directors and president, Miao Fuchun, our vice president, Wu Yan, one of our directors, and two other members.

 

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The following table summarizes information concerning CLIC’s investment assets as of December 31, 2001 and 2002 and our investment assets as of December 31, 2003.

 

     CLIC investment assets (1)

    Our investment assets

 
     As of December 31,

 
     2001

    2002

    2003

 
    

Carrying

value


   % of
total


    Carrying
value


   % of
total


    Carrying
value


   % of
total


 
     (RMB in millions, except as otherwise indicated)  

Cash and cash equivalents

   17,855    9.5 %   14,529    5.5 %   42,616    15.3 %

Term deposits

   76,083    40.3 %   123,675    46.4 %   137,192    49.1 %

Statutory deposits—restricted

   990    0.5 %   991    0.4 %   4,000    1.4 %

Fixed maturity securities, held to maturity

   1,388    0.7 %   1,220    0.5 %   —      —    

Fixed maturity securities, non-trading

   51,896    27.5 %   75,117    28.2 %   70,604    25.3 %
    
  

 
  

 
  

Fixed maturity securities

   53,284    28.2 %   76,337    28.6 %   70,604    25.5 %
    
  

 
  

 
  

Policy loans

   107    0.1 %   106    0.0 %   116    0.0 %

Equity securities, non-trading

   2,002    1.1 %   8,101    3.0 %   5,550    2.0 %

Equity securities, trading

   5,696    3.0 %   4,070    1.5 %   5,168    1.9 %
    
  

 
  

 
  

Equity securities

   7,698    4.1 %   12,171    4.5 %   10,718    3.8 %
    
  

 
  

 
  

Repurchase agreements

   30,480    16.1 %   36,388    13.7 %   14,002    5.0 %

Investments in associates(2)

   2,036    1.1 %   2,035    0.8 %   —      —    

Other investments(2)

   336    0.2 %   231    0.1 %   —      —    
    
  

 
  

 
  

Total investment assets

   188,869    100 %   266,463    100 %   279,248    100 %
    
  

 
  

 
  

Average cash and investment assets balance

              227,666          272,856       

Investment properties(2)(3)

   2,993          3,011                  

(1) Does not give effect to the restructuring.
(2) Investments made by CLIC pursuant to special approval of the State Council or by CLIC’s predecessor prior to the enactment of the PRC insurance law in 1995 and which CLIC was allowed to retain. These investments are not now permitted under the PRC insurance law and were retained by CLIC following the restructuring.
(3) Under H.K. GAAP, investment properties are not recorded as a part of investment assets, but as a part of fixed assets. Income derived from investment properties is recorded as investment income.

 

Risk management

 

Our primary investment objective is to pursue optimal investment yields while considering macroeconomic factors, risk control and regulatory requirements. We are exposed to four primary sources of investment risk:

 

  interest rate risk, relating to the market price and cash flow variability associated with changes in interest rates;

 

  credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest;

 

  market valuation risk, relating to the changes in market value for our investments, particularly our securities investment fund holdings; and

 

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  liquidity risk, relating to the lack of liquidity in many of the fixed maturity securities markets we invest in, due to contractual restrictions on transfer or the size of our investments in relation to the overall market.

 

Our investment assets are principally comprised of term deposits and fixed income securities, and therefore changes in interest rates have a significant impact on the rate of our investment return. We manage interest rate risk through adjustments to our portfolio mix and terms, and by managing, to the extent possible, the average duration and maturity of our assets and liabilities. However, because of the general lack of long-term fixed income securities in the Chinese financial markets and the restrictions on the types of investments we may make, the duration of some of our assets is lower than our liabilities. We believe that with the development of China’s financial markets and the gradual easing of our investment restrictions, our ability to match our assets to our liabilities will improve. Chinese financial markets currently do not provide an effective means for us to hedge our interest rate risk.

 

Because we are limited in the types of investments we may make, we believe we have relatively low credit risk. We monitor our credit risk through in-house fundamental analysis of the Chinese economy and the underlying obligors and transaction structures.

 

We are subject to market valuation risk, particularly because of the relative lack of stability of China’s bond and stock markets. We manage valuation risk through industry and issuer diversification and asset allocation.

 

Since by law we are limited to investments in China, including term deposits with Chinese banks and securities investment funds, we are exposed to the effect of changes in the Chinese economy and other factors which affect the Chinese banking industry and securities markets.

 

We are also subject to market liquidity risk for many of the fixed maturity securities investments we make, due to the size of our investments in relation to the overall market. We manage liquidity risk through selection of liquid assets and through asset diversification. In addition, we view fundraising through repurchase agreements as a way of managing our short-term liquidity risk.

 

Our ability to manage our investment risks is limited by the investment restrictions placed on us and the lack of sophisticated investment vehicles in China’s capital markets. We understand that the CIRC is considering opening other investment channels to insurance companies, including mortgage-backed securities, infrastructure project financings, foreign fixed-income securities and direct investment in China’s stock markets. We will consider these alternative ways of investing once they become available to us.

 

For further information on our management of interest rate risk and market valuation risk, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

 

Investment results

 

In the restructuring, CLIC transferred to us investment assets with a book value of RMB 212,452 million (US$25,669 million) as of June 30, 2003. To the greatest extent practicable, investment assets were divided in such a manner that the separated pools of assets and liabilities have the same portfolio composition and maturity characteristics. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring—Transfer of Insurance Policies and Related Assets—Investment assets”.

 

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Our investment yield for the year ended 31, 2003, which includes the investment yield for investments held by CLIC through September 30, 2003, was 3.4%. The yield on CLIC’s investment assets and investment properties, excluding net realized investment gains and losses, was 3.8% for the year ended December 31, 2002 and 4.1% for the year ended December 31, 2001.

 

The following table sets forth the yields on average assets for each component of CLIC’s and our investment portfolios for the periods indicated.

 

     CLIC (1)

    China Life(2)

 
     As of or for the years ended December 31,

 
     2001

    2002

    2003

 
     Yield (3)

    Amount

    Yield (3)

    Amount

    Yield (4)

    Amount

 
     (RMB in millions, except as otherwise indicated)  

Cash, cash equivalents and term deposits:

                                    

Investment income

   3.4 %   2,714     3.7 %   4,310     3.6 %   5,543  

Ending assets: cash and cash equivalents

         17,855           14,529           42,616  

Ending assets: statutory deposits—restricted

         990           991           4,000  

Ending assets: term deposits

         76,083           123,675           137,192  
          

       

       

Ending assets

         94,928           139,195           183,808  

Fixed maturity securities:

                                    

Investment income

   4.2 %   1,918     4.2 %   2,723     3.5 %   2,793  

Net realized gains/(losses)

         188           446           550  
          

       

       

Total

         2,106           3,169           3,343  

Ending assets

         53,284           76,337           70,604  

Policy loans:

                                    

Investment income

   2.8 %   3     6.6 %   7     4.4 %   4  

Ending assets

         107           106           116  

Equity securities:

                                    

Investment income

   12.3 %   893     2.4 %   240     2.4 %   312  

Net realized gains/(losses)

         (194 )         (180 )         318  
          

       

       

Total

         699           60           630  

Ending assets

         7,698           12,171           10,718  

Resale and repurchase agreements:

                                    

Resale agreements:

                                    

Investment income

   3.2 %   815     3.3 %   1,094     2.6 %   1,121  

Net realized gains/(losses)

         —             —             —    
          

       

       

Total

         815           1,094           1,121  

Ending assets

         30,480           36,388           14,002  

Repurchase agreements:

                                    

Total

         (56 )         (71 )         (7 )

Ending assets

         14,608           3,602           6,448  

Investments in associates(5):

                                    

Investment income/(losses)

   (1.6 )%   (32 )   (0.3 )%   (6 )   1.6 %   16  

Ending assets

         2,036           2,035           —    

Investment properties(5)(6):

                                    

Investment income

   1.5 %   29     2.2 %   67     4.0 %   58  

Ending assets

         2,993           3,011           —    

Other investments(5):

                                    

Investment income

   0.9 %   4     3.2 %   9     4.5 %   10  

Ending assets

         336           231           —    

Total investments:

                                    

Net investment income(6)

   4.1 %   6,276     3.8 %   8,347     3.4 %   9,825  

Net realized gains/(losses)

         (6 )         266           868  

(1) Does not give effect to the restructuring.
(2) Includes the investments held by CLIC through September 30, 2003.
(3) Yields for 2001 and 2002 are calculated by dividing the investment income for that year by the average of the ending balances of that year and the previous year.

 

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(4) Yields for 2003 are calculated as the weighted average (weighted according to the amount of investment income for the relevant periods) of the yields for the first three quarters of CLIC (without giving effect to the restructuring) and the fourth quarter of China Life of 2003. The yields for such periods were calculated by dividing the investment income of CLIC or China Life for the relevant nine or three-month period by the average of the ending balances for that nine or three-month period and the previous nine or three-month period.
(5) Investments made by CLIC pursuant to special approval of the State Council or by CLIC’s predecessor prior to the enactment of the PRC insurance law in 1995 and which CLIC was allowed to retain. These investments are not now permitted under the PRC insurance law and were retained by CLIC following the restructuring.
(6) Under H.K. GAAP, investment properties are not booked as a part of investment assets, but as a part of fixed assets. Income derived from investment properties is recorded as investment income.

 

Term deposits

 

Term deposits consist principally of term deposits with Chinese commercial banking institutions and represented 49.1% of our total investment assets as of December 31, 2003, 46.4% of CLIC’s total investment assets as of December 31, 2002, and 40.3% of CLIC’s total investment assets as of December 31, 2001.

 

We generally make term deposits with state-owned commercial banks and large joint stock commercial banks. The terms of the term deposits vary. Substantially all of them carry variable interest rates which are linked to deposit rates set by the People’s Bank of China from time to time, thus providing us with a measure of protection against rising interest rates and, for a significant portion of them, the variable interest rates also cannot fall below a fixed guaranteed rate. They typically allow us to renegotiate terms with the banks upon prepayment, including calculations methods for accrued interest, if any. Term deposits must be greater than RMB 30 million and have a deposit period of longer than five years. We make term deposits to obtain higher yields than can ordinarily be obtained with regular deposits.

