New China Life Insurance -- A Thousand Days of Struggle

At the end of 2009, the full-length drama surrounding shareholder rights for New China Life Insurance Co. Ltd. finally ended. On December 28, after long delays the insurer established a new board of directors. Then on January 14, New China Life Insurance Asset Management Co., the company in charge of New China Life's 180 billion yuan in assets, appointed a new management team. The era of the long-term absence of a board of directors, with management, shareholders and even regulators sharing governance responsibility, was finally over.

Four years ago, during his tenure as Chairman of New China Life, Guan Guoliang misappropriated company funds and disguised the holding company's operating exposure, prompting some shareholders to demand Guan's resignation, causing a stir in the entire insurance industry. A few months later, controversy surrounded the Guan's fate, dividing shareholders into two factions and leading to a stalemate. But by the middle of winter in 2006, Guan was removed from his post, a victory for the "anti-Guan faction" in the first of what would be a series of battles.

After ousting Guan, New China Life entered into a long period of both internal and external strife. In November 2007, because Guan was unable to return fully the funds he diverted, a judicial investigation was launched against him. At the same time, five of New China Life's problematic shareholder equity stakes were acquired by the China Insurance Protection Fund for 2.7 billion yuan.

In November 2008, Guan was charged in court with embezzlement and misappropriation, while the controversy surrounding the power struggle for control over New China Life had still not concluded. The past problems caused by Guan's actions had not been completely resolved, and the restructuring of the company's corporate governance system was almost at a standstill. For a long period of time various factions could not reach consensus on the establishment of a new board of directors or the appointment of a new management team. The company budget and salary allocations were not operating normally and financial statements could not be issued on time. Moreover, there was no way for the company to identify its assets and liabilities, and long-term insolvency issues seriously constrained business development, not to mention long-term planning and raising funds for a public listing.
   
Another year passed and under special approval from the State Council, the China Insurance Protection Fund transferred its 38.8 percent equity stake in New China Life to Central Huijin Investment Ltd., a move viewed as aiming to balance out power on all sides. But the arrival of Central Huijin hasn't been as smooth as some had hoped. After over nearly nine months of negotiations, in December 2009, Central Huijin finally agreed to purchase the equity stake in New China Life for a price of only four billion yuan. As a result, the need for a newly appointed board of directors was only recently put back on the agenda.

The chess game between shareholders, management and regulators is rooted in the company's lack of corporate governance. By taking a broad look at New China Life's turbulent history, in reality it was difficult for each side to reach a balance between standardizing business practices and adapting to the legal environment. Players in the game all either actively or passively went beyond their own authority.

With the arrival of Central Huijin, for a time it seemed as if the clouds had parted and the sun was coming out. New China Life had nominally realized the rebuilding of its governing structure. Even so, the unresolved problems in the company's history will certainly bring about new management challenges for the company in the future. Lacking a clear power structure with checks and balances, nearly all Chinese enterprises will be forced to accept a universal fate. New China Life spent four years battling this problem, and only time will tell whether or not future shareholders, management and regulators can fully bring about the implementation of the new corporate governance structure.
  
The Past and the Present

New China Life was established in 1996 with 500 million yuan in registered capital. At that time seven out of the 15 shareholders each held stakes of over 10 percent, including the Orient Group and Baosteel Group. Later the entry of Zurich Insurance Group as the leading shareholder boosted registered capital to 1.2 billion yuan.

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Guan, a former Orient Group CFO and Vice President, was only 38 years old when New China Life was established. But due to his exceptional talent and keen business sense, in 1998 he was appointed as Chairman of New China Life.

Thereafter, Guan gradually consolidated his power and increased control over the company. On one hand, Guan's diligence and leadership helped New China Life to become China's fourth largest life insurance company. On the other hand, Guan's repeated transfers of company capital exceeded the allowable range regulatory authorities placed on insurance capital. Guan used his friends and relatives to set up project companies and invest in numerous real estate projects, creating a complicated web of relationships with various creditors. These projects enabled New China Life to report profits on its books year after year, but the rights and interests for this massive amount of invisible assets were not clear, and the risk associated with several billions yuan in capital all hinged on just one person. 

An audit from Price Waterhouse Coopers (PwC) later showed that during the time Guan controlled New China Life, over 13 billion yuan in capital flowed out of the company. By the time when the China Insurance Regulatory Commission (CIRC) conducted a full investigation, there was still 2.9 billion yuan in capital that had not yet been returned. PwC has been New China Life's external auditing agency for a number of years. However, due to incomplete information, so far they have not been able to provide any auditing advice on the company's past annual reports.

In order to ensure absolute control over New China Life, Guan planned to push forward several transactions by using funds diverted from the company and pooling together shares from other shareholders. In 2006, before Guan broke ties with external shareholders, he and his partners collectively held more than 40 percent of the company. 

However, Guan's actions led to strong opposition from other shareholders, and the power struggle between the "anti-Guan" and "pro-Guan" factions gradually escalated.

