By staff reporter Chen Huiying

(Caijing Magazine) A cozy traditional courtyard in west Beijing, near the Old Summer Palace, complements the headquarters of a powerhouse insurance company, the People's Insurance Co. of China Group (PICC).
 
While passing tourists enjoy the historic atmosphere, PICC officials inside the building have been busy executing what they hope will be a rapid internal transition and bracing for a share restructuring that may begin in 2010.

It would be the fourth overhaul in the company's 60-year run, which parallels the history of the People's Republic of China and, likewise, has not been easy.

"PICC will develop a multi-source revenue model next year that includes property insurance, life insurance and financial investments," said Chairman Wu Yan. "If everything goes well, we will kick off preparations for PICC's IPO next year."

PICC's restructuring plan got a green light in June from seven government agencies, including the Ministry of Finance and central bank. Also approved was its proposal to dual list on the Hong Kong and mainland bourses.

A formal announcement was expected soon to mark PICC's shift to a shareholding company. Wu said PICC plans to invite strategic investors to participate in the dual listing project, although the timing and other details have yet to be determined.

Wu, 48, was chairman of the nation's insurance leader China Life (SSE: 601628,  HKEX: 02628) before taking the helm at PICC in early 2007. Since then, he has helped PICC triple its total assets to 302 billion yuan and increase assets under company management almost five-fold to a whopping 725 billion yuan.

Under Wu, PICC underwent an ambitious expansion – surprisingly with no direct cash injection from the government -- and adopted a diversified business model by shaking off its heavy reliance on property insurance. He's looking forward to the next step.

"The purpose of restructuring, in addition to building a scientific governance structure, is to provide a stable source of capital," Wu said September 1 in an exclusive interview with Caijing. "But PICC needs time to make conditions ripe."

"If PICC had proposed a group IPO in 2007," he added, "people would have thought it nothing but a whim."

Restructuring Rumblings

PICC had a chance to launch on the Shanghai Stock Exchange in October 2007, when the share price of its affiliate PICC Property and Casualty Co. Ltd. (PICC P&C) peaked at HK$ 17.92 on the Hong Kong bourse. Market analysts expected Wu to ride the upward tide and launch a mainland listing for the affiliate, garnering much-needed capital for the group's expansion.

In fact, PICC's financial adviser, China International Capital Corp. (CICC), had drafted a dual list plan at that time and put it on Wu's table. But the plan went nowhere.

"It was a choice between short-term return and long-term interests," Wu explained.

While a 2007 listing of PICC P&C in Shanghai would have boosted the group's capital base in the short run, he said, the parent company would not have been able to provide "strong support for developing its branches in the future."

It was not the right time for the parent to let go. "If PICC P&C had needed additional capital in five years, who would have financed it?" Wu asked. "If the life insurance branch got hungry for capital, where would the money have come from?"

At the time, Wu continued, PICC had few sources for fresh capital; it couldn't raise funds on the open market, nor could it expect government cash injections from the Ministry of Finance.

Had the company tapped its 68 percent share in PICC P&C and benefited from a listing in Shanghai, the stake would have been diluted. Moreover, the potential for fund-raising would have been limited, and the insurance group would have been haunted by risks of a possible hostile takeover targeting its treasured affiliate.

Internal discussions spanned a half-year and revolved around four possible choices: group IPO; public listing by PICC P&C in Shanghai; injections of other PICC assets into the profitable property insurance branch; or bundling assets outside PICC P&C for a package listing.

"Injecting other assets into PICC P&C seemed to be a natural choice, since it was the largest chunk of the group's assets and contributed much of the latter's income," Wu said. "But P&C's growth has limits, and there would be a looming risk of diluted shareholding.

"Moreover, our nascent personal insurance business would have been vastly undervalued had it been injected into P&C."

Lengthy deliberations resulted in a group listing plan that Wu decided would leave PICC ample room for growth.

Road Bumps

PICC launched an expansion in 2007 that went smoothly until 2008, when a tragic earthquake devastated part of southwest Sichuan Province and rattled the domestic insurance market. A few months later, international financial markets turned south.