 

The following table sets forth term deposits by contractual maturity dates, as of the dates indicated.

 

     CLIC(1)

   China Life

     As of December 31,

     2001

   2002

   2003

     Amortized
cost


   Amortized
cost


   Amortized
cost


     (RMB in millions)

Due in one year or less

   5,929    6,621    2,349

Due after one year and through five years

   48,143    108,953    121,443

Due after five years and through ten years

   21,011    7,101    12,400

Due after ten years

   1,000    1,000    1,000
    
  
  

Total term deposits

   76,083    123,675    137,192
    
  
  

(1) Does not give effect to the restructuring.

 

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The following table sets forth term deposits outstanding to Chinese banking institutions as of the dates indicated.

 

     CLIC(1)

   China Life

     As of December 31,

     2001

   2002

   2003

     Amortized
cost


   Amortized
cost


   Amortized
cost


     (RMB in millions)

Industrial & Commercial Bank of China

   9,624    24,027    23,121

Agriculture Bank of China

   12,147    20,178    8,927

Bank of China

   12,140    11,748    20,304

China Construction Bank

   4,517    9,139    5,945

Other banks

   37,655    58,583    78,895
    
  
  

Total term deposits

   76,083    123,675    137,192
    
  
  

(1) Does not give effect to the restructuring.

 

Fixed maturity securities

 

Fixed maturity securities consist of Chinese treasury bonds, Chinese government agency bonds and Chinese corporate bonds, and represented 25.3% of our total investment assets as of December 31, 2003, 28.6% of CLIC’s total investment assets as of December 31, 2002 and 28.2% of CLIC’s total investment assets as of December 31, 2001.

 

Based on estimated fair value, Chinese treasury bonds, Chinese government agency bonds and Chinese corporate bonds comprised 55.9%, 38.0% and 6.1% of our total non-trading fixed maturity securities as of December 31, 2003, respectively, 67.9%, 27.7% and 4.4% of CLIC’s total non-trading fixed maturity securities as of December 31, 2002, respectively, and 75.3%, 20.9% and 3.8% of CLIC’s total non-trading fixed maturity securities as of December 31, 2001, respectively. Except for a few series of Chinese treasury bonds, which collectively had an estimated fair value of RMB 31,731 million (US$3,834 million) as of December 31, 2003, most of our fixed maturity securities are publicly traded in secondary markets in China.

 

The treasury bonds are sovereign debt of the Chinese government. The government agency bonds are backed by the Chinese government and are therefore sovereign-rated. The corporate bonds we invest in are issued primarily by state-owned enterprises involved in railway development, the Three Gorges Dam construction project and the telecommunication and power generation sectors, and are rated AAA by China Chengxin International Credit Rating Co., Ltd. or Dagong Global Credit Rating Agency, which provide the credit ratings for the fixed maturity securities we invest in.

 

Chengxin International was created by a consortium of companies including Fitch Ratings and International Finance Company. Chengxin International provides ratings on both companies and securities, including insurance companies, securities firms, commercial banks and corporate bonds. AAA is the highest of ten rating categories. Dagong provides ratings on both companies and securities, including insurance companies, commercial banks, mutual funds and long-term and short-term debts. AAA is the highest of nine rating categories. China has other approved rating agencies, such as China Lianhe and Shanghai Far East, both of which have similar rating structures. Ratings given by these entities are not directly comparable to ratings given by U.S. rating agencies.

 

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The following table sets forth the amortized cost and estimated fair value of fixed maturity securities, as of the dates indicated.

 

    CLIC(1)

    China Life

 
    As of December 31,

 
    2001

    2002

    2003

 
    Amortized
cost


  % of
total


    Estimated
fair value


  % of
total


    Amortized
cost


  % of
total


    Estimated
fair value


  % of
total


    Amortized
cost


  % of
total


    Estimated
fair value


  % of
total


 
    (RMB in millions)  

Fixed maturity securities, non-trading:

                                                           

Treasury bonds

  37,016   72.6 %   39,078   73.3 %   49,661   66.4 %   50,979   66.7 %   40,449   56.3 %   39,477   55.9 %

Government agency bonds

  10,688   20.9 %   10,836   20.3 %   20,615   27.6 %   20,815   27.2 %   27,234   37.7 %   26,817   38.0 %

Corporate bonds

  1,956   3.8 %   1,982   3.7 %   3,212   4.3 %   3,323   4.4 %   4,508   6.2 %   4,310   6.1 %
   
 

 
 

 
 

 
 

 
 

 
 

Total fixed maturity securities, non-trading

  49,660   97.3 %   51,896   97.3 %   73,488   98.3 %   75,117   98.3 %   72,191   100.0 %   70,604   100.0 %

Fixed maturity securities, held to maturity:

                                                           

Treasury bonds

  717   1.4 %   750   1.4 %   584   0.8 %   602   0.8 %   —     —       —     —    

Government agency bonds

  —     —       —     —       —     —       —     —       —     —       —     —    

Corporate bonds

  671   1.3 %   691   1.3 %   636   0.9 %   671   0.9 %   —     —       —     —    
   
 

 
 

 
 

 
 

 
 

 
 

Total fixed maturity securities, held to maturity

  1,388   2.7 %   1,441   2.7 %   1,220   1.7 %   1,273   1.7 %   —     —       —     —    
   
 

 
 

 
 

 
 

 
 

 
 

Total fixed maturity securities

  51,048   100 %   53,337   100 %   74,708   100 %   76,390   100 %   72,191   100 %   70,604   100 %
   
 

 
 

 
 

 
 

 
 

 
 


(1) Does not give effect to the restructuring.

 

The following table shows the amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates, as of the dates indicated.

 

     CLIC(1)

   China Life

     As of December 31,

     2001

   2002

   2003

     Amortized
cost


   Estimated
fair value


   Amortized
cost


   Estimated
fair value


   Amortized
cost


   Estimated
fair value


     (RMB in millions)

Due in one year or less

   1,606    1,641    3,583    3,621    1,652    1,642

Due after one year and through five years

   17,003    18,191    18,547    19,426    12,949    13,087

Due after five years and through ten years

   23,443    24,356    33,009    33,767    36,873    36,460

Due after ten years

   8,996    9,149    19,569    19,576    20,716    19,415
    
  
  
  
  
  

Total fixed maturity securities

   51,048    53,337    74,708    76,390    72,190    70,604
    
  
  
  
  
  

(1) Does not give effect to the restructuring.

 

Under the CIRC’s regulations, our investments in corporate bonds at any given time may not exceed 20% of our total assets as of the end of the preceding month. We diversify our corporate bonds by industry and issuer. Our corporate bond portfolio does not have significant exposure to a single industry or issuer.

 

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Problem and restructured fixed maturity securities

 

We monitor fixed maturity securities to identify investments that management considers to be problems. We also monitor investments that have been restructured.

 

We define problem securities in the fixed maturity securities category as securities to which principal or interest payments are in default or are to be restructured pursuant to commenced negotiations, or as securities issued by a debtor that has subsequently entered liquidation.

 

We define restructured securities in the fixed maturity securities category as securities to which we have granted a concession that we would not have otherwise considered but for the financial difficulties of the obligor or issuer.

 

None of our fixed maturity securities is classified either a problem security or a restructured security.

 

Policy loans

 

We offer interest-bearing policy loans to our policyholders, who may borrow from us at total amounts up to 70% of the cash surrender values of their policies. In general, the loans are secured by the policyholders’ rights under the policies. As of December 31, 2003, the total amount of our policy loans was RMB 116 million (US$14 million), and represented 0.04% of our total investment assets as of that date.

 

Securities investment funds

 

Securities investment funds consist of Chinese domestic investment funds that primarily invest in securities that are issued by Chinese companies and traded on China’s securities exchanges, and represented 3.8% of our total investment assets as of December 31, 2003.

 

We invest in both “closed-end” securities investment funds, in which the number of shares is fixed and the share value depends on the trading value, and “open-end” securities investment funds, in which the number of shares issued by the fund fluctuates and the share value is set by the value of the assets held by the fund. Under the CIRC’s regulations, investment holdings in securities investment funds during any given month, based on the cost of investment, may not exceed 15% of the total assets of an insurance company as of the end of the proceeding month. In addition, investment holdings in a single securities investment fund during any given month may not exceed 3% of total assets of the company as of the end of the proceeding month, and no investment in any single “closed-end” securities investment fund may exceed 10% of that fund. Our holdings in securities investment funds comply with those restrictions.

 

The following table presents the carrying values of investments in open-end and closed-end securities investment funds as of the dates indicated.

 

     CLIC(1)

    China Life

 
     As of December 31,

 
     2001

    2002

    2003

 
     Carrying
value


   % of
total


    Carrying
value


   % of
total


    Carrying
value


   % of
total


 
     (RMB in millions, except as otherwise indicated)  

Open-end

   1,130    16.8 %   4,139    36.9 %   5,168    48.2 %

Closed-end

   5,605    83.2 %   7,075    63.1 %   5,550    51.8 %
    
  

 
  

 
  

Total

   6,735    100 %   11,214    100 %   10,718    100 %
    
  

 
  

 
  


(1) Does not give effect to the restructuring.

 

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Repurchase agreements

 

We enter into repurchase agreements, which consist of bond repurchase activities in repurchase exchange markets. Bonds repurchased under these agreements represented 5.0% of our total cash and investment assets as of December 31, 2003, 13.7% of CLIC’s total cash and investment assets as of December 31, 2002 and 16.1% of CLIC’s total cash and investment assets at December 31, 2001.