In September 2006, the CIRC launched an investigation to look into irregularities with New China Life's capital operations. Because Guan could not promptly repay the diverted funds, three months later he was removed from his position as Chairman. Later on February 2, 2009, Guan was officially detained on the charges of misappropriation and embezzlement of funds.

Facing repeated delays in which Guan and other problematic shareholders could not fully repay the diverted funds, the CIRC announced May 24, 2007 that the newly established China Insurance Protection Fund would purchase the shares of the five problematic shareholders for a price of 2.73 billion yuan. The deal would also deduct funds owed to the company from the capital of problematic shareholders and return a total of 1.45 billion yuan in diverted funds to New China Life.

However, by this time the immense scale of assets that Guan had created by diverting funds from the company had not yet been strictly investigated. A shareholder representative told Caixin: "The deal was essentially selling New China Life's shares at a premium. Repaying the originally misappropriated funds was equivalent to tacitly approving of Guan's illegal activities."

Later it would seem as if this method for resolving the lingering problems created too many conflicts. Was the hole that Guan created in New China Life only worth 260 million yuan? How should the company handle the 1.45 billion yuan in debt? Does New China Life have any additional liabilities that have not yet come out in the open? Should the diverted funds be categorized as "short-term loans"? This series of questions have become obstacles impeding further reorganization and have delayed the process of normalization for New China Life.

The "Caretaker" Era

Amidst the "flames of war" at the shareholder meetings, New China Life's insurance business and investment operations have been through several. On the positive side, data indicates that the company has not only reversed the downward trend in insurance premiums, over the past three years the scale of premiums has actually consistently surpassed benchmarks. On the other hand, the company's asset management business, lacking Guan's "resourcefulness" at going around the law and diverting company funds, has suffered a disastrous decline.

At the end of 2009, New China Life's total assets were valued at nearly 190 billion yuan, of which 95 percent are entrusted to New China Asset Management Co. to carry out investments. After Guan was removed from his post, innovative ideas for investment ceased and capital was primarily invested into the stock and bond markets, leading to lackluster results.

A high level executive at New China Asset Management said that while the company had negative returns on investments in 2008 and lost 1.3 billion yuan, the company still "came out even" in terms of overall accounts.

Faced with over two years of barely passable investment results, New China Life employees reported on numerous occasions that the company's asset management team lacked adequate professional standards. Employees were also dissatisfied with the way high level executives at the company were able to purchase expensive automobiles, sign up for expensive golf club memberships, organize company trips to Europe and the United States and even hurry to issue large bonuses before Central Huijin became a shareholder.

In truth, the poor performance of New China Life's asset management arm was deeply rooted in the company's ineffective corporate governance.

On July 3, 2006, New China Asset Management was formed in order to manage investments of New China Life's insurance capital. In theory the company should have been wholly owned by its parent New China Life. But under Guan's special arrangement during his tenure as Chairman, New China Asset Management had a registered capital of 100 million yuan of which New China Life put up 95 million while five other shareholders held one million yuan each.

In May 2007, the China Insurance Protection Fund bought the shares of the five above-mentioned shareholders in New China Life, but the shares held by the five in New China Asset Management had not yet been worked out. After Guan's crimes were made public and he was removed from his posts in both companies, New China Asset Management went through a long period without a Chairman. The company was even managed simultaneously by two different management teams of equal status. 

A New Round of Silent Warfare

Since the end of 2006 when Guan was removed from his post, it has taken three long years to witness the entrance of a new shareholder. Central Huijin's first move as the company's new shareholder was to bring New China Life back to having a solid legal governing structure, followed by appointing a new board of directors for New China Asset Management and enhancing the company's professional investment capability. 

In the second half of 2009, the company finally made some progress in share restructuring. On October 28, the CIRC announced that it had already approved of the company's revised charter in which shareholders would be reduced from six to four. With the new charter, New China Asset Management is now in charge of 97 percent of the company's assets. 

On January 14, New China Asset Management's shareholders and board of directors convened and brought on a new management team to be hired for an initial term of three years.

"One hundred billion yuan in assets all belong to this asset management company – they cannot afford even the slightest slipup," said an insider close to New China Life.

In addition to corporate governance issues, the most difficult challenge facing New China Life is insolvency. Solvency for an insurance company means that the company has the ability to cover claims and pay insurance benefits. By the end of 2008, New China Life's solvency rate had fallen to 27.43 percent, far below the 100 percent required by regulatory authorities. The market recovered to some extent in 2009, but the company's solvency rate was still gravely insufficient, and as a result it was listed in 2009 with five other insurance companies on the insolvency blacklist.

Neither increased capitalization nor a public listing will be able to help New China Life overcome the obstacles of determining and quantifying the influence that Guan created on the company, whether or not the company's accounting statements can show three years of consistent profitability and whether or not the company can pass an external audit.

Caixin learned that New China Life had already accounted for relevant losses since the end of 2006. According to the company, meeting the condition of consistent profitability for three years as a prerequisite for listing publicly would not be difficult. At the same time, as the trial against Guan continues, state auditing ministries are conducting deep investigations into the company and its books. "There will be a day when the truth comes out," said one insider close to New China Life.

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