PICC P&C reported 100 billion yuan in premium income in 2008, securing a seat among the world's top 10 general (non-life) insurance companies. But due to disaster-related payouts, the company reported a pre-tax loss of 447 million yuan.

PICC is no stranger to bumps in the road. Launched in 1949, the company is the founder of the nation's insurance industry. Another milestone was reached in November 2003 when PICC P&C became the first Chinese state-owned financial institution to launch an IPO in Hong Kong, raising HK$ 5.4 billion.

But the market glory was short-lived. Just a month later, much larger rival China Life listed in Hong Kong and New York, raising a combined US$ 3.4 billion.

The IPO overshadowing was a telling example of PICC's second-class status in modern times. Its market share, revenues and premium incomes have all paled in comparison to China Life as well as the state-owned giants China Ping An and China Pacific Insurance.

Wu's Strategy

When he came on board in 2007, Wu tailored a strategy to consolidate and win advantages for PICC P&C in the property and casualty market while beefing up the life insurance business. The strategy worked, as PICC Life jumped from 19th on the Chinese market to sixth in 2008.

One of Wu's maneuvers to help the life insurance branch has involved reforming 29 provincial life insurance subsidiaries over the past two years and folding them into PICC Life. As a condition, a major shareholder sold a 29 percent stake in PICC Life to PICC P&C. When the dust settled, PICC's internal ties were much stronger.

Wu also turned to China's rural areas in search of new PICC life insurance clients. The effort worked, as premium income generated by PICC Life increased to 32 percent of the company's total from 2.38 percent.

Wu said he expects the company to turn a profit next year. That would certainly help the company reach its market listing goal, as three consecutive years with no losses is a requirement for any company to list on the mainland.

The performance report has been questioned by some industry analysts. One industry insider who prefers anonymity said PICC's rapid expansion under tough market conditions, especially in the life insurance sector, might have been accompanied by high capital costs and heavy spending to build a sales force.

PICC has ambitions beyond the insurance market. And now with several finance-related business licenses under its belt, PICC's dream of building a multi-business empire is starting to take shape.

Since 2007, Wu has helped increase the group's control over its branches. Its stake in PICC Assets Management rose to 81 percent from 41 percent, while its share of PICC Life climbed to 80 percent from 51 percent. It also increased its stake in PICC Health to 84 percent from 51 percent.

Under Wu, the company has made several, high profile investments in the past two years, obtaining a 32.35 percent stake in China Credit Trust Co. Ltd. (CCTIC) from the Ministry of Finance and assuming 55 percent control of the financial firm Huawen for 862 million yuan.

Wu said in mid-2008 he heard MOF would hand over a stake in CCTIC, and that a number of state-owned financial institutions would vie for it. Wu applied and won the coveted stake because PICC P&C had shouldered 60 percent of the national insurance casualty and property payouts after a string of natural disasters.

And Wu described the Huawen investment as "a choice with no alternative."

Huawen is a holding company with hundreds of billions of yuan in assets and licenses for several kinds of financial business including mutual funds and trusts. The company started with 100 million yuan in registered capital in the 1990s as joint investment company with PICC's branch in Guangxi Province and the business arm of People's Daily, the top newspaper of the Communist Party,

Huawen's top manager, Wang Zheng, was involved in a notorious scandal involving a Shanghai securities fund in 2006 and was sentenced to three years in jail. After his departure, the Huawen family was faulted for a Byzantine share structure with heavy leverage and a huge amount of bank and internal borrowing. Potential investors were scared off, but stakeholder PICC accepted the task of sorting out the mess.

Amid the scandal, PICC bought shares held by the People's Daily and increased its stake to 55 percent.

Now, Wu said, PICC is communicating with relevant government agencies about consolidating Huawen's assets. A successful outcome would bring PICC and Wu one step closer to what he hopes will be an inevitable – a comprehensive financial group.

But as anyone in the insurance industry knows, the game comes with risks.

"When PICC lands on the stock exchange, it will position itself as a big, modern insurance financial group," said an analyst with a major securities firm.

"But a truly hybrid financial firm with a modern management system will share client resources on the front-end and split costs on the back-end, which might take up to 10 years to realize.

"Judging by that standard," the analyst said, "PICC has a long way to go."

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