 

Information Technology

 

Our information technology systems provide support to many aspects of our businesses, including product development, sales and marketing, business management, cost control and risk control. Our information technology systems are comprised of an actuarial system, a marketing support system, an instant policy-processing system, an e-commerce system, a central business processing system, an agent management information system, a customer service system, an accounting and financial management system, a risk management system and an office automation, or OA, system. While we plan to centralize our information technology systems, we also plan to build back-up systems to reduce the risk of system failures and the impacts these failures may have on our business.

 

Our actuarial system automatically generates and analyzes premiums and policy fees and supports the calculation of reserves, the analysis of business operations and the development and design of new products.

 

Our marketing support system provides our agents with real time support for their daily operations, giving them easy access to information about customers and insurance products, providing detailed calendar planning and allowing them to conduct on-site premium calculation and product design.

 

Our instant policy-processing system provides support for intermediaries, such as banks and post offices, to sell products on our behalf.

 

Our e-commerce system currently provides online support for the sales by our agents. We plan to provide online services to our individual customers beginning in the second half of 2004.

 

Our central business processing system, or CBPS, provides comprehensive and integrated support for various aspects of our business, such as customer relationship management, contract management and sales agent management. We believe our customer information database, gathered and processed by CBPS, collectively contain the largest customer database in the Chinese life insurance industry.

 

Our agent management information system maintains files for our branches and our individual agents and thus allows us to monitor their performance and assists us in determining agent compensation.

 

Our China Life accounting and financial management system provides financial bookkeeping, business accounting, final accounting and other administrative functions. It gathers and processes financial data for management, marketing and customer service purposes.

 

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We deliver our customer services through a sophisticated telephone call center network, complementing the customer services provided by our customer service units. We are in the process of implementing a more technically advanced customer service system based on Internet protocol technology that is capable of delivering content-rich customer services. The new system also uses the popular “95519” access number and can be directly monitored by personnel at our company headquarters. The new system has been installed and is fully functional at seven provincial level branch offices. We expect to complete the implementation of the new system at each of our branch offices at the provincial level by the end of 2004. See “—Customer Support Management”.

 

Our OA system, which was first implemented in 1997 and is still in development, facilitates the resource utilization and information exchange among company personnel. We believe we have the widest computer network in the Chinese life insurance industry, connecting all branch offices to our network and allowing our management to obtain precise and comprehensive business information from local branches and distribute information to the branches.

 

We and our predecessor invested significantly in information technology systems, investing RMB 368 million, RMB 362 million and RMB 630 million in 2003, 2002 and 2001. Our information technology systems are supported by approximately 1,500 experienced engineers, technicians and specialists, which we believe is the largest professional staff in the Chinese life insurance industry.

 

Trademarks

 

We conduct our business under the “China Life” brand name (in English and Chinese), the “ball” logos and other business related slogans and logos. One of the “ball” logo trademarks has been registered in the PRC and CLIC has filed applications to register the trademarks in the “China Life” name (in English and Chinese), the other “ball” logo and other business related slogans and logos with the Trademark Office under the SAIC. CLIC has entered into a trademark license agreement with us, under which CLIC has agreed to grant us a royalty-free license to use these trademarks. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Trademark License Agreement”.

 

Regulatory and Related Matters

 

Overview

 

Development of regulatory framework

 

The PRC insurance law was enacted in 1995. It provided the initial framework for regulating the domestic insurance industry. Among the steps taken under the 1995 law were the following:

 

  Licensing of insurance companies and insurance intermediaries, such as agents and brokers. The 1995 insurance law established requirements for minimum registered capital levels, form of organization, qualification of senior management and the adequacy of the information systems for insurance companies and insurance agencies and brokers.

 

  Separation of property and casualty insurance businesses and life insurance businesses. The 1995 insurance law classified insurance between property, casualty, liability and credit insurance businesses, on the one hand, and life, accident and health insurance businesses on the other, and prohibited companies from engaging in both types of businesses.

 

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  Regulation of market conduct by participants. The 1995 insurance law prohibited fraudulent and other unlawful conduct by insurance companies, agencies and brokers.

 

  Substantive regulation of insurance products. The 1995 insurance law gave insurance regulators the authority to approve the policy terms and premium rates for certain insurance products.

 

  Financial condition and performance of insurance companies. The 1995 insurance law established reserve and solvency standards for insurance companies, imposed restrictions on investment powers and established mandatory reinsurance requirements, and put in place a reporting regime to facilitate monitoring by insurance regulators.

 

  Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory authority, then the People’s Bank of China, was given broad powers under the 1995 insurance law to regulate the insurance industry.

 

Establishment of the China Insurance Regulatory Commission and 2002 amendments to the insurance law

 

China’s insurance regulatory regime was strengthened further with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement reform in the insurance industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market. The PRC insurance law was also significantly amended in 2002.

 

Since its establishment, the CIRC has promulgated a series of regulations indicating a gradual shift in the regulatory approach to a more transparent regulatory process and a convergent movement toward international standards. Significant changes include:

 

  more stringent reserve and solvency requirements and their disclosure;

 

  the increase in the level of disclosures required to be made to the CIRC by insurance companies;

 

  greater freedom for insurance companies to develop products to meet market needs, with a significant reduction in the items which require the CIRC’s approval;

 

  broader investment powers for insurance companies, including allowing insurers to make equity investments in insurance-related enterprises, such as asset management companies;

 

  tightening of market conduct regulation and increased penalties for violations;

 

  phasing out of mandatory reinsurance by the beginning of 2006; and

 

  reduction of barriers to entry, including allowing property and casualty insurers to enter the accident and short-term health insurance business.

 

Insurance Company Regulation

 

The CIRC. The CIRC has extensive supervisory authority over insurance companies, including:

 

  promulgation of regulations applicable to the insurance industry;

 

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  examination of insurance companies;

 

  establishment of investment regulations;

 

  approving the policy terms and premium rates for certain insurance products;

 

  setting of standards for measuring the financial soundness of insurance companies;

 

  requiring insurance companies to submit reports concerning their business operations and condition of assets; and

 

  ordering the suspension of all or part of an insurance company’s business.

 

Licensing requirements. An insurance company is required to obtain a license from the CIRC in order to engage in an insurance business. In general, a license will be granted only if the company can meet prescribed registered capital requirements and other specified requirements, including requirements relating to its form of organization, the qualifications of its senior management and actuarial staff, the adequacy of its information systems and specifications relating to the insurance products to be offered. Our headquarters and all of our branch offices have obtained the requisite insurance licenses.

 

The CIRC may grant a life insurer a license to offer all or part of the following products: accident insurance, term life insurance, whole life insurance, annuities, short-term and long-term health insurance, endowment insurance (for individuals only) and other personal insurance approved by the CIRC, as well as reinsurance relating to any of the foregoing.

 

An insurance company may seek approval for establishing branch offices to meet its business needs so long as it meets minimum capital and other requirements. Our headquarters and substantially all of our branch offices have obtained business licenses. Our PRC legal counsel, King & Wood, has advised us that there is no legal impediment for the remaining branch offices to obtain their business licenses.

 

Minimum capital requirements. Under newly implemented insurance company regulations, the minimum paid-in capital for an insurance company is RMB 200 million. For an insurance company whose registered capital is RMB 200 million, the minimum incremental capital for each first branch office in a province other than the province where it is located is RMB 20 million. No additional capital will be required when the paid-in capital has reached RMB 500 million, and the insurer’s solvency level is sound.

 

Restriction of ownership in joint stock insurance companies. Any acquisition of shares which results in the acquirer owning 10% or more of the registered capital of a joint stock insurance company, whether or not listed, requires the approval of the CIRC. Listed insurance companies are exempted from filing with the CIRC with regard to the change of equity interest less than 10% of an insurance company. Except for insurance holding companies or insurance companies otherwise approved by the CIRC, an individual entity, including its affiliates, may not hold more than a 20% equity interest of an insurance company. In addition, except for public listed companies, when the equity of an insurance company collectively owned by foreign entities exceeds 25%, it shall be governed by insurance company regulations governing foreign-invested insurance companies. Except in the context of a public offering or as otherwise permitted by law or with the prior approval of the State Council in China, no bank or securities company may invest in an insurance company.

 

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Fundamental changes. Prior approval must be obtained from the CIRC before specified fundamental changes relating to a Chinese insurance company may occur. These include:

 

  a change to registered capital, change in capital structure, operating premises of the company or its branch offices, business scope or senior management;

 

  a merger or spin-off;

 

  a transfer of a 10% or more equity interest in the company;

 

  a termination of branch offices; and

 

  a dissolution or bankruptcy of the company.

 

In addition, certain other changes relating to the insurance company must be reviewed by or filed with the CIRC.

 

Regulation of insurance and annuity products generally. The 1995 insurance law provided that the basic terms and premiums of the principal commercial insurance and annuity products offered by an insurance company will be set by a governmental authority (which today is the CIRC).

 

The 2002 amendment to the insurance law changed the manner in which insurance products were regulated, giving insurance companies greater freedom to develop products to meet market needs. Under the 2002 amendment, the terms and the rates for premiums and policy fees of non-traditional life insurance and annuity products, insurance products that affect social and public welfare and insurance products that are mandatorily required by statute, are required to be submitted to the CIRC for approval. In determining whether or not to approve a product, the CIRC is required to consider whether the product adequately provides for the protection of social and public welfare and whether it will lead to inappropriate competition. Other insurance products are required to be filed with the CIRC. In general, the CIRC requires insurance companies to price their products based on mortality rate, interest rate and policy expense and commission assumptions. The assumed mortality rates are based on experience tables applicable to the PRC life insurance industry. The assumed interest rates represent the insurance company’s expectation of its investment returns, subject to CIRC regulations, and the assumed policy expenses and commissions are based on its assessment of its operating and sales expenses, which is also subject to CIRC regulations.

 

Regulation of participating products. A participating product is one which the policyholder or annuitant is entitled to share in the distributable earnings of the insurer through “policy dividends”. The participation dividend may be in the form of a cash payment or an increase in the insured amount. Not less than 70% of the distributable earnings is required to be distributed as dividends. Participating products may not be sold or modified without the prior approval of the CIRC. Policyholders and annuitants purchasing participating products must be given, prior to purchase, an explanatory statement that explains the nature and special characteristics of the products, any fees due under the products, the method for allocating dividends under the product policy and the risks to the policyholder or annuitant from holding the product. Insurance companies are required to present in their sales promotional materials three scenarios covering high, medium and low returns for illustration. They are prohibited from making public announcements about the returns of their participating products and from making comparisons with participating, universal or investment-linked products offered by other insurance companies. If cash dividends are to be paid on participating products, the insurance company may not use rates of return or like ratios to describe the dividend.

 

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An insurance company that offers participating products is required to have a computer system that can support these kinds of products, and the agents who sell these products are required to complete a training course designed specially for these products. Investment accounts for participating products are required to be segregated from those of non-participating products as well as from those of supplemental insurance that is added to the participating products.

 

Insurance companies offering participating products are required to file an annual report with the CIRC. The insurance company is also required to provide a performance report to the holders of its participating products at least once a year, setting forth specified financial and other information regarding the products.

 

Regulation of investment-linked products. An investment-linked product is one which insures the policyholder or annuitant against one or more separate risks and at the same time gives the policyholder or annuitant an interest in one or more separate investment accounts. Investment-linked products may not be sold or amended without the prior approval of the CIRC. We do not currently offer investment-linked products.

 

Persons purchasing an investment-linked product must be given, prior to purchase, an explanatory statement that explains the nature and special characteristics of the policy, the risks to the purchaser of holding the product, the investment strategy of the separate investment account, the investment account’s performance for the past ten years (or, if shorter, since the date of inception), the applicable fees payable under the product policy and how they are determined, the method of valuation of the assets in the investment account and the future policy or contract value which may accrue from the investment account. Insurance companies are required to present three scenarios covering high, medium and low returns for illustration.

 

The establishment of separate investment accounts is subject to the CIRC’s approval. Transactions between a separate investment account and any other account of the insurance company, other than a transfer of cash to pay for operating expenses of the separate investment account, are prohibited.

 

The insurance law prohibits investment managers of a separate investment account from engaging in an investment management business similar in nature to the management of the investment account, enter into transactions with the investment account or take any action which adversely affects the investment account. Agents who sell investment-linked products are required to pass a training course designed specially for these products.

 

An insurance company offering products with separate investment accounts is required to evaluate weekly the unit value of each investment account and publish a semi-annual notice which includes the financial condition of each investment account, the investment returns in the past five years (or, if shorter, since the date of inception), the investment portfolio as of the date of the report, the management fees charged in the report period and any change in the investment strategy or policy during the period. The insurance company is required to provide an annual report to the holders setting forth information regarding the product.

 

An insurance company offering products with separate investment accounts is required to submit to the CIRC annual financial reports regarding the investment accounts. In addition, the insurance company must notify the CIRC if on any day the net redemptions from an investment account exceed 1% or more of the total value of the account on the previous day. If the cumulative redemptions since the beginning of a fiscal year exceed 30% of the value of the account at the beginning of the year, or if there have been sustained losses which the investment manager believes to be irreversible, the insurance company may seek the approval of the CIRC to close the investment account.

 

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Foreign exchange denominated insurance. Insurance companies may seek approval from the CIRC and the State Administration of Foreign Exchange to engage in foreign exchange denominated insurance and reinsurance businesses. This will allow life insurance companies to offer products to non-Chinese policyholders or for non-Chinese beneficiaries, as well as policies covering accidents and illnesses which occur outside China, together with related reinsurance.

 

Reporting and disclosure requirements. Within the prescribed time period following the end of a fiscal year, an insurance company must submit to the CIRC, among other disclosures, an annual report with audited financial statements and an annual report setting forth its solvency level as of the end of the fiscal year, and other regulatory monitoring items. When the insurance company’s solvency level falls below the minimum solvency requirement, the CIRC also may require the insurance company to file a corrective plan to bring it into compliance with the requirement.

 

Statutory reinsurance. All insurance companies are currently required to reinsure 10% of the risks insured under insurance policies, other than life insurance products, underwritten by them. This requirement began to be phased out beginning in 2003 and is scheduled to be abolished entirely by the beginning of 2006. Insurance companies are also required to reinsure, for any single risk, the excess of the maximum potential liability over an amount equal to 10% of the sum of paid-in capital and capital reserves.

 

Regulation of investments. The 1995 insurance law requires insurance companies to invest their funds in a sound and prudent manner with the dual objective of seeking a return and preservation of capital. It significantly restricts the investments life insurance companies are allowed to make. Insurance funds may be invested only in bank deposits, Chinese treasury bonds, government agency bonds issued by the central bank or quasi-sovereign policy banks of the Chinese government, as well as other investment vehicles approved by the State Council, such as bonds of specified large state-owned enterprises. The 1995 insurance law specifically prohibits insurance companies from establishing any entity engaged in the securities businesses and from investing in enterprises.

 

Since 1999, the CIRC has implemented a gradual but deliberate regulatory expansion of insurance company investment powers.

 

Beginning in August 1999, insurance companies which were authorized to become members of the inter-bank market were permitted to engage in purchases and sales of Chinese treasury bonds and government agency bonds in that market. Beginning in October 1999, insurance companies were allowed to invest in qualified domestic securities investment funds. The amount of investment assets that may be so invested by an insurance company may not exceed a percentage of its total assets as of the end of the prior year as prescribed by the CIRC. The investment in any one fund on a cost basis may not exceed 20% of the maximum amount that may be invested in securities investment funds, and that investment may not account for more than 10% of the fund. These quantitative restrictions were relaxed in January 2003. Since then, the amounts of investment assets that may be so invested by an insurance company may not exceed 15% of its total assets as of the end of the prior month. The investment in any one fund on a cost basis may not exceed 3% of the insurance total assets as of the end of the prior month. The investment in any one closed-end fund may not account for more than 10% of the fund. Notwithstanding the foregoing, insurance companies may invest up to 100% of the assets of one of the investment accounts relating to investment-linked products, up to 80% of the assets of the investment accounts relating to universal life products and up to 15% of the investment assets relating to participating products as of the prior month in qualified domestic securities investment funds.

 

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In October 1999, insurance companies were authorized to make deposits in commercial banks at negotiated rates, provided that the deposits have terms longer than five years and are in amounts of not less than RMB 30 million. The “jumbo” deposits generally bear more attractive interest rates than interest rates on “regular” deposits, which are subject to regulation by the central bank.

 

The 2002 amendment of the insurance law allows insurance companies to invest in insurance companies, asset management companies (restricted to managing insurance company assets) and other insurance-related enterprises upon receipt of regulatory approval from the CIRC. The general prohibition against investing in securities businesses and enterprises other than insurance-related enterprises remains in effect.

 

Prior to June 2003, insurance companies were only allowed to invest in corporate bonds issued by four types of government enterprises: railway development, the Three Gorges Dam construction project and enterprises in the telecommunications and power generation sectors. Furthermore, the total amount of these investments was limited to no more than 10% of an insurer total assets, and the total investment in any single issue of these four categories of bonds could not exceed 2% of the total assets of the insurer or 10% of the issue, whichever is lower. Since June 2003, insurance companies have been authorized to invest in any corporate bond provided that the bond has a rating AA or higher from China Chengxin International Credit Rating Co., Ltd., Dagong Global Credit Rating Agency, China Lianhe Credit Rating Co., Ltd., Shanghai Far East Credit Rating Co., Ltd. or other credit rating agencies approved by the CIRC, and its issuance has been authorized by the PRC securities regulators. An insurer’s total investment in these corporate bonds on a cost basis may not exceed 20% of its total assets as of the end of the prior month. Furthermore, the total investment in any single issue of corporate bonds may not exceed the lower of 2% of the total assets of the insurer as of the end of the prior month and 15% of the issue. Notwithstanding the foregoing, up to 100% of the assets of one of the investment accounts relating to investment-linked products and up to 80% of the assets of the investment accounts relating to universal life products may be invested in approved corporate bonds. Up to 20% of the investment assets relating to participating and other separately accounted products as of the end of the prior month may be invested in approved corporate bonds.

 

In January 2004, the State Council issued certain opinions on promoting the reform, opening and steady growth of the capital markets, which encourage, among other things, investment of insurance funds in the capital markets.

 

Solvency requirements. In March 2003, the CIRC introduced a new standard, the solvency ratio, to measure the financial soundness of life insurance companies to provide better policyholder protection under a system of corrective regulatory action. The solvency ratio of an insurance company is a measure of capital adequacy, which is calculated by dividing the actual solvency of the company (which is its admissible assets less admissible liabilities determined in accordance with PRC GAAP and relevant rules) by the minimum solvency it is required to meet.

 

The minimum solvency of a life insurance company is the sum of its minimum solvency for its short-term business (policies having a term of one year or less from the date of issuance) and the minimum solvency for its long-term business (policies having a term of more than one year from the date of issuance).

 

The minimum solvency for a life insurance company’s short-term business is the higher of:

 

  18% of the portion of net premium, deposits and policy fees received in the most recent fiscal year net of business tax and other surcharges which are not in excess of RMB 100 million, plus 16% of the portion which are in excess of RMB 100 million; and

 

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  26% of the portion of the average annual claims payments during the most recent three fiscal years which is not in excess of RMB 70 million, plus 23% of the portion which is in excess of RMB 70 million.

 

The minimum solvency for its long-term business is the sum of:

 

  1% of reserves for its investment-linked insurance business;

 

  4% of reserves for its other insurance businesses;

 

  0.1% of the total sums at risk under term life policies, the coverage period of which expires within three years;

 

  0.15% of the total sums at risk under term life policies, the coverage period of which expires within three to five years;

 

  0.3% of the total sums at risk under term life policies, the coverage period of which will not expire within five years;

 

  0.3% of the total sums at risk under whole life policies; and

 

  0.3% of the sums at risk of all other insurance and annuity products with a coverage period longer than one year.

 

An insurance company with a solvency ratio below 100% may be subject to a range of regulatory actions by the CIRC. If the solvency ratio is above 70%, the CIRC will have the right to require the insurance company to submit and implement a corrective plan. If the insurer fails to come into compliance with the solvency requirement within the prescribed time period, the CIRC may require the insurance company, among other things, to raise additional share capital, to seek reinsurance of its insurance obligations, to stop paying dividends on its shares or to restrict the acquisition of fixed assets or business operations or the establishment of branch offices.

 

If the solvency ratio of an insurance company falls to or below 70% but stays at or above 30%, in addition to the right to take the above-mentioned measures, the CIRC may also order the insurance company to sell its non-performing assets, transfer its insurance business to others, limit the remuneration and expense accounts of its senior management, restrict its advertising activities or cease any new business development.

 

If the solvency ratio falls below 30%, in addition to the right to take the regulatory actions described above, the CIRC will also have the right to put the insurer into receivership.

 

Insurance companies are required to calculate and report annually to the CIRC their solvency level and twelve additional financial ratios to assist it in monitoring the financial condition of insurers. A “usual range” of results for each of the twelve ratios is used as a benchmark. The departure from the “usual range” on four or more of the ratios can lead to regulatory actions being taken by the CIRC.

 

The report is required to be submitted on or prior to April 30 of each year, based on audited financial information for the prior year. We submitted our first report in April 2004. Among the twelve financial ratios, the calculation of six ratios requires financial data of two previous years, and we were accordingly not able to calculate such six ratios for the year of 2003 because we were just established in 2003. Our solvency level as of December 31, 2003 was approximately 3.95 times the minimum regulatory requirement and the six applicable financial ratios were within their usual ranges.

 

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Registered capital deposit. Insurance companies in China are required to deposit an amount equal to 20% of their registered capital with a bank designated by the CIRC. These funds may not be used for any purpose other than to pay off debts during a liquidation proceeding.

 

Statutory insurance fund. Chinese life insurance companies are required to contribute to an insurance guarantee fund 1% of their net premiums from accident and short-term health insurance, including policies assumed through reinsurance. Contributions are not required for life insurance and long-term health insurance. Contributions are not required to be provided once the total amount in the fund reaches 6% of the insurance company’s assets.

 

Statutory reserves. In addition to the statutory deposit and the statutory insurance fund, insurance companies are required to provide for the following statutory reserves in accordance with regulations established by the CIRC:

 

  reserves for future benefits and claims; and

 

  reserves for pending payments based on insurance claims already made and claims not yet made but for which an insured event has occurred.

 

These reserves are recorded as liabilities for purposes of determining an insurance company’s actual solvency. In May 2003, the CIRC issued a new regulation which affected the calculation of statutory reserves for certain insurance products. It has the general effect of increasing the reserves a life insurance company is required to make, thereby affecting its solvency as well as its income under PRC GAAP. Certain provisions of this regulation were already applied to our reserve evaluation under PRC GAAP as at December 31, 2003. The regulation came into full effect on January 1, 2004.

 

Appointment of actuaries. Insurance companies are required to appoint one or more actuarial professionals, certified by the CIRC, and must establish a system for actuarial reporting.

 

Market conduct. Insurance companies are required to take steps to ensure that sales promotional materials used by their sales representatives and agents are objective, true and correct, with no material omissions or misleading information, contain no forecasts of benefits that are not guaranteed under the insurance or annuity product and do not exaggerate the benefits provided under the insurance or annuity product. The sales promotional materials must also highlight in an appropriate fashion any exclusions of coverage or liability in their products, as well as terms providing for policy or annuity surrenders and return of premiums.

 

Insurance companies are subject to extensive regulation against anti-competitive behavior. They may not pay insurance agents, the insured or the beneficiary any rebates or other illegal payments, nor may they pay their agents commissions over and above the industry norm.

 

Compliance with regulatory requirements. Our management confirms that, based on the advice of King & Wood, our PRC legal counsel, except as set out in the sections entitled “Item 3. Key Information—Risk Factors—Risks Relating to the PRC Life Insurance Industry—All of our agents are required to be qualified and to be registered as business entities. If these qualification and registration requirements are enforced or result in policyholders canceling their policies, our business may be materially and adversely affected” and “—Insurance Company Regulation—Licensing requirements” above, we have complied in all material respects with all applicable regulatory requirements set out above.

 

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Regulation of Foreign-Invested Insurance Companies

 

China acceded to the WTO on December 11, 2001. As a result of China’s commitments in connection with the accession, the Chinese insurance market is gradually opening up to foreign insurers and insurance-related service providers. A foreign life insurer with total assets of not less than US$5,000 million and 30 years of industry experience in any WTO member country, and which has had a representative office for two years in China, is permitted to form a life insurance joint venture with a domestic partner of its choice. Foreign life insurers may own up to one-half of the joint venture. In addition, the current geographic limitation on foreign life insurers, which are now permitted to operate only in specified cities, is to be lifted within three years of China’s accession to the WTO. Foreign life insurers, which are currently not permitted to provide group life insurance, health insurance and annuity and other pension-like products, will be permitted to provide these products within three years of accession.

 

Foreign-invested insurance companies, including Sino-foreign equity joint ventures, insurance companies that are wholly owned and branches of foreign insurance companies, are generally regulated in the same manner as domestic insurance companies. Foreign-invested insurance companies may not, without the approval of the CIRC, engage in transactions with their affiliates, including reinsurance transactions and purchases and sales of assets. In addition, where the foreign-invested insurance company is a branch of a foreign insurance company, it is required to notify the CIRC of fundamental events relating to the foreign insurance company within ten days following the occurrence of the event. Reportable events include: (1) a change of name, senior management or jurisdiction of incorporation of the foreign insurance company, (2) a change in the foreign insurance company’s share capital, (3) a change in any person beneficially owning 10% or more of the foreign insurance company’s shares, (4) a change in business scope, (5) the imposition of administrative sanctions by any applicable regulatory authority, (6) a material loss incurred by the foreign insurance company, (7) a spin-off, merger, dissolution, revocation of corporate franchise or bankruptcy involving the foreign insurance company and (8) other events specified by the CIRC. If the foreign insurance company is dissolved, or its corporate franchise is revoked or it is declared bankrupt, the Chinese branch of the foreign insurance company will be prohibited from conducting any new business.

 

Regulation of Insurance Asset Management Companies

 

An insurance asset management company is a limited liability company or joint stock company that manages insurance funds on behalf of others. Insurance asset management companies are regulated by the CIRC.

 

Minimum capital requirements. The registered capital of an insurance asset management company may not be lower than the greater of (1) RMB 30 million in cash and (2) 0.1% of the insurance funds it manages, provided that the minimum capital is not required to exceed RMB 50 million.

 

Business operations. In accordance with newly implemented tentative regulations of insurance asset management companies, an insurance asset management company may conduct the following businesses:

 

  managing and operating insurance funds of its shareholders;

 

  managing and operating funds of insurance companies controlled by its shareholders;

 

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  managing and operating its own insurance funds; and

 

  other businesses otherwise approved by the CIRC or other departments of the State Council.

 

Insurance funds may only be invested in bank deposits, Chinese treasury bonds, Chinese government agency bonds and other investments as approved by the State Council. Insurance companies and insurance asset management companies are required to appoint an independent custodian in connection with the funds being managed.

 

Shareholding restrictions. At least 75% of shares of an insurance asset management company must be owned by domestic insurance companies, and at least one of the shareholders of an insurance asset management company must be an insurance company or insurance holding company satisfying specified requirements.

 

Management of Pension Funds. According to newly implemented trial measures on management of enterprise pension funds, subject to relevant regulatory approvals, insurance companies can become the trustee of, and insurance asset management companies can become the investment managers for, enterprise pension funds.

 

Investment risk control. Both insurance companies and asset management companies must establish structures, arrangements and measures to recognize, assess, manage and control investment risks. Members of senior management may not be responsible for the management of departments in charge of investment decisions, investment transactions and risk controls at the same time. Branches of insurance companies may not manage insurance funds. Insurance asset management companies must arrange for separate investment managers to manage their own funds and the insurance funds from other insurance companies, as well as insurance funds from an insurance company that are of a different nature.

 

Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries

 

Insurance agents are business entities or individuals which or who act on behalf of an insurance company in respect of insurance matters. An insurance company is prohibited from using any agent not licensed by the CIRC to market its insurance products, and is responsible for the acts of its agents when the acts are within the scope of their agency. Licensed insurance agencies fall into three groups: dedicated agencies, non-dedicated agencies and individual agents.

 

A dedicated agency is a partnership or company organized under the PRC company law whose principal business is to act as an agent of insurance companies. Dedicated agencies are subject to minimum capital and other requirements, and their business is generally limited to insurance-related activities.

 

A non-dedicated agency is a business entity whose principal business is other than as an insurance agency. To receive a license, the agency business must have a direct relationship with its principal business, which the CIRC has interpreted as permitting banks and post offices to act as non-dedicated insurance agencies.

 

An individual agent is an individual acting as agent for an insurer. To receive a license from the CIRC, the individual is required to hold a CIRC qualification certificate issued by the CIRC. An individual agent is also required to register with and obtain a business license from the agent’s local bureau of industry and commerce. In addition, the individual must not have committed any criminal offense or violation of any financial or insurance law or regulation and must be engaged in the insurance agency business full time. An individual insurance agent is permitted to act on behalf of only one life insurance company.

 

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Essentially none of our exclusive agents qualifies as an “individual agent” within the meaning of the insurance law because they do not meet the dual requirements of holding a CIRC qualification certificate and a business license from the local bureau of industry and commerce. We believe this situation is shared by all major life insurance companies in China. Approximately 63.5% of our exclusive agents hold a CIRC qualification certificate, and essentially none has a business license. In May 2004, the CIRC issued a circular requiring insurance companies to take effective measures in carrying out the qualification certification requirement. Furthermore, no insurance company may issue a company certificate to any person, identifying that person as its sales representative, if the person does not have a CIRC qualification certificate. Pursuant to the circular, we are also required to take appropriate measures to improve both participation of our agents taking the qualification examination and their success rate, and to report to the CIRC on a quarterly basis the percentage of our agents holding a CIRC qualification certificate. We are working with our agents who are not yet CIRC-qualified to obtain the CIRC qualification certificate. It is our understanding that the SAIC does not have procedures in place to effect the registration and licensing of individual insurance agents. See “Item 3. Key Information—Risk Factors—Risk Relating to the PRC Life Insurance Industry—All of our agents are required to be qualified and to be registered as business entities. If these qualification and registration requirements are enforced or result in policyholders canceling their policies, our business may be materially and adversely affected”.

 

All insurance agencies and agents are required to enter into agency agreements that specify the duration of the agency; the amount of the agency fee and the method of payment; the scope of the agency, including the insurance products to be marketed; and other relevant matters. Absent specific CIRC approval, insurance agents are prohibited from signing insurance and annuity products on behalf of the insurance companies they represent. None of our agents is authorized to sign insurance policies or annuity contracts for us.

 

Insurance agencies are required to open special accounts for the handling of funds that they hold or collect for the insurance companies they represent. They may not engage in the following activities: dealing with unauthorized insurers or insurance intermediaries, engaging in activities beyond their authorized business scope or geographical area, causing injury to the rights of the insurance companies they represent, spreading rumors or otherwise injuring the reputation of others in the insurance industry, misappropriating the funds of the insurance companies they represent, defrauding insurance customers through false or misleading representations or material omissions, using undue influence to induce insurance customers to purchase insurance, or defrauding the insurance companies they represent through collusion with the insured or the insurance beneficiary. In addition, dedicated insurance agencies are subject to various reporting requirements, including submission of annual financial reports, and are subject to supervision and examination by the CIRC.

 

Insurance brokers, who represent individuals and companies purchasing insurance, and other intermediaries are subject to similar regulatory requirements regarding their activities. Among other things, they are subject to supervision and examination by the CIRC, and fundamental corporate changes must be approved by the CIRC. Only companies organized under the PRC company law and meeting the requirements set by the CIRC are authorized to act as insurance brokers.

 

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ORGANIZATION STRUCTURE

 

LOGO

 

List of Significant Subsidiaries

 

Name of Subsidiary


 

Jurisdiction of Incorporation


 

Proportion of Ownership Interest

Owned by China Life


LOGO

  The People’s Republic of China   60%

 

China Life Insurance Asset

Management Company Limited

 

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PROPERTY, PLANTS AND EQUIPMENT

 

Properties

 

As of December 31, 2003, we owned and leased 3,452 and 2,597 properties respectively, and had 59 properties under construction.

 

Owned Properties

 

In connection with the restructuring, CLIC transferred 3,443 properties, including our headquarters in Beijing, China, to us. These 3,443 properties comprise a total gross floor area of approximately 3,997,000 m2 and are situated on 2,978 parcels of land with a total site area of approximately 3,145,000 m2. Approximately 95% of such parcels and buildings have been registered in our name. We and CLIC are still in the process of applying to register the remaining parcels of land and buildings owned by us in our name.

 

Of the transferred properties, 372 properties owned by us are leased to independent third parties. The remaining properties are mainly occupied by us as office premises.

 

As part of the restructuring, CLIC has undertaken to us (1) to have the land use right certificates and building ownership certificates in respect of all 3,443 properties and all 2,978 parcels of land registered under our name as soon as possible; (2) to be responsible for all costs, expenses, and claims incurred and (3) to indemnify us against all losses, claims, charges or expenses arising from any failure to obtain the land use right certificates and/or building ownership certificates. At the time of the restructuring, our PRC legal counsel, King & Wood, advised us that it was not aware of any material legal impediment to the transfer from CLIC to us of the land use right certificates and building ownership certificates. Upon completion of the transfer of all such land use right certificates and building ownership certificates to us, we will have lawful rights to occupy, let, transfer and mortgage all of these parcels of land and properties. If we and/or CLIC cannot obtain the relevant land use right certificates and/or building ownership certificates, our management believes that there will be no material financial impact on us as CLIC has undertaken to indemnify us against all losses or expenses arising out of or in connection with a failure to obtain the relevant land use right certificates and/or building ownership certificates.

 

The land was valued at RMB 10,956 million as at September 30, 2003 by Sallmanns (Far East) Limited.

 

Leased Properties

 

We lease office space for various branches and offices located throughout China. We lease office space located in China under a property leasing agreement entered into between CLIC and us, under which CLIC agreed to lease to us (1) 833 properties owned by CLIC, its subsidiaries and affiliates, which we refer to as the CLIC owned properties, with an aggregate gross floor area of approximately 637,000 m2; and (2) 1,764 properties which CLIC is entitled to sublet, which we refer to as the CLIC leased properties, with an aggregate gross floor area of approximately 1,060,000 m2. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Property Leasing Agreement”.

 

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At the time of the restructuring, CLIC held building ownership certificates in respect of 408 CLIC owned properties with a total gross floor area of approximately 352,000 m2 and, for the remaining 425 CLIC owned properties with a total gross floor area of approximately 285,000 m2, CLIC is in the process of completing the legal procedures in order to obtain the legal title to such CLIC owned properties. Further, CLIC has undertaken to us (1) to have the building ownership certificates in respect of these 425 CLIC owned properties registered under its name as soon as possible; (2) to be responsible for all costs, expenses and claims incurred and (3) to indemnify us against all losses, claims, charges or expenses arising from our occupation of these CLIC owned properties.

 

For the 1,764 CLIC leased properties which are initially leased by CLIC from independent third parties and then subletted to us, CLIC has undertaken to indemnify us against all losses or claims arising from our use of any of these subletted properties.

 

Properties under Construction

 

On some of the properties transferred to us, there are properties under construction situated on the parcels of land. As part of the restructuring, CLIC has undertaken to us (1) to have the building ownership certificates in respect of all properties under construction registered under our name upon completion of construction as soon as possible; (2) to obtain the necessary construction approvals in respect of all properties under construction as soon as possible; (3) to be responsible for all costs, expenses and claims incurred and (4) to indemnify us against all losses, claims, charges or expenses arising from any failure to obtain these construction approvals and/or building ownership certificates.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

 

You should read the following discussion and analysis in conjunction with the audited consolidated financial statements and accompanying notes included elsewhere in this annual report. For purposes of the following discussion, references to our “predecessor” mean CLIC, as our predecessor company prior to the restructuring, for the periods in question. In general, the financial results discussed in this section relate to historical consolidated financial data, including both the transferred policies and the non-transferred policies. When financial results discussed in this section relate to the transferred policies only or to our pro forma financial results, specific reference is made to that fact.

 

Overview

 

Restructuring

 

We were formed in connection with CLIC’s restructuring. In connection with the restructuring, CLIC transferred to us (1) all long-term insurance policies (policies having a term of more than one year from the date of issuance) issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999 and either (i) recorded as a long-term insurance policy as of June 30, 2003 in a database attached to the restructuring agreement as an annex or (ii) having policy terms for group supplemental medical insurance (fund type), (2) stand-alone short-term policies (policies having a term of one year or less from the date of issuance) issued on or after June 10, 1999 and (3) all riders supplemental to the policies described in clauses (1) and (2) above, together with the reinsurance contracts specified in an annex to the restructuring agreement. We refer to these policies as the “transferred policies”. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring”. All other insurance policies as of June 30, 2003 were retained by CLIC. We refer to these policies as the “non-transferred policies”. We refer to the insurance policies issued by us following the restructuring as the “new policies”.

 

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The restructuring was effected through a restructuring agreement entered into with CLIC on September 30, 2003, with retroactive effect to June 30, 2003. Pursuant to PRC law and the restructuring agreement, the transferred policies were transferred to us as of June 30, 2003; however, for accounting purposes the restructuring is treated as having occurred on September 30, 2003. As of June 30, 2003, we assumed all obligations and liabilities of CLIC under the transferred policies. CLIC continues to be responsible for its liabilities and obligations under the non-transferred policies following the restructuring. The business constituted by the policies and assets transferred to us and the obligations and liabilities assumed by us and the business constituted by the policies, assets, obligations and liabilities retained by CLIC were, prior to the restructuring, under common management from a number of significant aspects. Therefore, our historical financial statements for each of the years ended and as of December 31, 2001 and 2002 present the financial results of our predecessor company, CLIC. Our consolidated balance sheet data and profit and loss accounts data as of and for the year ended December 31, 2003 reflect the restructuring as having occurred on September 30, 2003.

 

Immediately following the restructuring, CLIC became our sole shareholder. Following our global offering in December 2003, CLIC became and remains our controlling shareholder, holding approximately 72.2% of our voting shares. We have been providing management and other services to CLIC, including the administration of the run-off of the non-transferred policies, the management of the investment assets retained by CLIC (through our asset management joint venture described below) and various other services for CLIC, for which we are paid fees. For a description of the restructuring and the other arrangements entered into in connection with the restructuring, see “Item 4. Information on the Company—History and Development of the Company—Our Restructuring” and “Item 7. Major Shareholders and Related Party Transactions”.

 

Overview of our Business

 

We are the leading life insurance company in China. We provide a broad range of insurance products, including individual life insurance, group life insurance, accident insurance and health insurance products. We had more than 48 million individual and group life insurance policies, annuity contracts and long-term health insurance policies in force as of December 31, 2003. We also offer accident and short-term health insurance policies to individuals and groups.

 

We report our financial results according to the following three principal business segments:

 

  Individual life insurance, which offers participating and non-participating life insurance and annuities to individuals. Our individual life insurance business comprises long-term products, meaning products having a term of more than one year at the date of their issuance.

 

  Group life insurance, which offers participating and non-participating life insurance and annuities products to companies and institutions. Our group life insurance business comprises long-term products.

 

  Accident and health insurance, which offers accident insurance and health insurance to individuals and groups. Our accident insurance business comprises short-term products, meaning products having a term of one year or less at the date of their execution. Our health insurance business comprises both short-term products and long-term products.

 

In addition, an asset management joint venture established by us and CLIC, manages our investment assets and, separately, substantially all of those of CLIC, pursuant to two asset management agreements, one with us and one with CLIC. See “Item 4. Key Information on the Company—Business Overview—Asset Management Business”. We own 60% of the joint venture, with CLIC owning the remaining 40%.

 

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Financial Overview of our Business

 

The historical financial statements included beginning on page F-1 of this annual report represent the consolidated results of CLIC and its subsidiaries (including both the transferred policies and the non-transferred policies) through September 30, 2003, the date on which the restructuring is deemed to have occurred for accounting purposes.

 

On a pro forma basis after giving effect to the restructuring, we had total gross written premiums and policy fees of RMB 52,925 million (US$6,394 million) and net profit of RMB 5,857 million (US$708 million) for the year ended December 31, 2003. Our principal business segments had the following pro forma results:

 

  Individual life insurance had pro forma total gross written premiums and policy fees of RMB 42,288 million (US$5,109 million) in 2003, principally reflecting an increase in sales of whole life products and growth in policy fees. These were offset in part by a decrease in sales of endowment products due to a shift toward participating endowment products, which are classified as investment products.

 

  Group life insurance had pro forma total gross written premiums and policy fees of RMB 432 million (US$52 million) in 2003, principally reflecting a shift away from whole life products in favor of products which are classified as investment products, which led to a decrease in premiums from risk-type products, as well as a reduction in the level of our policy fees on some of our products due to increased number of competitors and intense competition on pricing in the group life insurance market.

 

  Accident and health insurance had pro forma total gross written premiums of RMB 10,205 million (US$1,233 million) in 2003, principally reflecting a slight decrease in sales of accident insurance due to increased competition and growth in premiums in our short-term health insurance business.

 

The business of CLIC, our predecessor, was characterized by rapid growth of premium income over the past several years, particularly due to increased sales of participating risk-type products. Our historical results, which present the historical results of our predecessor for the periods presented below, until September 30, 2003, the date on which the restructuring is treated as having occurred for accounting purposes, reflect the continuing performance of policies that were issued prior to June 10, 1999. Many of these policies paid guaranteed fixed rates of return that, due to declining interest rates, came to be significantly higher than the rates of return on investment assets. This created a “negative spread”, where the investment return fell below the rate our predecessor had committed to pay on those policies. The policies issued by our predecessor on or after June 10, 1999, which have been transferred to us in the restructuring, were priced at significantly lower guaranteed rates, in line with the 2.50% cap established by the CIRC. We and CLIC have not incurred negative spread on these policies, as the average investment returns we and CLIC have been able to generate have been higher than the guaranteed rates.

 

Our predecessor did not prepare financial information in accordance with H.K. GAAP or U.S. GAAP prior to the financial year ended December 31, 2000. Accordingly, we first prepared financial information in accordance with H.K. GAAP and U.S. GAAP as of January 1, 2000. As of this date, all assets and liabilities were measured in accordance with the requirements of H.K. GAAP and U.S. GAAP, except that, as explained in note 2(n) to the consolidated financial statements included in this annual

 

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report, certain property on hand as of that date was stated on the basis of a valuation performed as of January 1, 2000. Hong Kong GAAP does not have specific guidance on the accounting treatment of long-term insurance contracts and we have adopted U.S. accounting rules in this regard in the preparation of the financial information. Preparation of H.K. GAAP and U.S. GAAP financial information as of January 1, 2000 required us to analyze insurance contracts in force at December 31, 1999 between traditional insurance contracts accounted for pursuant to the provisions of Statement of Financial Accounting Standards No. 60 “Accounting and Reporting by Insurance Enterprises” (SFAS 60) and the provisions regarding limited-payment contracts of Statement of Financial Accounting Standards No. 97 “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for the Realized Gains and Losses from the Sale of Investments” (SFAS 97), and investment-type contracts accounted for in accordance with the provisions regarding investment-type contracts of SFAS 97. The liability for policyholder account balances for contracts accounted for pursuant to SFAS 97 was equal to the policy account values. Account values consisted of an accumulation of gross premium payments less loadings for expenses, mortality and profit plus credited interest. No asset in respect of deferred policy acquisition costs was recorded for investment contracts issued prior to June 10, 1999, since these contracts carried guaranteed interest rates in excess of the investment return obtainable at December 31, 1999 and the asset was therefore not considered recoverable. Interest continued to be credited on these contracts at guaranteed rates which mainly ranged from 5.0% up to 8.8% and up to 11.0% for a small number of policies, whereas CLIC’s investments yielded approximately 3.4% for 2003, 3.8% in 2002, and 4.1% in 2001. As a result, the negative spread on these policies has continued to negatively affect results attributable to these policies in the periods presented below.

 

The liability for contracts accounted for pursuant to SFAS No. 60 and provisions regarding limited-payment contracts of SFAS No. 97 was based on best-estimate assumptions of investment returns, mortality, lapse and policy administration expenses. As of the beginning of the year ended December 31, 2000 there was a premium deficiency in respect of our predecessor’s aggregate traditional insurance business in a loss making situation due to negative spreads between the interest rate guaranteed to policyholders on policies issued prior to June 10, 1999 and our predecessor’s estimate of future investment returns of 3.8% on this business. Accordingly, for policies issued prior to June 10, 1999, the best estimate assumptions were based on our predecessor’s best estimate assumptions determined as of December 31, 1999, with no provision for adverse deviation so as not to create future profits. Mortality and morbidity rates, which vary by age of the insured, and lapse rates, which vary by contract type, were based on expected experience at December 31, 1999. This was based on the results of an analysis of our predecessor’s actual mortality, morbidity and lapse experience incurred in the years 1999 through 2002. This experience was found to be comparable in all such years. Based on the findings of a subsequent study of our experience, which included a breakdown of the lapse experience of our products in a more detailed way than before, and our knowledge of the business, the mortality assumption and the morbidity assumption remain unchanged for policies issued in 2003, but the lapse assumption for certain types of policies issued in 2003 were revised. In setting the mortality assumption, mortality experience was compared to and expressed as a percentage of the “CL” series of life tables. These tables were compiled by the People’s Insurance Company of China in 1994 and 1995 and issued by the People’s Bank of China, which was the principal regulatory authority of the insurance industry at the time. The tables are based on policy samples drawn from 43 subsidiaries and branches and the mortality experience of these sample policies during the period January 1, 1990 to December 31, 1993 were studied. Currently all life insurance companies in China are required to use these tables for product pricing.

 

Factors Affecting Our Results of Operations

 

Revenues, Expenses and Profitability

 

We earn our revenues primarily from:

 

  insurance premiums from the sale of life insurance policies and annuity contracts, including participating and non-participating policies and annuity contracts with life contingencies, as well as accident and health insurance products. Net premiums earned accounted for 77.5% of total revenues in 2003.

 

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  policy fees for investment-type contracts. Policy fees accounted for 7.7% of total revenues in 2003.

 

  investment income and realized and, in some cases, unrealized gains and losses from our investment assets. Net investment income and net realized and unrealized gains and losses accounted for 13.9% of total revenues in 2003.

 

In addition, following the restructuring, we receive service fees for policy management services we provide to CLIC and, prior to incorporation of the asset management joint venture, we received asset management fees for asset management services we provided to CLIC. Since incorporation of the asset management joint venture in November 2003, CLIC has paid asset management fees to the asset management joint venture, which is a subsidiary of ours. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Policy Management Agreement”.

 

Our operating expenses primarily include:

 

  insurance benefits provided to our policyholders, accident and health claims and claim adjustment expenses;

 

  increases in future policyholder benefits;

 

  amortization of deferred policy acquisition costs;

 

  underwriting and policy acquisition costs;

 

  policyholder dividends and participation in profits;

 

  interest credited to policyholder contract deposits; and

 

  administrative and other expenses.

 

In addition, following the restructuring, we pay rent to CLIC on the properties we lease from it.

 

Our profitability depends principally on our ability to price and manage risk on insurance and annuity products, our ability to maximize the return on investment assets, our ability to attract and retain customers, and our ability to manage expenses. In particular, factors affecting our profitability include:

 

  our ability to design and distribute products and services and to introduce new products which gain market acceptance on a timely basis;

 

  our ability to price our insurance and investment products at levels that enable us to earn a margin over the costs of providing benefits and the expense of acquiring customers and administering those products;

 

  our returns on investment assets;

 

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  our mortality and morbidity experience;

 

  our lapse experience, which affects our ability to recover the cost of acquiring new business over the lives of the contracts;

 

  our cost of administering insurance contracts and providing customer services;

 

  our ability to manage liquidity and credit risk in our investment portfolio and to manage duration risk in our asset and policy portfolios through asset-liability management; and

 

  changes in regulations.

 

In addition, other factors, such as competition, taxes, securities market conditions and general economic conditions, affect our profitability.

 

Interest Rates

 

For many of our long-term life insurance and annuity products, we are obligated to pay a minimum interest or crediting rate to our policyholders or annuitants. These products expose us to the risk that changes in interest rates may reduce our “spread”, or the difference between the rate of return we are able to earn on our investments intended to support our insurance obligations and the amounts that we are required to pay under the policies. The minimum rate we pay is established when the product is priced, subject to a cap set by the CIRC and which may be adjusted from time to time. Currently, the CIRC cap is 2.50%. If the rates of return on our investments fall below the minimum rates we guarantee, our profitability would be adversely affected. Due to China’s recent fast growing economy, the Chinese government may take certain measures, including raising interest rates, in an effort to ensure sustainable economic growth. If the interest rates were to increase, but the CIRC did not raise the cap, sales of some of our products, including our non-participating investment-type products, could be adversely impacted. An increase in guaranteed rates caused by a rise in the CIRC cap may lead to an increase in surrenders and withdrawals of our existing products which offer rates lower than the new rates.

 

Interest rates also affect our returns on investment assets, a large proportion of which is held in negotiated bank deposits and fixed maturity securities. In a declining interest rate environment, interest rate changes expose us to reinvestment risks. In a rising interest rate environment, higher rates may yield greater interest income but also may generate unrealized capital losses for fixed maturity securities designated as trading, causing us to incur realized capital losses for securities we reinvest or requiring us to take an impairment if the market value of fixed maturity securities declines for an extended period.

 

Sustained levels of high or low interest rates also may affect the relative popularity of our various products. For example, the recent popularity of our participating products is partially driven by the protracted low interest rate environment in China and the 2.50% cap set by the CIRC on the guaranteed rates of return we may apply. The investment nature of the product, including the enhanced yield by means of dividends, has proven to be attractive to China’s insurance buyers.

 

Investments

 

As an insurance company, we are limited by Chinese law and regulations in the types of assets in which we may invest policyholder funds. As prescribed by China’s insurance law, we are limited to investing insurance premiums, deposits and other funds we receive primarily in term deposits; fixed maturity securities, including Chinese treasury bonds, Chinese government agency bonds and corporate bonds issued by Chinese companies and meeting specified criteria; and securities investment funds

 

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primarily invested in equity securities issued by Chinese companies and traded on China’s securities exchanges. We also may participate in bond repurchase activities through domestic inter-bank repurchase markets and repurchase exchange markets. We currently are prohibited from investing in other securities without the CIRC’s approval. However, we understand that the CIRC is considering easing these restrictions in the future. If the CIRC does so, this may permit us to invest in additional asset classes such as mortgage-backed securities, infrastructure project financings, foreign fixed-income securities and direct investment in China’s securities markets. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. Our only material concentration risk relates to our investments in Chinese government securities.

 

The limitations on the types of investments we are permitted to make affect the investment returns we are able to generate and subject us to various risks that we would not, or to a lesser extent, be subject to if we were able to invest in a wider array of investments. In particular, the limited availability of long-duration investment assets in the markets in which we invest has resulted in the duration of our assets being shorter than that of our liabilities. We believe that with the gradual easing of the investment restrictions imposed on insurance companies in China, our ability to match the duration of our assets to that of our liabilities will improve. We also seek to reduce the risk of duration mismatch by focusing on product offerings whose maturity profiles are in line with the duration of investments available to us in the prevailing investment environment.

 

Our results can be materially affected by investment impairments, although there has been no material impairment charge recorded in our consolidated profit and loss accounts. The following table sets forth impairment charges, which are included in net realized gains and losses, for the years ended December 31, 2001 2002 and 2003.

 

     For the year ended
December 31,


 
     2001

    2002

    2003

 
     (RMB in millions)  

Fixed maturity securities

   —       (59 )   (7 )

Equity securities

   (11 )   (2 )   0  
    

 

 

Total

   (11 )   (61 )   (7 )
    

 

 

 

Impairments in 2002 relating to a government bond deposited with a local broker that encountered financial difficulties in 2002, resulted in an impairment charge of RMB 36 million. This is an isolated case.

 

Non-trading securities were comprised of the following asset classes as of December 31, 2002 and 2003.

 

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     As of December 31,

     2002

   2003

     Cost or
amortized
cost


   Estimated
fair value


   Cost or
amortized
cost


   Estimated
fair value


     (RMB in millions)

Fixed maturity securities

                   

Government bonds

   49,661    50,979    40,449    39,477

Government agency bonds

   20,615    20,815    27,234    26,817

Corporate bonds

   3,212    3,323    4,508    4,310
    
  
  
  

Subtotal

   73,488    75,117    72,191    70,604
    
  
  
  

Equity securities

                   

Common stocks, unlisted

   957    957    —      —  

Funds

   7,523    7,144    5,422    5,550
    
  
  
  

Subtotal

   8,480    8,101    5,422    5,550
    
  
  
  

Total

   81,968    83,218    77,613    76,154
    
  
  
  

 

The total amount of non-trading securities as of December 31, 2003 was lower than the total amount of non-trading assets as of December 31, 2002 because a portion of such assets were retained by CLIC in accordance with the terms of the restructuring, which was treated as having occurred on September 30, 2003.

 

We had unrealized gains of RMB 608 million, RMB 2,114 million and RMB 2,275 million and unrealized losses of RMB 2,067 million, RMB 864 million and RMB 44 million as of December 31, 2003, 2002 and 2001. The total unrealized losses as of December 31, 2003 were 2.7% of total non-trading securities. The total unrealized losses as of December 31, 2002 and 2001 were less than 1% of total non-trading securities at such dates. These unrealized losses as of December 31, 2003, 2002 and 2001 related primarily to valuation adjustments to government and government agency bonds. Valuation adjustments to securities investment funds also contributed substantially to the unrealized losses as of December 31, 2002. We made substantially all of the revaluation adjustments on the basis of quoted market prices at of the relevant balance sheet dates.

 

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The following tables set forth the length of time that each class of securities has continuously been in an unrealized loss position as of December 31, 2003 and 2002.

 

     As of December 31, 2003

 
     0-6
months


    7-12
months


    12-24
months


   Total

 
     (RMB in millions)  

Fixed maturity securities

                       

Unrealized losses

   (1,935 )   (125 )   —      (2,060 )

Carrying amounts

   48,116     2,297     —      50,413  

Unrealized losses as a percentage of carrying amounts

   4.02 %   5.44 %   —      4.08 %

Equity securities

                       

Unrealized losses

   (5 )   (2 )   —      (7 )

Carrying amounts

   895     421     —      1,316  

Unrealized losses as a percentage of carrying amounts

   0.56 %   0.48 %   —      0.53 %

Total

                       

Total unrealized losses

   (1,940 )   (127 )   —      (2,067 )

Total carrying amounts

   49,011     2,718     —      51,729  

Unrealized losses as a percentage of carrying amounts

   3.96 %   4.67 %   —      4.00 %

 

     As of December 31, 2002

 
     0-6
months


    7-12
months


    12-24
months


    Total

 
     (RMB in millions)  

Fixed maturity securities

                        

Unrealized losses

   (472 )   (8 )   (2 )   (482 )

Carrying amounts

   25,078     1,187     13     26,278  

Unrealized losses as a percentage of carrying amounts

   1.88 %   0.67 %   15.38 %   1.83 %

Equity securities

                        

Unrealized losses

   (382 )   —       —       (382 )

Carrying amounts

   6,261     —       —       6,261  

Unrealized losses as a percentage of carrying amounts

   6.10 %               6.10 %

Total

                        

Total unrealized losses

   (854 )   (8 )   (2 )   (864 )

Total carrying amounts

   31,339     1,187     13     32,539  

Unrealized losses as a percentage of carrying amounts

   2.73 %   0.67 %   15.38 %   2.66 %

 

In determining whether a decline in value of a non-trading or held-to-maturity security is other-than-temporary and an impairment charge should be recorded in the income statement, our management considers a range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the securities and in assessing the prospects for near term recovery. Inherent in the evaluation are assumptions and estimates about the operations of the issuer and its future earnings potential. The actual results may differ from the assumptions and estimates. We principally consider the following factors in making an evaluation about impairment:

 

  the length of time and the extent to which the market value has been below amortized cost;

 

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  the potential for impairments of securities when the issuer is experiencing significant financial difficulties; and

 

  considerations specific to an industry sector.

 

Should we conclude that an unrealized loss is other-than-temporary, the loss is recorded in the income statement but there is no impact on shareholders’ equity as the securities are accounted for at estimated fair value, with unrealized losses included in reserves until they are realized or determined to be other-than-temporary. See “—Critical Accounting Policies”.

 

As of December 31, 2003, our total investment assets were RMB 279,248 million (US$33,739 million) and the investment yield for the year ended December 31, 2003 was 3.4%. The investment yield for this period (which includes the investment yield for investments held by CLIC through September 30, 2003) primarily reflected a relatively higher level of investments in lower-yielding resale agreements and bank deposits due to limited market capacity. As of December 31, 2002, CLIC’s total investment assets, before giving effect to the restructuring, were RMB 266,463 million (US$32,194 million) and the investment yield for the year ended December 31, 2002 was 3.8%. The investment yield for this period primarily reflected a shift away from resale agreements, which have a comparatively low yield, as well as poor conditions in the equity markets. As of December 31, 2001, CLIC’s total investment assets, before giving effect to the restructuring, were RMB 188,869 million and the investment yield for the year ended December 31, 2001 was 4.1%. The investment yield for this period primarily reflected a comparatively high investment yield in the Chinese equity markets that year.

 

For 2001 and 2002, we calculated the investment yield for a given year by dividing the investment income for that year by the average of the ending balance of that year and the previous year. Yields for 2003 were calculated as the weighted average (weighted according to the amount of investment income for the relevant periods) of the yields for the first three quarters of CLIC (without giving effect to the restructuring) and the fourth quarter China Life of 2003. The yields for such periods were calculated by dividing the investment income of CLIC or China Life for the relevant nine or three-month period by the average of the ending balances for that nine or three-month period and the previous nine or three-month period.

 

Mix of Products

 

The following table sets forth, for the transferred and new policies, premium and deposit information as of or for the years ended December 31, 2001, 2002 and 2003 by type of product in our individual life insurance business, group life insurance business and accident and health insurance business.

 

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As of or for the year ended

December 31,


   Compound
annual
growth rate


 
     2001

   2002

   2003

   2003

   (2001-2003)

 
     RMB    RMB    RMB    US$       
     (in millions)       

Individual life insurance business

                          

Whole life and term life insurance:

                          

Gross written premiums

   9,111    12,289    16,292    1,968    33.7 %

Endowment:

                          

Gross written premiums

   11,925    18,169    16,998    2,054    19.4 %

Deposits

   9,839    50,428    75,619    9,136    177.2 %

Annuities: