-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SFfE3Ap4dGssgSBikB5jqESDmMyb1KMkj9/opbYPlS+LB8lZ0jktq0J0/YECmrtL BwtanIEemn1w68Mymmbt/Q== 0001193125-03-084422.txt : 20031120 0001193125-03-084422.hdr.sgml : 20031120 20031120120948 ACCESSION NUMBER: 0001193125-03-084422 CONFORMED SUBMISSION TYPE: F-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20031120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHINA LIFE INSURANCE CO LTD CENTRAL INDEX KEY: 0001268896 IRS NUMBER: 000000000 STATE OF INCORPORATION: F4 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-110615 FILM NUMBER: 031014886 MAIL ADDRESS: STREET 1: 16 CHAOWAI AVE STREET 2: CHAOYANG DISTRICT CITY: BEIJING STATE: F4 ZIP: 100020 FORMER COMPANY: FORMER CONFORMED NAME: CHINE LIFE INSURANCE CO LTD DATE OF NAME CHANGE: 20031103 F-1 1 df1.txt FORM F-1 As filed with the Securities and Exchange Commission on November 20, 2003 Registration No. 333- ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- [NAME IN CHINESE CHARACTERS] (Exact name of Registrant as specified in its charter) China Life Insurance Company Limited (Translation of Registrant's name in English) The People's Republic of 6311 None China (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) 16 Chaowai Avenue Chaoyang District Beijing 100020, China (86-10) 8565-9999 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) CT Corporation System 111 Eighth Avenue, 13/th/ Floor New York, New York 10011 (212) 894-8940 (Address, including zip code, and telephone number, including area code, of Agent for Service) ----------------- With copies to: Wolcott B. Dunham, Jr., Gregory Miao, Esq. Esq. Susan J. Sutherland, Esq. James C. Scoville, Esq. Skadden, Arps, Slate, Debevoise & Plimpton Meagher & Flom LLP 2202 Jin Mao Tower East Wing Office, Level 4 88 Century Boulevard China World Trade Center Shanghai 200121, China No. 1 Jian Guo Men Wai (86-21) 5047-1800 Avenue Beijing 100004, China (86-10) 6505-5511 ----------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ----------------- CALCULATION OF REGISTRATION FEE ================================================================================
Proposed Amount of Maximum Aggregate Registration Title of Each Class of Securities to Be Registered Offering Price(1)(2) Fee - ------------------------------------------------------------------------------------------------------------------------ Overseas listed foreign-invested shares, or H shares, par value RMB 1.00 per share (3) $2,500,000,000 $202,250
================================================================================ (1) The amount of shares registered includes any shares initially offered or sold outside the U.S. that are thereafter sold or resold in the U.S. Offers and sales of shares outside the U.S. are being made pursuant to Regulation S under the Securities Act of 1933 and are not covered by this Registration Statement. (2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. (3) American Depositary Shares issuable on deposit of the H shares registered hereby will be registered under a separate registration statement on Form F-6. Each American Depositary Share represents H shares. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS (Subject to Completion) Issued November 20, 2003 [LOGO] China Life Insurance Company Limited [NAME IN CHINESE CHARACTERS] AMERICAN DEPOSITARY SHARES REPRESENTING H SHARES ----------------- China Life Insurance Company Limited is offering American depositary shares, or ADSs, representing its overseas listed foreign-invested shares, or H shares. Each ADS represents H shares. We are selling ADSs, representing H shares. China Life Insurance (Group) Company, or CLIC, which is our controlling shareholder, also is selling ADSs, representing H shares. This is our initial public offering. We currently estimate that the initial public offering price per ADS will be between US$ and US$ , equivalent to between HK$ and HK$ per H share at the exchange rate of HK$ to US$1.00, the noon buying rate on , 2003. This offering of ADSs is part of a global offering of an aggregate of H shares, including a Hong Kong public offering of H shares. The ADSs have been approved for listing on the New York Stock Exchange, subject to official notification of issuance, under the symbol "LFC". We have applied for the listing of the H shares on the Hong Kong Stock Exchange under the stock code "2628". ----------------- Investing in the ADSs involves risks. See "Risk Factors" beginning on page 22. -----------------
Underwriting Discounts Proceeds to Price to and Proceeds to the Selling Public Commissions Us Shareholder -------- ------------ ----------- ----------- Per ADS US$ US$ US$ US$ Total.. US$ US$ US$ US$ === === === ===
The information in the above table excludes H shares offered in the Hong Kong public offering, with aggregate proceeds to us of HK$ . We and the selling shareholder have granted to the underwriters an option to purchase up to an aggregate of additional ADSs to cover over-allotments. The United States Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the ADSs to purchasers in New York on , 2003. The ADSs are expected to commence trading on the New York Stock Exchange on , 2003. You may not be able to sell or otherwise deal in these securities prior to the commencement of trading. (in alphabetical order) China International Citigroup Credit Suisse First Boston Deutsche Bank Securities Capital Corporation
Financial Advisers to China Life China International Capital Corporation Lehman Brothers , 2003 TABLE OF CONTENTS
Page ---- Prospectus Summary........................ 1 Risk Factors.............................. 22 Forward-Looking Statements................ 38 Exchange Rate Information................. 39 Use of Proceeds........................... 41 Dividend Policy........................... 42 Capitalization............................ 44 Dilution.................................. 45 Selected Historical Consolidated Financial Data.................................... 46 Unaudited Pro Forma Consolidated Financial Data.................................... 49 Operating and Financial Review and Prospects............................... 57 Prospective Financial Information......... 109 Embedded Value............................ 111 Life Insurance Industry in China.......... 113 Business.................................. 119 Regulation................................ 156
Page ---- Management................................. 166 Principal and Selling Shareholder.......... 172 The Restructuring.......................... 173 Relationship with CLIC..................... 184 Description of Share Capital............... 193 Description of American Depositary Receipts 207 Shares Eligible for Future Sale............ 216 Taxation................................... 217 Enforceability of Civil Liabilities........ 224 Underwriters............................... 226 Legal Matters.............................. 237 Experts.................................... 237 Expenses Relating to this Offering......... 238 Where You Can Find More Information........ 239 Glossary................................... G-1 Index to Consolidated Financial Statements. F-1 Annex A--Actuarial Consultants' Report of Tillinghast-Towers Perrin................ A-1 Annex B--Valuation Report of Sallmanns (Far East) Ltd................................ B-1
- -------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell these securities and seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the securities offered by this prospectus. Until , 2003, all dealers that buy, sell or trade H shares or ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. CONVENTIONS References References in this prospectus 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 prospectus 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 prospectus is based on premium information as reported by the CIRC. The reported information includes premium information that is not i determined in accordance with H.K. GAAP or U.S. GAAP. Our market share information set forth in this prospectus 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 prospectus, 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. 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 prospectus mean the currency of the PRC, references to "U.S. dollars" or "US$" mean the currency of the United States of America, and references to "H.K. dollars" or "HK$" 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. Unless otherwise indicated, our financial information presented in this prospectus has been prepared in accordance with H.K. GAAP. The glossary beginning on page G-1 of this prospectus sets forth the meaning of various insurance-related terms used in this prospectus, which are highlighted in bold where they first appear. Unless otherwise indicated, translations of RMB amounts into U.S. dollars in this prospectus have been made at the rate of US$1.00 to RMB 8.2776, 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 June 30, 2003. The noon buying rate on November 19, 2003 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 June 30, 2003 or at all. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. In connection with the offering of the ADSs and the H shares, the underwriters, for a limited period after the commencement of the offering of the ADSs offered hereby, may over-allot or effect transactions with a view to supporting market prices of the ADSs or H shares at levels higher than those which might otherwise prevail. However, the underwriters are not under any obligation to do this. Any stabilizing will be effected by one of the joint global coordinators, acting as stabilizing manager, or its agents. Such stabilizing, if commenced, may be discontinued at any time, and must be brought to an end after a limited period. For a description of these activities, see "Underwriters". ii PROSPECTUS SUMMARY This summary highlights key information contained elsewhere in this prospectus. It may not contain all of the information that is important to you. You should read the entire prospectus, including "Risk Factors" and our consolidated financial statements and notes to those statements included in this prospectus, before making an investment decision. Our consolidated balance sheet data as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, and the profit and loss accounts data for the years ended December 31, 2000, 2001 and 2002 and for the six-month periods ended June 30, 2002 and 2003 present the financial results of our predecessor company, CLIC. The policies, contracts and assets retained by CLIC are not ours and will not be available to generate revenues for us in current or future periods. Therefore, to reflect our business more accurately as it will be operated following the restructuring, other than the data described in "Summary Historical Consolidated Financial Data", "Selected Historical Consolidated Financial Data" and "Operating and Financial Review and Prospects", or unless we otherwise state, all company data provided in this prospectus relate only to the policies and assets transferred to us in the restructuring. The glossary beginning on page G-1 of this prospectus sets forth the meaning of various insurance-related terms used in this prospectus, which are highlighted in bold where they first appear. China Life We are the leading life insurance company in China. We sell our products through the most extensive distribution network of exclusive agents, direct sales representatives and dedicated and non-dedicated agencies throughout China. We had more than 44 million individual and group life insurance policies, annuity contracts and long-term health insurance policies in force as of June 30, 2003. We also offer accident and short-term health insurance policies to individuals and groups. We are ranked number one in life insurance in China, with a market share of 45% in 2002, determined on a pro forma basis after giving effect to CLIC's restructuring described below. We are: . The leading provider of individual life insurance and annuity products, with a market share of 51% in 2002, nearly three times that of our nearest competitor. . A leading provider of group life insurance and annuity products, with a market share of 18% in 2002. We insure the employees of many of China's largest companies and institutions, including many of the Fortune Global 500 companies operating in China. . The leading accident insurance provider, with a market share of 69% in 2002, and a leading health insurance provider, with a market share of 34% in 2002 in this fast-growing market. . One of the largest asset managers and institutional investors, with investment assets of RMB 212,452 million (US$25,666 million), after giving effect to the restructuring, and, together with CLIC's investment assets, of RMB 335,840 million (US$40,572 million) as of June 30, 2003. Through an asset management joint venture established by us and CLIC, following the restructuring we are managing our investment assets and substantially all of those of CLIC. These assets under management accounted for more than one-half of all assets under management held by Chinese life insurance companies in 2002. We have been able to generate significant revenue growth and, on a pro forma basis after giving effect to the restructuring, we earned significant net profit in 2002 and in the six months ended June 30, 2003. Our total gross premiums and policy fees from the policies transferred to us in the restructuring grew from RMB 23,304 million (US$2,815 million) for the six months ended June 30, 2002 to RMB 25,403 million (US$3,069 million) for the six months ended June 30, 2003, representing an increase of 9.0%. Total deposits from the transferred policies grew from RMB 40,626 million (US$4,908 million) for the six months ended June 30, 2002 to RMB 58,417 1 million (US$7,057 million) for the six months ended June 30, 2003, representing an increase of 43.8%. Total gross premiums and policy fees from the transferred policies grew from RMB 21,107 million for the year ended December 31, 2000 to RMB 47,077 million (US$5,687 million) for the year ended December 31, 2002, representing a compound annual growth rate of 49.3%. Total deposits from the transferred policies grew from RMB 15,220 million for the year ended December 31, 2000 to RMB 58,572 million (US$7,076 million) for the year ended December 31, 2002, representing a compound annual growth rate of 96.2%. On a pro forma basis after giving effect to the restructuring, we had a net profit of RMB 3,128 million (US$378 million) for the six months ended June 30, 2003 and a net profit of RMB 4,524 million (US$547 million) for the year ended December 31, 2002. As the leading life insurance company in China, we believe we are well positioned to capitalize on the growing demand for life, annuity, accident and health insurance products in China. We believe several trends are increasing the demand for life insurance products in China. These include: . The rapid growth of China's economy in recent years, resulting in rising income per capita. . The continued growth of China's middle class and the ageing of its population. . The rapid change in China's social welfare system, shifting the provision of social welfare benefits from the state to a mix of private and public providers. . Increasing demand for sophisticated insurance and investment products, including participating products. Although the life insurance industry has grown significantly in recent years, the development of the life insurance market in China remains in its early stages. According to CIRC data, from 1999 through 2002, total life insurance premiums grew at a compound annual growth rate of 37.7%. Despite this growth, however, China's "life insurance depth" (the proportion of premiums to gross domestic product) was only 2.2% as of the end of 2002, and "life insurance density" (life insurance premiums per capita) was only RMB 177.04 (US$21.38) in 2002. We provide the following products and services: Individual Life Insurance. Our individual life insurance business offers life insurance and annuity products to individuals, primarily through a distribution force comprised of approximately 650,000 exclusive agents operating in approximately 8,000 field offices throughout China. We also sell individual life insurance and annuity products through non-dedicated agencies located in approximately 78,000 outlets of commercial banks, post offices and savings cooperatives throughout China. Our individual life insurance gross written premiums and policy fees from the transferred policies totaled RMB 20,370 million (US$2,461 million) for the six months ended June 30, 2003 and RMB 37,662 million (US$4,550 million) for the year ended December 31, 2002, constituting 80.2% and 80.0% of our total gross written premiums and policy fees for those periods. Our individual life insurance deposits from the transferred policies totaled RMB 53,271 million (US$6,436 million) for the six months ended June 30, 2003 and RMB 52,340 million (US$6,323 million) for the year ended December 31, 2002, constituting 91.2% and 89.4% of our total deposits for those periods. In connection with the restructuring, CLIC has agreed to transfer its entire exclusive agency sales force to us. Group Life Insurance. Our group life insurance business offers life insurance and annuity products to companies and institutions, primarily through approximately 10,000 direct sales representatives operating in more than 4,800 branch offices. We also sell our group life products through dedicated insurance agencies and 2 insurance brokerage companies. Our group life insurance gross written premiums and policy fees from the transferred policies totaled RMB 267 million (US$32 million) for the six months ended June 30, 2003 and RMB 477 million (US$58 million) for the year ended December 31, 2002, constituting 1.1% and 1.0% of our total gross written premiums and policy fees for those periods. Our group life insurance deposits from the transferred policies totaled RMB 5,146 million (US$622 million) for the six months ended June 30, 2003 and RMB 6,232 million (US$753 million) for the year ended December 31, 2002, constituting 8.8% and 10.6% of our total deposits for those periods. Accident and Health Insurance. Our accident and health insurance business offers accident and health insurance products to individuals and groups, either as primary products, as riders or as supplementary products packaged with our life insurance and annuity products. We sell accident and health insurance products primarily through the same distribution channels that we use to sell our life insurance and annuity products. Our accident insurance gross written premiums from the transferred policies totaled RMB 2,359 million (US$285 million) for the six months ended June 30, 2003 and RMB 5,174 million (US$625 million) for the year ended December 31, 2002, constituting 9.3% and 11.0% of our total gross written premiums and policy fees for those periods. Our health insurance gross written premiums from the transferred policies totaled RMB 2,407 million (US$291 million) for the six months ended June 30, 2003 and RMB 3,764 million (US$455 million) for the year ended December 31, 2002, constituting 9.5% and 8.0% of our total gross written premiums and policy fees for those periods. Asset Management. An asset management joint venture established by us and CLIC manages our investment assets and, separately, substantially all of those of CLIC. Through this joint venture, we expect to be able to offer asset management products and services to other insurance companies. See "Business--Asset Management Business". We own 60% of the joint venture, with CLIC owning the remaining 40%. Competitive Strengths As the leading provider of life insurance, annuity, accident insurance and health insurance products in China, we believe that our competitive strengths will enable us to benefit from the increasing demand for these products. Our competitive strengths include: . Leading position in the life insurance market in China. We are the leading life insurance company in China, with a market share of 45% in 2002. Among China's 31 provinces, autonomous regions and municipalities nationwide, we were the market leader in 29 in 2002. . Largest customer base nationwide. We are the only life insurance company in China with both a nationwide business license and a nationwide distribution network. We believe we have the largest customer base among all life insurance companies in China. . Most recognized life insurance brand name. We believe our history as the oldest and largest life insurance business in China, our leading market share and our nationwide customer base have given us the highest brand recognition of any life insurance company in China. . Largest, multi-channel distribution network. We believe we have the largest distribution force with the most extensive geographic reach as compared to any of our competitors. Throughout China, we have approximately 650,000 exclusive agents operating in approximately 8,000 field offices for our individual products and approximately 10,000 direct sales representatives in more than 4,800 branch offices for our group products. 3 . Nationwide customer support. We believe we have the most extensive customer service network in the Chinese life insurance industry, with approximately 3,000 customer service units operating in our branch and field offices throughout China. . Leading asset manager. Assets under our management accounted for more than one-half of all investment assets under management by Chinese life insurance companies in 2002 based on CIRC data, making us one of the largest institutional investors in China in terms of assets under management. . Strong financial position. As of June 30, 2003, on a pro forma basis after giving effect to the restructuring, we had total net assets of RMB 36,182 million (US$4,371 million) and our solvency level was more than 2.8 times the minimum regulatory requirement. On a pro forma basis after giving effect to the restructuring, we had a net profit of RMB 3,128 million (US$378 million) for the six months ended June 30, 2003 and a net profit of RMB 4,524 million (US$547 million) in 2002. . Experienced management team. Our management team has in-depth industry knowledge and extensive managerial experience in life insurance, finance and asset management. Business Strategy Our goal is to build on our position as China's leading life insurance company and become one of the top life insurance companies worldwide. Our objectives are to achieve sustainable growth of our businesses and to create long-term shareholder value. To achieve these objectives, we intend to capitalize on our leading position in China's life insurance market. We intend to pursue the following business strategies: . Capitalize on our market leading position and capture the high growth opportunities in the Chinese life insurance market. We intend to capitalize on our market leading position in the Chinese life insurance market by pursuing the following growth strategies in our individual, group and accident and health insurance segments: -- Build on our leading market position in the mass market and focus on the emerging mass affluent market. -- Capture opportunities in the fast growing group pension and annuity businesses. -- Strengthen leadership in accident insurance and improve the financial performance of health insurance. . Capitalize on our existing customer base and provide products and services tailored to specific customer groups. As the leading provider in China's life insurance market, we have a broader customer base than any of our competitors. We intend to capitalize on the relationship with our existing customers by offering value-added products and services that meet their specific requirements and providing the highest level of customer support in China. 4 . Enhance the productivity of our core distribution channels and expand our multi-channel distribution network. We intend to implement the following measures to further enhance the productivity of our core distribution channels and broaden the reach of our multi-channel distribution network: -- We believe we have the largest exclusive agency distribution system in China, and will seek to enhance this competitive advantage by improving our agent recruitment, training, performance evaluation process and compensation scheme. -- We will continue to enhance the skills and professional expertise of our direct sales force for group insurance. -- We will continue to dedicate substantial resources to develop our bancassurance business. -- We are exploring opportunities to develop the distribution of products through other channels, including dedicated insurance agencies, insurance brokerage companies and the Internet. . Build on our widely recognized brand name. We will continue to build on China Life's reputation as a provider of comprehensive and competitive products and solutions and of reliable and convenient services. . Build on our competitive product design capabilities to meet changing customer needs. We will seek to develop products and services which meet the requirements of specific customer groups and generate attractive margins. . Build on our asset management strength. We will seek to improve our technological and managerial skills and enhance our ability to match the duration of our assets and liabilities with a view to reducing risk and improving profitability. . Strengthen risk management. We plan to devote significant resources to enhance our risk management policies and procedures in light of our rapidly developing business. . Continue to enhance efficiency through active cost control management. To enhance our efficiency further, we are consolidating functions and management layers in our organizational structure at both the headquarters and local branch levels. . Implement advanced information technology systems. Relying on advanced information technology, we intend to build on our capacity to respond to market feedback and various contingencies. . Enhance performance-oriented corporate structure and compensation systems. We are dedicated to improving the performance orientation of our organizational structure and our compensation systems. . Continue to enhance training and development. We seek to attract and retain the most talented individuals in the industry and improve their skills, productivity and career development opportunities. For more information on our business strategies, see "Business--Business Strategy". 5 Risks Relating to Our Business As part of your evaluation of our company, you should take into account the risks we face in our business and not solely our competitive strengths and strategies. These risks include: . Our ability to attract and retain productive agents and maintain their qualifications and registrations. . Our ability to develop other distribution channels for our products. . The effect of any agent or employee misconduct. . Our ability to attract and retain key personnel, including senior management, underwriting personnel, actuaries, information technology specialists, investment managers and other professionals. . The effect of interest rate changes, and constraints on our ability to match the duration of our assets and liabilities, which makes us more exposed to interest rate changes. . Risks relating to our investments. . Differences in future actual claims results from the assumptions used in pricing and establishing reserves for our insurance and annuity products. . Competition in the Chinese insurance industry. . Risks relating to the restructuring. For more information about these and other risks, see "Risk Factors" beginning on page 22. You should consider these risk factors carefully together with all the other information included in this prospectus. 6 Our Restructuring The following charts set out our corporate structure before the restructuring, after the restructuring but before the global offering, and after the global offering. Before the restructuring: [ORGANIZATIONAL CHART] After the restructuring but before the global offering: [ORGANIZATIONAL CHART] 7 After the global offering: [ORGANIZATIONAL CHART] - -------- (1) Assuming the over-allotment option is not exercised. We were formed on June 30, 2003 as a joint stock company 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 in this prospectus 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. See "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. 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. Therefore, our consolidated balance sheet data as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, and the profit and loss accounts data for the years ended December 31, 2000, 2001 and 2002 and for the six-month periods ended June 30, 2002 and 2003, present the financial results of our predecessor company, CLIC. 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, other than the data described in "Selected Historical Consolidated Financial Data" and "Operating and Financial Review and Prospects", or unless we otherwise state, all company data provided in this prospectus, including data concerning premiums, deposits, policy fees, insurance policies, annuity contracts, agents, personnel, offices, distribution channels and investment assets, do not include the data of any of the policies, contracts and investment assets that are included in our historical consolidated financial statements but were retained by CLIC in connection with the restructuring. 8 We have agreed to provide policy management and other services to CLIC, and CLIC will remain our majority shareholder. In connection with the restructuring, CLIC changed its name from China Life Insurance Company to China Life Insurance (Group) Company. CLIC is a state-owned enterprise. Accordingly, the PRC government has the power, through CLIC, so long as CLIC holds the majority of our shares, subject to our articles of association and applicable laws, to control the composition of our board of directors and, through the board, to exercise significant influence over the company's management and policies. In exercising this power, CLIC is subject to PRC laws and regulations, as well as the applicable laws, regulations and listing rules of the jurisdictions or exchanges in or on which our securities are sold or traded. CLIC's restructuring was approved by the State Council and the CIRC. Our principal executive and registered offices are located at 16 Chaowai Avenue, Chaoyang District, Beijing 100020, China. Our telephone number is (86-10) 8565-9999. 9 THE GLOBAL OFFERING Unless otherwise indicated, information in this prospectus assumes that the underwriters will not exercise the over-allotment option to purchase additional ADSs. See "Underwriters". Offering by us.............. ADSs representing H shares (including H shares offered to the public in Hong Kong). Offering by the selling shareholder............... CLIC is selling ADSs, representing H shares, in the global offering. As a result of the global offering, CLIC's ownership interest in China Life will be reduced from 100.0% to %, or % if the underwriters' over-allotment option is exercised in full. Global offering............. The global offering consists of this U.S. offering, the international offering and the Hong Kong public offering. U.S. offering........... H shares in the form of H shares or ADSs in a public offering in the United States and on a private placement basis in Canada. International offering.. H shares in the form of H shares or ADSs offered outside the United States and Canada, including to professional and institutional investors in Hong Kong. Hong Kong public offering H shares offered for public subscription in Hong Kong. The Hong Kong public offering is conditional upon the listing committee of the Hong Kong Stock Exchange granting the listing of and permission to trade in the H shares offered in the global offering. If the number of H shares validly applied for in the Hong Kong public offering represents a multiple of: (1) 15 times or more but less than 50 times, (2) 50 times or more but less than 100 times, or (3) 100 times or more than 100 times, the number of H shares initially available in such offering, then an additional H shares, H shares or H shares, respectively, will be reallocated to the Hong Kong public offering, such that the additional H shares, when aggregated with the H shares initially available in the Hong Kong public offering, will represent approximately 7.5% in the case of (1) above, 10% in the case of (2) above and 20% in the case of (3) above, of the total number of H shares initially available under the global offering, without giving effect to the underwriters' over-allotment option. In such case, the number of ADSs allocated to the U.S. offering and/or the international offering will be reduced correspondingly, in such manner as the joint global coordinators deem appropriate. Any unsold H shares in the Hong Kong public offering may be reallocated to the U.S. offering and the international offering. The joint global coordinators also have discretion to reallocate additional H shares to the Hong Kong public offering from the U.S. offering and/or the international offering. 10 Over-allotment option....... We and the selling shareholder have granted an option to the underwriters to purchase an aggregate of additional ADSs representing H shares, at the initial public offering price, exercisable in whole or in part by the underwriters. Lock-ups.................... We and CLIC have agreed with the underwriters to a lock-up of shares for a period of 180 days. See "Underwriters". Price per ADS or H share in the U.S. and international offerings................. The initial public offering price per ADS will be between US$ and US$ , equivalent to between HK$ and HK$ per H share at the exchange rate of HK$ to US$1.00, the noon buying rate on , 2003. The initial public offering price for ADSs under the U.S. and international offerings is payable in U.S. dollars and the initial public offering price for H shares under the Hong Kong public offering, the U.S. offering and the international offering is payable in Hong Kong dollars. The price per ADS and price per H share will include any brokerage fees, Hong Kong Securities and Futures Commission transaction levies, investor compensation levies and Hong Kong Stock Exchange trading fees payable in connection with the initial sale and purchase of the ADSs and H shares. These fees and levies will be paid to the relevant authorities or brokers by us and the selling shareholder. Price per H share in the Hong Kong public offering. The initial public offering price per H share in the Hong Kong public offering, when increased by a 1% brokerage fee, a 0.005% Hong Kong Securities and Futures Commission transaction levy, a 0.002% investor compensation levy and a 0.005% Hong Kong Stock Exchange trading fee payable by purchasers, is effectively equivalent to the initial public offering price per ADS in the U.S. and international offerings, based on an exchange rate of HK$ to US$1.00, the noon buying rate on , 2003, and adjusted for the ratio of H shares per ADS. ADSs........................ Each ADS represents H shares. The ADSs will be evidenced by American Depositary Receipts, or ADRs. To understand the terms of the related ADRs, you should carefully read the section in this prospectus entitled "Description of American Depositary Receipts". We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement of which this prospectus forms a part. H shares to be outstanding immediately after this global offering........... H shares, or H shares if the underwriters' over-allotment option is exercised in full. 11 Timing of global offering... The following is a tentative timetable of key events in the global offering: Hong Kong public offering commences Business day 1 (Hong Kong time) Hong Kong public offering closes Business day 4 (Hong Kong time) Pricing of global offering Business day 4 (New York time) Final allocation of H shares Business day (Hong Kong time) Trading of ADSs commences on the New Business day York Stock Exchange (New York time) Trading of H shares commences on the Business day Hong Kong Stock Exchange (Hong Kong time)
business day gap between pricing and trading of H shares....... The H shares offered in the global offering will not commence trading on the Hong Kong Stock Exchange until all of the conditions contained in the underwriting agreement for the Hong Kong public offering have been satisfied, which is expected to be Hong Kong business days after the date of pricing of the H shares. The ADSs offered in the global offering are expected to commence trading on the New York Stock Exchange on the business day in New York immediately preceding the day when trading of the H shares commences on the Hong Kong Stock Exchange. You will not be able to sell or otherwise deal in the H shares or ADSs prior to the commencement of their trading on the Hong Kong Stock Exchange or the New York Stock Exchange. Payment and delivery........ The underwriters expect to deliver the ADSs in New York, New York to purchasers on , 2003. Use of proceeds............. We estimate that the net proceeds received by us from the offering will be approximately US$ million, after deducting the underwriting discounts and expenses payable by us in the global offering and assuming an initial public offering price of US$ per ADS, the midpoint of the range set forth on the cover page of this prospectus. We expect to use the net proceeds from this offering for general corporate purposes and to strengthen our capital base. We estimate that the net proceeds received by CLIC from the offering will be approximately US$ million, after deducting the underwriting discount and estimated offering expenses payable by CLIC. We will not receive any of the proceeds from the sale of shares by CLIC. In accordance with PRC regulations, CLIC will be required to contribute the net proceeds it receives from this offering to the Chinese National Social Security Fund. 12 Dividend policy............. We intend to declare and pay annual cash dividends to shareholders. Our decision to pay any dividend will depend on our results of operations and cash flows, our financial position, solvency requirements, our shareholders' interests, general business conditions, our future prospects, statutory and regulatory restrictions on the payment of dividends by us and other factors that our board of directors deems relevant. We are required to make allocations to statutory funds from our after-tax income. The payment of any dividend by us must be approved by our shareholders. Subject to these considerations and constraints, we expect to begin paying dividends in 2005. See "Dividend Policy". Listings.................... Our ADSs have been approved for listing on the New York Stock Exchange, subject to official notification of issuance, under the symbol "LFC". We have applied to list our H shares on the Hong Kong Stock Exchange under the stock code "2628". 13 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The following tables set forth our summary consolidated financial information. We have derived the summary consolidated financial information as of and for the years ended December 31, 2000, 2001 and 2002 and as of and for the six-month periods ended June 30, 2002 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus. As described below, these financial statements present the financial results of our predecessor company, CLIC. The financial statements are prepared and presented in accordance with H.K. GAAP. For a reconciliation of our net profit and owners' equity to U.S. GAAP, see Note 26 of the notes to the financial statements included elsewhere in this prospectus. 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 insurance policies supplemental to the policies described in clauses (1) and (2) above, together with the reinsurance contracts specified in an annex to the restructuring agreement. All other insurance 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 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 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 consolidated balance sheet data as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, and the profit and loss accounts data for the years ended December 31, 2000, 2001 and 2002 and for the six-month periods ended June 30, 2002 and 2003, 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. You should read this information in conjunction with the rest of the prospectus, including our audited consolidated financial statements and the accompanying notes and "Operating and Financial Review and Prospects" included elsewhere in this prospectus. 14
For the six months ended For the year ended December 31, June 30, --------------------------------- ------------------------ 2000 2001 2002 2002 2002 2003 2003 ------- ------- ------- ------ ------- ------- ------ RMB RMB RMB US$ RMB RMB US$ (in millions, except 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 8,308 34,164 36,091 4,360 Less: premiums ceded to reinsurers................. (1,501) (1,655) (1,869) (226) (765) (690) (83) ------- ------- ------- ------ ------- ------- ------ Net written premiums and policy fees............... 43,213 55,214 66,900 8,082 33,399 35,401 4,277 Net change in unearned premium reserves............ (314) (248) (476) (58) 306 17 2 ------- ------- ------- ------ ------- ------- ------ Net premiums earned and policy fees................ 42,899 54,966 66,424 8,025 33,705 35,418 4,279 ------- ------- ------- ------ ------- ------- ------ Net investment income.............................. 4,374 6,276 8,347 1,008 3,991 5,070 612 Net realized gains/(losses) on investments......... (23) (6) 266 32 684 691 83 Net unrealized gains/(losses) on investments....... 298 (322) (1,067) (129) (75) 280 34 Other income....................................... 827 293 338 41 121 122 15 ------- ------- ------- ------ ------- ------- ------ Total revenues..................................... 48,375 61,207 74,308 8,977 38,426 41,581 5,023 ------- ------- ------- ------ ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits.......... (8,467) (10,099) (7,010) (847) (3,869) (4,580) (553) Accident and health claims and claim adjustment expenses........................................ (2,767) (3,829) (4,053) (490) (1,959) (2,455) (297) Increase in future life policyholder benefits.... (27,738) (33,121) (45,374) (5,482) (22,793) (23,192) (2,802) Policyholder dividends and participation in profits (7) (177) (641) (77) (310) (862) (104) Amortization of deferred policy acquisition costs.. (1,745) (3,024) (3,832) (463) (2,102) (2,648) (320) Underwriting and policy acquisition costs.......... (3,073) (2,176) (1,661) (201) (822) (708) (86) Administrative expenses............................ (4,318) (5,100) (6,162) (744) (2,916) (3,005) (363) Other operating expenses........................... (2,602) (1,110) (634) (77) (316) (704) (85) Interest expense on bank borrowings................ (29) (5) (7) (1) (4) (5) (1) Interest credited to policyholder contract deposits (4,505) (5,799) (7,095) (857) (3,209) (4,109) (496) Statutory insurance levy........................... (59) (64) (73) (9) (30) (38) (5) ------- ------- ------- ------ ------- ------- ------ Total benefits, claims and expenses................ (55,310) (64,504) (76,542) (9,247) (38,330) (42,306) (5,111) ------- ------- ------- ------ ------- ------- ------ Profit/(loss) before income tax expense and minority interests................................ (6,935) (3,297) (2,234) (270) 96 (725) (88) Income tax expense................................. (14) (4) (14) (2) (3) (8) (1) ------- ------- ------- ------ ------- ------- ------ Profit/(loss) before minority interests............ (6,949) (3,301) (2,248) (272) 93 (733) (89) Minority interests................................. (41) 6 (2) (0) (2) 19 2 ------- ------- ------- ------ ------- ------- ------ Net profit/(loss).................................. (6,990) (3,295) (2,250) (272) 91 (714) (86) ======= ======= ======= ====== ======= ======= ====== U.S. GAAP Revenues......................................... 48,375 61,207 74,308 8,977 38,426 41,581 5,023 Net profit/(loss)................................ (7,026) (3,336) (2,317) (280) 61 (556) (67) Net profit/(loss) per share/(1)/................. (0.35) (0.17) (0.12) (0.01) 0.00 (0.03) (0.00) Net profit/(loss) per ADS........................
- -------- (1) The 20,000,000,000 shares issued to CLIC in the restructuring have been given retroactive treatment for purposes of computing per share amounts. 15
As of December 31, As of June 30, ------------------------------------- --------------------------- 2000 2001 2002 2002 2002 2003 2003 -------- -------- -------- ------- -------- -------- ------- RMB RMB RMB US$ RMB RMB US$ (in millions) Consolidated Balance Sheet Data H.K. GAAP Assets Investments Fixed maturity securities......................... 37,684 53,284 76,337 9,222 61,449 82,017 9,908 Equity securities................................. 6,794 7,698 12,171 1,470 7,084 14,797 1,788 Term deposits..................................... 39,653 76,083 123,675 14,941 97,798 142,043 17,160 Statutory deposits--restricted.................... 40 990 991 120 991 992 120 Investments in associated companies............... 2,031 2,036 2,035 246 2,027 1,993 241 Policy loans...................................... 109 107 106 13 105 136 16 Securities purchased under agreements to resell... 19,840 30,480 36,388 4,396 46,247 70,061 8,464 Other............................................. 572 336 231 28 299 209 25 Cash and cash equivalents......................... 23,275 17,855 14,529 1,755 17,575 23,592 2,850 -------- -------- -------- ------- -------- -------- ------- Total investments................................... 129,998 188,869 266,463 32,191 233,575 335,840 40,572 -------- -------- -------- ------- -------- -------- ------- Other assets Accrued investment income......................... 3,033 3,527 4,198 507 4,003 4,277 517 Premiums receivable............................... 1,388 1,844 1,757 212 2,878 3,282 396 Reinsurance assets................................ 970 1,100 1,224 148 1,091 971 117 Deferred policy acquisition costs................. 5,996 10,893 18,084 2,185 14,185 21,282 2,571 Property, plant and equipment, net of accumulated depreciation..................................... 15,617 18,347 18,457 2,230 18,237 18,610 2,249 Other............................................. 5,375 3,528 3,587 433 4,176 3,676 444 -------- -------- -------- ------- -------- -------- ------- Total other assets.................................. 32,379 39,239 47,307 5,715 44,570 52,098 6,294 -------- -------- -------- ------- -------- -------- ------- Total assets........................................ 162,377 228,108 313,770 37,906 278,145 387,938 46,866 ======== ======== ======== ======= ======== ======== ======= Liabilities and equity Liabilities Future life policyholder benefits................. 226,868 259,989 305,363 36,890 282,782 328,555 39,692 Policyholder contract deposits and other funds.... 89,373 105,609 156,273 18,879 139,575 210,975 25,487 Unearned premium reserves......................... 4,131 4,441 5,036 608 4,058 4,719 570 Reserves for claims and claim adjustment expenses......................................... 716 867 879 106 1,010 910 110 Annuity and other insurance balances payable...... 4,029 6,362 8,057 973 8,257 7,987 965 Premiums received in advance...................... 735 1,481 1,767 213 1,231 1,860 225 Policyholder deposits............................. 694 629 592 72 609 570 69 Policyholder dividends payable.................... 2 177 688 83 390 1,599 193 Securities sold under agreements to repurchase.... 90 14,608 3,602 435 4,501 -- -- Bank borrowings................................... 921 379 313 38 325 311 38 Provision......................................... 73 330 445 54 388 460 56 Other liabilities................................. 3,489 4,206 4,716 570 4,967 4,800 580 Statutory insurance fund.......................... 1,132 1,215 1,337 162 1,269 1,399 169 -------- -------- -------- ------- -------- -------- ------- Total liabilities................................... 332,253 400,293 489,068 59,083 449,362 564,145 68,153 -------- -------- -------- ------- -------- -------- ------- Commitments and contingencies....................... -- -- -- -- -- -- -- Minority interests.................................. 169 163 165 20 164 146 18 Owners' equity...................................... (170,045) (172,348) (175,463) (21,197) (171,381) (176,353) (21,305) -------- -------- -------- ------- -------- -------- ------- Total liabilities and equity........................ 162,377 228,108 313,770 37,906 278,145 387,938 46,866 ======== ======== ======== ======= ======== ======== ======= U.S. GAAP Total assets...................................... 162,307 227,997 313,592 37,884 278,004 387,918 46,864 Total liabilities................................. 332,253 400,293 489,068 59,083 449,362 564,145 68,153 Owners' equity.................................... (170,115) (172,459) (175,641) (21,219) (171,522) (176,373) (21,307)
16 SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The summary unaudited pro forma consolidated financial information for the year ended December 31, 2002, for the six-month periods ended June 30, 2002 and 2003 and as of June 30, 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, 2002 or at the start of the six-month periods ended June 30, 2002 or 2003, respectively, for purposes of the pro forma consolidated profit and loss accounts data and on June 30, 2003 for purposes of the pro forma consolidated balance sheet data. Although we believe it reflects all significant adjustments necessary to give effect to the restructuring as set forth above, the summary 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 transactions had in fact occurred on those dates 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. For an explanation of the pro forma adjustments set forth below, see "Unaudited Pro Forma Consolidated Financial Data" and the historical consolidated financial statements and accompanying notes of China Life included elsewhere in this prospectus. 17
For the six months ended June 30, 2003 ----------------------------------------- Historical Adjustments 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................... 36,091 (10,688) 25,403 3,069 Less: premiums ceded to reinsurers....................... (690) -- (690) (83) ------- ------- ------- ------ Net written premiums and policy fees..................... 35,401 (10,688) 24,713 2,986 Net change in unearned premium reserves.................. 17 -- 17 2 ------- ------- ------- ------ Net premiums earned and policy fees...................... 35,418 (10,688) 24,730 2,988 ------- ------- ------- ------ Net investment income.................................... 5,070 (2,032) 3,038 367 Net realized gains/(losses) on investments............... 691 (271) 420 51 Net unrealized gains/(losses) on investments............. 280 (110) 170 21 Other income............................................. 122 842 964 116 ------- ------- ------- ------ Total revenues........................................... 41,581 (12,259) 29,322 3,542 ------- ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits................. (4,580) 2,946 (1,634) (197) Accident and health claims and claim adjustment expenses (2,455) -- (2,455) (297) Increase in future life policyholder benefits........... (23,192) 10,638 (12,554) (1,517) Policyholder dividends and participation in profits...... (862) -- (862) (104) Amortization of deferred policy acquisition costs........ (2,648) -- (2,648) (320) Underwriting and policy acquisition costs................ (708) 442 (266) (32) Administrative expenses.................................. (3,005) 175 (2,830) (342) Other operating expenses................................. (704) 505 (199) (24) Interest expense on bank borrowings...................... (5) 5 -- -- Interest credited to policyholder contract deposits...... (4,109) 2,832 (1,277) (154) Statutory insurance levy................................. (38) -- (38) (5) ------- ------- ------- ------ Total benefits, claims and expenses...................... (42,306) 17,543 (24,763) (2,992) ------- ------- ------- ------ Profit/(loss) before income tax expense and minority interests.............................................. (725) 5,284 4,559 551 Income tax expense....................................... (8) (1,406) (1,414) (171) ------- ------- ------- ------ Profit/(loss) before minority interests.................. (733) 3,878 3,145 380 Minority interests....................................... 19 (36) (17) (2) ------- ------- ------- ------ Net profit/(loss)........................................ (714) 3,842 3,128 378 ------- ------- ------- ------ U.S. GAAP Net profit.............................................. 3,128 378
18
For the six months ended June 30, 2002 ------------------------------- Historical Adjustments Pro Forma ---------- ----------- --------- (RMB in millions) Revenues Gross written premiums and policy fees........................ 34,164 (10,860) 23,304 Less: premiums ceded to reinsurers............................ (765) -- (765) ------- ------- ------- Net written premiums and policy fees.......................... 33,399 (10,860) 22,539 Net change in unearned premium reserves....................... 306 -- 306 ------- ------- ------- Net premiums earned and policy fees........................... 33,705 (10,860) 22,845 ------- ------- ------- Net investment income......................................... 3,991 (1,977) 2,014 Net realized gains/(losses) on investments.................... 684 (337) 347 Net unrealized gains/(losses) on investments.................. (75) 37 (38) Other income.................................................. 121 851 972 ------- ------- ------- Total revenues................................................ 38,426 (12,286) 26,140 ------- ------- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits...................... (3,869) 2,753 (1,116) Accident and health claims and claim adjustment expenses..... (1,959) -- (1,959) Increase in future life policyholder benefits................ (22,793) 9,527 (13,266) Policyholder dividends and participation in profits........... (310) 2 (308) Amortization of deferred policy acquisition costs............. (2,102) -- (2,102) Underwriting and policy acquisition costs..................... (822) 644 (178) Administrative expenses....................................... (2,916) 156 (2,760) Other operating expenses...................................... (316) 160 (156) Interest expense on bank borrowings........................... (4) 4 -- Interest credited to policyholder contract deposits........... (3,209) 2,524 (685) Statutory insurance levy...................................... (30) -- (30) ------- ------- ------- Total benefits, claims and expenses........................... (38,330) 15,770 (22,560) ------- ------- ------- Profit/(loss) before income tax expense and minority interests 96 3,484 3,580 Income tax expense............................................ (3) (1,003) (1,006) ------- ------- ------- Profit/(loss) before minority interests....................... 93 2,481 2,574 Minority interests............................................ (2) (9) (11) ------- ------- ------- Net profit/(loss)............................................. 91 2,472 2,563 ======= ======= ======= U.S. GAAP Net profit................................................... 2,563
19
For the year ended December 31, 2002 ----------------------------------------- Historical Adjustments Pro Forma Pro Forma ---------- ----------- --------- --------- RMB RMB RMB US$ (in millions) Revenues Gross written premiums and policy fees................... 68,769 (21,692) 47,077 5,687 Less: premiums ceded to reinsurers....................... (1,869) 4 (1,865) (225) ------- ------- ------- ------ Net written premiums and policy fees..................... 66,900 (21,688) 45,212 5,462 Net change in unearned premium reserves.................. (476) 12 (464) (56) ------- ------- ------- ------ Net premiums earned and policy fees...................... 66,424 (21,676) 44,748 5,406 ------- ------- ------- ------ Net investment income.................................... 8,347 (4,001) 4,346 525 Net realized gains/(losses) on investments............... 266 (126) 140 17 Net unrealized gains/(losses) on investments............. (1,067) 507 (560) (68) Other income............................................. 338 1,728 2,066 250 ------- ------- ------- ------ Total revenues........................................... 74,308 (23,568) 50,740 6,130 ------- ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits................. (7,010) 4,702 (2,308) (279) Accident and health claims and claim adjustment expenses (4,053) -- (4,053) (490) Increase in future life policyholder benefits........... (45,374) 20,455 (24,919) (3,010) Policyholder dividends and participation in profits...... (641) 3 (638) (77) Amortization of deferred policy acquisition costs........ (3,832) -- (3,832) (463) Underwriting and policy acquisition costs................ (1,661) 1,106 (555) (67) Administrative expenses.................................. (6,162) 256 (5,906) (713) Other operating expenses................................. (634) 204 (430) (52) Interest expense on bank borrowings...................... (7) 7 -- -- Interest credited to policyholder contract deposits...... (7,095) 5,527 (1,568) (189) Statutory insurance levy................................. (73) -- (73) (9) ------- ------- ------- ------ Total benefits, claims and expenses...................... (76,542) 32,260 (44,282) (5,350) ------- ------- ------- ------ Profit/(loss) before income tax expense and minority interests.............................................. (2,234) 8,692 6,458 780 Income tax expense....................................... (14) (1,890) (1,904) (230) ------- ------- ------- ------ Profit/(loss) before minority interests.................. (2,248) 6,802 4,554 550 Minority interests....................................... (2) (28) (30) (4) ------- ------- ------- ------ Net profit/(loss)........................................ (2,250) 6,774 4,524 546 ======= ======= ======= ====== U.S. GAAP Net profit.............................................. 4,524 546
20
As of June 30, 2003 ------------------------------------------ Historical Adjustments Pro Forma Pro Forma ---------- ----------- --------- --------- RMB RMB RMB US$ (in millions) Pro Forma Consolidated Balance Sheet Data H.K. GAAP Assets Investments Fixed maturity securities........................ 82,017 (36,927) 45,090 5,447 Equity securities................................ 14,797 (6,066) 8,731 1,055 Term deposits.................................... 142,043 (44,480) 97,563 11,786 Statutory deposits-restricted.................... 992 3,008 4,000 483 Investments in associated companies.............. 1,993 (1,993) -- -- Policy loans..................................... 136 (87) 49 6 Securities purchased under agreements to resell.. 70,061 (23,724) 46,337 5,598 Other............................................ 209 (209) -- -- Cash and cash equivalents........................ 23,592 (12,590) 11,002 1,329 -------- -------- ------- -------- Total investments................................. 335,840 (123,068) 212,772 25,705 -------- -------- ------- -------- Other assets Accrued investment income........................ 4,277 (1,559) 2,718 328 Premiums receivable.............................. 3,282 (540) 2,742 331 Reinsurance assets............................... 971 -- 971 117 Deferred policy acquisition costs................ 21,282 -- 21,282 2,571 Property, plant and equipment, net of accumulated depreciation................................... 18,610 (6,971) 11,639 1,406 Other assets..................................... 3,676 (3,041) 635 77 -------- -------- ------- -------- Total other assets................................ 52,098 (12,111) 39,987 4,831 -------- -------- ------- -------- Total assets...................................... 387,938 (135,179) 252,759 30,535 ======== ======== ======= ======== Liabilities and equity Future life policyholder benefits................ 328,555 (260,113) 68,442 8,268 Policyholder contract deposits and other funds... 210,975 (80,551) 130,424 15,756 Unearned premium reserves........................ 4,719 -- 4,719 570 Reserves for claims and claim adjustment expenses 910 -- 910 110 Other liabilities................................ 18,986 (10,463) 8,523 1,030 Deferred tax..................................... -- 3,239 3,239 391 Commitments and contingencies.................... -- -- -- -- Minority interests............................... 146 174 320 39 Owners' equity................................... (176,353) 212,535 36,182 4,371 -------- -------- ------- -------- Total liabilities and equity...................... 387,938 (135,179) 252,759 30,535 ======== ======== ======= ======== U.S. GAAP Total investments................................ 212,772 25,705 Total assets..................................... 252,759 30,535 Total liabilities and equity..................... 252,759 30,535
21 RISK FACTORS You should consider the risks described below carefully before making an investment decision. You should pay particular attention to the fact that we are a Chinese company and are governed by a legal and regulatory environment that in some respects differs from that which prevails in other countries. Our business, financial condition or results of operations could be affected materially and adversely by any of these risks. The trading price of our H shares and ADSs could decline due to any of these risks, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this prospectus. 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. We have established a dedicated business unit to enter into strategic alliances with partner banks. 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. 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. 22 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. 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 prospectus, which present the historical results of CLIC, 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 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 2.00% 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 23 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, has resulted in the duration of our assets being shorter than that of our liabilities. 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, on a pro forma basis after giving effect to the restructuring, 45.9% of our total investment assets as of June 30, 2003 consisted of term deposits with Chinese banks, and of these deposits, 43.9% 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. Defaults on our fixed maturity investments may materially and adversely affect our profitability. On a pro forma basis after giving effect to the restructuring, 21.2% of our investment assets as of June 30, 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 "Regulation--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. 24 The PRC securities markets are still emerging markets, which may expose us to risks of loss from our investments there. On a pro forma basis after giving effect to the restructuring, we had RMB 8,731 million (US$1,055 million) invested in securities investment funds as of June 30, 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. 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 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. In particular, we based our assumptions for mortality on the "CL" series of life tables issued by the People's Bank of China, adjusted based on the results of an analysis of actual death claims incurred by us in 2001 and 2002. Likewise, we based our surrender and morbidity experience on an analysis of lapses and morbidity incurred by us in 2001 and 2002. Given the limited nature of this experience, it is possible that our actual claims could vary significantly from the assumptions used. 25 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. 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 reinsurance to reduce our catastrophe exposure. Such an event could have a material adverse effect on us. We are involved in litigation involving our insurance operations on an ongoing basis, which could result in financial losses or harm our businesses. We are involved in litigation involving our insurance operations on an ongoing basis. In addition, the CIRC from time to time makes inquiries and conducts examinations or investigations concerning our compliance with insurance laws. 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, given the inherent unpredictability of litigation, it is possible that an adverse outcome could have a material adverse effect on our operating results or cash flows. See "Business--Legal Proceedings". The embedded value information we present in this prospectus is based on several assumptions and may vary significantly as those assumptions are changed. In order to provide investors with an additional tool to understand our economic value and business results, we have disclosed information regarding our embedded value, as discussed in the section entitled, "Embedded 26 Value". These measures are based on a discounted cash flow valuation determined using commonly applied actuarial methodologies. Standards with respect to the calculation of embedded value are still evolving, however, and there is no single adopted standard for either the form, determination or presentation of the embedded value of an insurance company. Moreover, because of the technical complexity involved in embedded value calculations and the fact that embedded value estimates vary materially as key assumptions are changed, you should read the discussion under the section entitled "Embedded Value", as well as "Annex A--Actuarial Consultants' Report of Tillinghast-Towers Perrin", in their entirety. You should use special care when interpreting embedded value results and should not place undue reliance on them. See also "Forward-Looking Statements". We do not possess the title certificates in respect of some of the properties owned by us. We own 3,443 properties, including our headquarters in Beijing, China. CLIC holds 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. Our PRC legal counsel, King & Wood, has advised us that it is 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. 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. See "Life Insurance Industry in China". 27 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. 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 short-term accident and 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 short-term group accident and health insurance products we offer. . Mutual fund companies and other financial services providers. We face potential 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, 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 "Regulation--Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries". Approximately 37% of our individual agents had not obtained such a certificate as of June 30, 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, if the CIRC were to enforce this regulation in the future, and if a substantial number of our agents do not become licensed, our business may be materially and adversely affected. 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 28 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 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 you, 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 you. 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 you 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) above, together with the reinsurance contracts 29 specified in an annex to the restructuring agreement. All other insurance policies were retained by CLIC. See "The 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 June 30, 2003, CLIC's owners' equity was a deficit of RMB 176,353 million (US$21,305 million) and as of December 31, 2002, CLIC's owners' equity was a deficit of RMB 175,463 million (US$21,197 million). The net losses incurred by CLIC were RMB 714 million (US$86 million) for the six months ended June 30, 2003 and RMB 6,990 million (US$844 million), RMB 3,295 million (US$398 million) and RMB 2,250 million (US$272 million) for 2000, 2001 and 2002, respectively. These losses were attributable to losses incurred by CLIC on policies retained by CLIC in the restructuring, which has offset the profitability of the policies transferred to us. On a pro forma basis after giving effect to the restructuring, our net profit was RMB 3,128 million (US$378 million) for the six months ended June 30, 2003 and RMB 4,524 million (US$547 million) in 2002. 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 expected to be approved by the MOF and the State Tax Administration; 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 "The 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. 30 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 a company 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 and "ball" logo, and CLIC, which retained 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 and "ball" logo. CLIC retained these trademarks and has registered the "ball" logo trademark in the PRC. CLIC has filed an application to register the trademark in the "China Life" name 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 "Relationship with CLIC--Trademark License Agreement" and "Relationship with CLIC--Non-Competition Agreement". The China Life brand name and our reputation could be materially harmed if CLIC failed 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. 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. Upon completion of the global offering, CLIC will hold 75% of our share capital, or approximately % if the 31 underwriters' over-allotment option is exercised in full. 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 the company's 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 "Relationship with CLIC". 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 within three years. 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 "Relationship with CLIC--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 the assets, liabilities and operations retained by CLIC. See "Operating and Financial Review and Prospects--Overview--Restructuring" and "--Consolidated Results of Operations". As a 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 32 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. 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 33 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 are generally required to resolve disputes with us, our senior management and holders of our domestic shares only through arbitration in Hong Kong or China". 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 law against us, our management and some of the underwriters and experts named in the prospectus. We are a company incorporated under the laws of China, and substantially all of our assets are located in China. In addition, our directors, supervisors, executive officers and some of the underwriters and experts named in the prospectus 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 underwriters and experts named in the prospectus, 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 underwriters and experts named in this prospectus 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. See "Enforceability of Civil Liabilities". 34 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 "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, following the completion of the global offering, we will be 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 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 prospective strengthening in the statutory reserve requirements applicable to life insurance companies operating in China, which will come into effect on December 31, 2003, will lead 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 "Dividend Policy". 35 Risks Relating to the Global Offering Our actual financial performance could vary materially from the prospective financial information contained in this prospectus. The financial projections contained in the section entitled "Prospective Financial Information" are included for the purpose of listing our H shares on the Hong Kong Stock Exchange. They represent our estimate of our results of operations for the year ending December 31, 2003. These projections are based upon a number of assumptions, some of which may not materialize or may change. In addition, unanticipated events could adversely affect the actual results that we achieve in 2003. As a result, our actual results may vary materially from these projections. You should not unduly rely on these projections. Although we will become a reporting company after the global offering and will have ongoing disclosure obligations under U.S. federal securities laws, we do not intend to update or otherwise revise the projections in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events. We have prepared the projections in accordance with customary practice in securities offerings in Hong Kong, but not in compliance with the published guidelines of the United States Securities and Exchange Commission and the American Institute of Certified Public Accountants, which contain more detailed requirements. The rules of the Hong Kong Stock Exchange relating to financial projections only require us to disclose the principal assumptions on which we base the projections. An active trading market for our H shares or ADSs may not develop, and their trading prices may fluctuate significantly. Prior to the global offering, no public market for our H shares or ADSs has existed. We cannot assure you that a liquid public market for either our H shares or our ADSs will develop or be sustained after the global offering. If an active public market for our H shares or ADSs does not develop after the global offering, the market price and liquidity of our H shares or ADSs may be materially and adversely affected. Because the initial public offering price is higher than the net tangible book value per share, you will incur immediate dilution. The initial public offering price of our H shares is higher than the net tangible book value per share of the outstanding shares issued to CLIC. Therefore, purchasers of our H shares or ADSs in this offering will experience an immediate dilution in net tangible book value of HK$ per H share or US$ per ADS, and CLIC will receive an increase in the net tangible book value per share of its shares. Since there will be a business day time gap between pricing and trading of our H shares and ADSs offered in this offering, holders of our H shares and holders of our ADSs are subject to the risk that the trading prices of our H shares and ADSs could fall during the period before trading of our H shares and ADSs begins. The initial prices to the public of our H shares and ADSs sold in the global offering will be determined on the date of pricing. However, our H shares will not commence trading on the HKSE until they are delivered, which is expected to be Hong Kong business days after the pricing date. Trading of our ADSs on the NYSE will not commence until the business day immediately preceding the commencement of trading of our H shares on the HKSE. As a result, investors may not be able to sell or otherwise deal in our H shares or ADSs during that period. Accordingly, holders of our H shares and holders of our ADSs are subject to the risk that the trading prices of our H shares and ADSs could fall before trading begins as a result of adverse market conditions or other adverse developments that could occur between the time of sale and the time trading begins. 36 Your investment in our shares is subject to exchange rate risk between U.S. dollars and Hong Kong dollars. Our H shares will be quoted and traded in Hong Kong dollars on the Hong Kong Stock Exchange. However, our ADSs will be quoted and traded in U.S. dollars on the New York Stock Exchange, and accordingly the value of your investment in the ADSs is subject to the effect of changes in exchange rates between U.S. dollars and Hong Kong dollars. Since October 1983, the exchange rate of the Hong Kong dollar has been linked to the U.S. dollar. See "Exchange Rate Information". If, however, the Hong Kong dollar depreciates against the U.S. dollar in the future, the value of your investment in U.S. dollar terms could decline even if the quoted or trading price of our H shares on the Hong Kong Stock Exchange were to remain unchanged or appreciate. 37 FORWARD-LOOKING STATEMENTS We have included in this prospectus forward-looking statements that state our intentions, beliefs, expectations or predictions for the future, in particular under "Operating and Financial Review and Prospects", "Prospective Financial Information", "Business" and "Annex A--Actuarial Consultants' Report of Tillinghast-Towers Perrin". 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; . our business strategy and plan of operation; . the prospective financial information regarding our business; . our dividend policy; and . information regarding our embedded value. 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 prospectus, 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 "Risk Factors" and elsewhere in this prospectus, including in conjunction with the forward-looking statements included in this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements contained in this prospectus, whether as a result of new information, future events or otherwise, except as required by law. All forward-looking statements contained in this prospectus are qualified by reference to this cautionary statement. 38 EXCHANGE RATE INFORMATION We prepare our financial statements in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars, and U.S. dollars into Renminbi, at RMB 8.2776 to US$1.00, the noon buying rate on June 30, 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. 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$1.00 since the link was first established. The Hong Kong government has stated its intention to maintain the link at that rate, and it, acting through the Hong Kong Monetary Authority, has a number of means by which it may act to maintain exchange rate stability. Exchange rates between the Hong Kong dollar and other currencies are influenced by the linked rate between the U.S. dollar and the Hong Kong dollar. 39 The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each of the periods shown:
Noon buying rate --------------------------- RMB per US$ HK$ per US$ ------------- ------------- High Low High Low ------ ------ ------ ------ January 2003....................... 8.2800 8.2766 7.8001 7.7988 February 2003...................... 8.2800 8.2768 7.8000 7.7989 March 2003......................... 8.2776 8.2770 7.7995 7.7987 April 2003......................... 8.2774 8.2769 7.7998 7.7991 May 2003........................... 8.2771 8.2768 7.7995 7.7985 June 2003.......................... 8.2776 8.2768 7.7993 7.7980 July 2003.......................... 8.2776 8.2768 7.7998 7.7950 August 2003........................ 8.2775 8.2766 7.7998 7.7920 September 2003..................... 8.2775 8.2768 7.7999 7.7444 October 2003....................... 8.2776 8.2765 7.7684 7.7085 November 2003 (through November 19) 8.2770 8.2766 7.7692 7.7475
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 1998, 1999, 2000, 2001, 2002 and 2003 (through November 19) (calculated by averaging the noon buying rates on the last day of each month of the periods shown):
Period-end noon Average noon buying rate buying rate --------------- ------------- RMB HK$ RMB HK$ per per per per US$ US$ US$ US$ ------ ------ ------ ------ 1998...................... 8.2789 7.7476 8.2969 7.7465 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 (through November 19) 8.2767 7.7600 8.2772 7.7878
40 USE OF PROCEEDS We estimate that the net proceeds to us from this offering will be approximately US$ million (RMB million) before exercise of the over-allotment option, assuming an offering price of US$ (RMB ) per ADS, the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discount and our estimated offering expenses. If the over-allotment option is exercised in full, we estimate that the net proceeds to us from the offering of these additional shares will be approximately US$ million (RMB million), assuming an offer price of US$ per ADS, the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discount and our estimated offering expenses. We expect to use the net proceeds from this offering, including the net proceeds of the offering of any additional shares if the over-allotment option is exercised, for general corporate purposes and to strengthen our capital base. All of the net proceeds we receive from the global offering will be applied to increase our level of paid-in capital and further strengthen our solvency level. All these proceeds will be invested in accordance with the regulations of the relevant regulatory authorities and our investment policy. We estimate that the net proceeds received by CLIC from this offering will be approximately US$ million (RMB million), or US$ million (RMB million) if the underwriters exercise in full their option to purchase additional shares, assuming an offering price of US$ (RMB ) per ADS, the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by CLIC. We will not receive any of the proceeds from the sale of shares by CLIC. In accordance with PRC regulations, CLIC will be required to contribute the net proceeds it receives from this offering to the Chinese National Social Security Fund. 41 DIVIDEND POLICY The payment of any dividend by us must be approved by shareholders in a shareholders' meeting. Our board of directors intends to recommend the declaration of cash dividends to the shareholders in general meeting. The decision to make a recommendation for the payment of any dividend and the amount of the dividend will depend on: . our results of operations and cash flows; . our financial position; . statutory solvency requirements as determined under PRC GAAP with reference to CIRC rules; . our shareholders' interests; . general business conditions; . our future prospects; . statutory and regulatory restrictions on the payment of dividends by us; and . other factors that our board of directors deems relevant. We will pay dividends out of our after-tax profits only after we have made the following allowances and allocations: . recovery of accumulated losses, if any; . allocations to the statutory common reserve fund equivalent to 10% of our after-tax income, as determined under PRC GAAP; . allocations to the statutory common welfare fund equivalent to between 5% and 10% of our after-tax income, as determined under PRC GAAP; and . allocations to a discretionary common reserve fund as approved by the shareholders in a shareholders' meeting. The minimum and maximum allocations to the statutory funds are 15% and 20% of our after-tax income, as determined under PRC GAAP. When the statutory common reserve fund reaches and is maintained at or above 50% of our registered capital, no further allocations to this fund will be required. 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. Payment of dividends by us is also regulated by the PRC insurance law. If we do not meet the minimum solvency level required by the CIRC, we may be prohibited from paying dividends. See "Description of Share Capital--Dividends" and "Regulation--Insurance Company Regulation--Solvency requirements". Our predecessor, CLIC, did not pay any dividends in any of the three financial years ended December 31, 2002. A prospective strengthening in the statutory reserve requirements applicable to life insurance companies 42 operating in China, which will come into effect on December 31, 2003, will lead 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. Subject to the considerations and constraints described above, we expect to begin paying dividends in 2005, at a payout range of between 10% and 20% of our after-tax profits, as determined under H.K. GAAP. We expect to continue to pay dividends in line with our earnings performance thereafter. We will declare dividends, if any, in Renminbi with respect to the H shares on a per share basis and will pay such dividends in Hong Kong dollars. 43 CAPITALIZATION The following table presents: . the actual consolidated capitalization of CLIC as of June 30, 2003; . the actual consolidated capitalization of CLIC as of June 30, 2003, as adjusted to reflect the restructuring as if it had occurred on that date; and . our pro forma consolidated capitalization as of June 30, 2003, as if this offering of H shares at an offering price of US$ per ADS, or HK$ per H share, the midpoint of the range set forth on the cover page of this prospectus, had occurred on that date. You should read this table in conjunction with "Operating and Financial Review and Prospects" and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.
As of June 30, 2003 --------------------------------------------- Adjusted for Pro forma as Actual restructuring adjusted ----------------- ------------ ------------- RMB US$ RMB US$ RMB US$ -------- ------- ------ ----- ------ ------ (in millions) Bank borrowings................................... 311 38 -- -- (of which RMB 140 million is secured and RMB 171 million is unsecured, actual) Equity Ordinary shares, par value RMB 1.00 per share; no shares issued and outstanding, actual; 20,000,000,000 shares issued and outstanding, adjusted for restructuring; and shares issued and outstanding, pro forma.............. 4,600 556 20,000 2,416 Additional paid-in capital....................... 113 14 16,182 1,955 Retained earnings and accumulated other comprehensive income........................... (181,066) (21,874) -- -- Total equity..................................... (176,353) (21,305) 36,182 4,371 Total capitalization......................... (176,042) (21,267) 36,182 4,371
44 DILUTION Our net tangible book value as of June 30, 2003, determined on a pro forma basis after giving effect to the restructuring as if it had occurred on June 30, 2003, was RMB 21,923 million (US$2,648 million), which equates to a pro forma net tangible book value of US$ per ADS. Net tangible book value per ADS represents: . the amount of our tangible assets, meaning total assets less net intangible assets; . reduced by our total liabilities and minority interests; and . divided by the ADS equivalent of the total number of H shares outstanding. Dilution in pro forma net tangible book value per ADS represents the difference between the amount per ADS paid by purchasers of our ADSs and H shares in this offering and the pro forma net tangible book value per share immediately following this offering. After giving effect to ADSs and H shares which we and CLIC are selling in this offering, based on the midpoint of the price range set forth on the cover page of this prospectus, and after deducting our underwriting discount and estimated offering expenses and giving effect to our intended use of proceeds, our pro forma adjusted net tangible book value as of June 30, 2003 would have been approximately US$ million, or US$ per ADS, or to US$ per ADS, if the underwriters exercise the over-allotment option in full. This represents an immediate increase in pro forma net tangible book value of US$ per ADS to CLIC, our existing shareholder, and an immediate dilution of pro forma net tangible book value of US$ per ADS to new investors purchasing shares in this offering. This dilution will be US$ per ADS if the underwriters exercise the over-allotment option in full. Assuming this offering had occurred on June 30, 2003, the following table illustrates the dilution per share on the basis that the underwriters do not exercise the over-allotment option and that they exercise the over-allotment option in full:
Over-allotment Over-allotment option not option fully exercised exercised -------------- -------------- (US$) Initial public offering price per ADS........................................ Pro forma net tangible book value per ADS before this offering............... Increase per ADS attributable to investors in this offering.................. Pro forma net tangible book value as adjusted to give effect to this offering Dilution per ADS to investors in this offering...............................
Assuming this offering had occurred on June 30, 2003, the following table summarizes the differences between the total consideration paid and the average price per share paid by CLIC (based on the pro forma net tangible book value of RMB 21,923 million (US$2,648 million) for the net assets transferred to us as of June 30, 2003, as determined under H.K. GAAP) and the investors in this offering with respect to the number of ordinary shares purchased from us:
Shares purchased Total consideration ---------------- ------------------- Average price Number Percent Amount Percent per share ------ ------- ------ ------- ------------- CLIC...................... % US$ % US$ Investors in this offering % US$ % US$ ------ ---- --- ---- --- Total..................... 100% US$ 100% US$ ====== ==== === ==== ===
45 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, 2000, 2001 and 2002 and as of and for the six-month periods ended June 30, 2002 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus. As described below, these financial statements present the financial results of our predecessor company, CLIC. The financial statements are prepared and presented in accordance with H.K. GAAP. For a reconciliation of our net profit and owners' equity to U.S. GAAP, see Note 26 of the notes to the financial statements included elsewhere in this prospectus. 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. See "The Restructuring". All other insurance 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 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 proposes, the restructuring is treated as having occurred on September 30, 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 from a number of significant aspects. Therefore, our consolidated balance sheet data as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, and the profit and loss accounts data for the years ended December 31, 2000, 2001 and 2002 and for the six-month periods ended June 30, 2002 and 2003, 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. You should read this information in conjunction with the rest of the prospectus, including our audited consolidated financial statements and the accompanying notes and "Operating and Financial Review and Prospects" included elsewhere in this prospectus. The selected historical consolidated financial information below omits data related to 1998 and 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, 1998 and 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. 46
For the six months For the year ended December 31, ended June 30, --------------------------------- ------------------------ 2000 2001 2002 2002 2002 2003 2003 ------- ------- ------- ------ ------- ------- ------ RMB RMB RMB US$ RMB RMB US$ (in millions, except 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 8,308 34,164 36,091 4,360 Less: premiums ceded to reinsurers............ (1,501) (1,655) (1,869) (226) (765) (690) (83) ------- ------- ------- ------ ------- ------- ------ Net written premiums and policy fees.......... 43,213 55,214 66,900 8,082 33,399 35,401 4,277 Net change in unearned premium reserves....... (314) (248) (476) (58) 306 17 2 ------- ------- ------- ------ ------- ------- ------ Net premiums earned and policy fees........... 42,899 54,966 66,424 8,025 33,705 35,418 4,279 ------- ------- ------- ------ ------- ------- ------ Net investment income......................... 4,374 6,276 8,347 1,008 3,991 5,070 612 Net realized gains/(losses) on investments.... (23) (6) 266 32 684 691 83 Net unrealized gains/(losses) on investments.. 298 (322) (1,067) (129) (75) 280 34 Other income.................................. 827 293 338 41 121 122 15 ------- ------- ------- ------ ------- ------- ------ Total revenues................................ 48,375 61,207 74,308 8,977 38,426 41,581 5,023 ------- ------- ------- ------ ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits...... (8,467) (10,099) (7,010) (847) (3,869) (4,580) (553) Accident and health claims and claim adjustment expenses........................ (2,767) (3,829) (4,053) (490) (1,959) (2,455) (297) Increase in future life policyholder benefits (27,738) (33,121) (45,374) (5,482) (22,793) (23,192) (2,802) Policyholder dividends and participation in profits..................................... (7) (177) (641) (77) (310) (862) (104) Amortization of deferred policy acquisition costs....................................... (1,745) (3,024) (3,832) (463) (2,102) (2,648) (320) Underwriting and policy acquisition costs..... (3,073) (2,176) (1,661) (201) (822) (708) (86) Administrative expenses....................... (4,318) (5,100) (6,162) (744) (2,916) (3,005) (363) Other operating expenses...................... (2,602) (1,110) (634) (77) (316) (704) (85) Interest expense on bank borrowings........... (29) (5) (7) (1) (4) (5) (1) Interest credited to policyholder contract deposits.................................... (4,505) (5,799) (7,095) (857) (3,209) (4,109) (496) Statutory insurance levy...................... (59) (64) (73) (9) (30) (38) (5) ------- ------- ------- ------ ------- ------- ------ Total benefits, claims and expenses........... (55,310) (64,504) (76,542) (9,247) (38,330) (42,306) (5,111) ------- ------- ------- ------ ------- ------- ------ Profit/(loss) before income tax expense and minority interests.......................... (6,935) (3,297) (2,234) (270) 96 (725) (88) Income tax expense............................ (14) (4) (14) (2) (3) (8) (1) ------- ------- ------- ------ ------- ------- ------ Profit/(loss) before minority interests....... (6,949) (3,301) (2,248) (272) 93 (733) (89) Minority interests............................ (41) 6 (2) (0) (2) 19 2 ------- ------- ------- ------ ------- ------- ------ Net profit/(loss)............................. (6,990) (3,295) (2,250) (272) 91 (714) (86) ======= ======= ======= ====== ======= ======= ====== U.S. GAAP Revenues..................................... 48,375 61,207 74,308 8,977 38,426 41,581 5,023 Net profit/(loss)............................ (7,026) (3,336) (2,317) (280) 61 (556) (67) Net profit/(loss) per share/(1)/............. (0.35) (0.17) (0.12) (0.01) 0.00 (0.03) (0.00) Net profit/(loss) per ADS....................
- -------- (1) The 20,000,000,000 shares issued to CLIC in the restructuring have been given retroactive treatment for purposes of computing per share amounts. 47
As of December 31, As of June 30, ------------------------------------- --------------------------- 2000 2001 2002 2002 2002 2003 2003 -------- -------- -------- ------- -------- -------- ------- RMB RMB RMB US$ RMB RMB US$ (in millions) Consolidated Balance Sheet Data H.K. GAAP Assets Investments Fixed maturity securities......................... 37,684 53,284 76,337 9,222 61,449 82,017 9,908 Equity securities................................. 6,794 7,698 12,171 1,470 7,084 14,797 1,788 Term deposits..................................... 39,653 76,083 123,675 14,941 97,798 142,043 17,160 Statutory deposits--restricted.................... 40 990 991 120 991 992 120 Investments in associated companies............... 2,031 2,036 2,035 246 2,027 1,993 241 Policy loans...................................... 109 107 106 13 105 136 16 Securities purchased under agreements to resell... 19,840 30,480 36,388 4,396 46,247 70,061 8,464 Other............................................. 572 336 231 28 299 209 25 Cash and cash equivalents......................... 23,275 17,855 14,529 1,755 17,575 23,592 2,850 -------- -------- -------- ------- -------- -------- ------- Total investments................................... 129,998 188,869 266,463 32,191 233,575 335,840 40,572 -------- -------- -------- ------- -------- -------- ------- Other assets Accrued investment income......................... 3,033 3,527 4,198 507 4,003 4,277 517 Premiums receivable............................... 1,388 1,844 1,757 212 2,878 3,282 396 Reinsurance assets................................ 970 1,100 1,224 148 1,091 971 117 Deferred policy acquisition costs................. 5,996 10,893 18,084 2,185 14,185 21,282 2,571 Property, plant and equipment, net of accumulated depreciation..................................... 15,617 18,347 18,457 2,230 18,237 18,610 2,249 Other............................................. 5,375 3,528 3,587 433 4,176 3,676 444 -------- -------- -------- ------- -------- -------- ------- Total other assets.................................. 32,379 39,239 47,307 5,715 44,570 52,098 6,294 -------- -------- -------- ------- -------- -------- ------- Total assets........................................ 162,377 228,108 313,770 37,906 278,145 387,938 46,866 ======== ======== ======== ======= ======== ======== ======= Liabilities and equity Liabilities Future life policyholder benefits................. 226,868 259,989 305,363 36,890 282,782 328,555 39,692 Policyholder contract deposits and other funds.... 89,373 105,609 156,273 18,879 139,575 210,975 25,487 Unearned premium reserves......................... 4,131 4,441 5,036 608 4,058 4,719 570 Reserves for claims and claim adjustment expenses......................................... 716 867 879 106 1,010 910 110 Annuity and other insurance balances payable...... 4,029 6,362 8,057 973 8,257 7,987 965 Premiums received in advance...................... 735 1,481 1,767 213 1,231 1,860 225 Policyholder deposits............................. 694 629 592 72 609 570 69 Policyholder dividends payable.................... 2 177 688 83 390 1,599 193 Securities sold under agreements to repurchase.... 90 14,608 3,602 435 4,501 -- -- Bank borrowings................................... 921 379 313 38 325 311 38 Provision......................................... 73 330 445 54 388 460 55 Other liabilities................................. 3,489 4,206 4,716 570 4,967 4,800 580 Statutory insurance fund.......................... 1,132 1,215 1,337 162 1,269 1,399 169 -------- -------- -------- ------- -------- -------- ------- Total liabilities................................... 332,253 400,293 489,068 59,083 449,362 564,145 68,153 -------- -------- -------- ------- -------- -------- ------- Commitments and contingencies....................... -- -- -- -- -- -- -- Minority interests.................................. 169 163 165 20 164 146 18 Owners' equity...................................... (170,045) (172,348) (175,463) (21,197) (171,381) (176,353) (21,305) -------- -------- -------- ------- -------- -------- ------- Total liabilities and equity........................ 162,377 228,108 313,770 37,906 278,145 387,938 46,866 ======== ======== ======== ======= ======== ======== ======= U.S. GAAP Total assets...................................... 162,307 227,997 313,592 37,884 278,004 387,918 46,864 Total liabilities................................. 332,253 400,293 489,068 59,083 449,362 564,145 68,153 Owners' equity.................................... (170,115) (172,459) (175,641) (21,219) (171,522) (176,373) (21,307)
48 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The unaudited pro forma consolidated financial information for the year ended December 31, 2002, for the six-month periods ended June 30, 2002 and 2003 and as of June 30, 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, 2002 or at the start of the six-month periods ended June 30, 2002 or 2003, for purposes of the pro forma profit and loss data, and on June 30, 2003, for purposes of the pro forma consolidated balance sheet data. 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 transactions had in fact occurred on those dates 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 "Operating and Financial Review and Prospects" and the historical consolidated financial statements and accompanying notes of China Life included elsewhere in this prospectus. Upon the approval of the State Council and the CIRC, we were formed on June 30, 2003 in connection with the restructuring by 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 prospectus 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 prospectus as the "transferred policies". See "The 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 effective date. See "The Restructuring--Transfer of Insurance Policies and Related Assets". . 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 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. 49 . 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 "Relationship with CLIC--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 "The Restructuring--Transfer of Insurance Policies and Related Assets". . CLIC retained the trademarks used in our business, including the "China Life" name and "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 "Relationship with CLIC--Trademark License Agreement". . CLIC's contracts with its agents and other intermediaries were transferred to us. See "The 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 "Relationship with CLIC". As a result of the transfer of assets and liabilities to us pursuant to the restructuring, we would have had a pro forma owners' equity as of June 30, 2003 of RMB 36,182 million (US$4,371 million), as determined under H.K. GAAP. In consideration of this transfer, we issued 20,000,000,000 domestic state-owned shares to CLIC as of the effective date. 50
For the six months ended June 30, 2003 ---------------------------------------------- Historical Adjustments Note Pro Forma Pro Forma ---------- ----------- ---- --------- --------- RMB RMB RMB US$ (in millions) Pro Forma Consolidated Profit and Loss Accounts Data Revenues Gross written premiums and policy fees................... 36,091 (10,688) (a) 25,403 3,069 Less: premiums ceded to reinsurers....................... (690) -- (a) (690) (83) ------- ------- ------- ------ Net written premiums and policy fees..................... 35,401 (10,688) (a) 24,713 2,986 Net change in unearned premium reserves.................. 17 -- (a) 17 2 ------- ------- ------- ------ Net premiums earned and policy fees...................... 35,418 (10,688) (a) 24,730 2,988 ------- ------- ------- ------ Net investment income.................................... 5,070 (2,032) (b) 3,038 367 Net realized gains/(losses) on investments............... 691 (271) (b) 420 51 Net unrealized gains/(losses) on investments............. 280 (110) (b) 170 21 Other income............................................. 122 842 964 116 (49) (l) 869 (c) 22 (d) ------- ------- ------- ------ Total revenues........................................... 41,581 (12,259) 29,322 3,542 ------- ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits................. (4,580) 2,946 (e) (1,634) (197) Accident and health claims and claim adjustment expenses (2,455) -- (e) (2,455) (297) Increase in future life policyholder benefits........... (23,192) 10,638 (f) (12,554) (1,517) Policyholder dividends and participation in profits...... (862) -- (e) (862) (104) Amortization of deferred policy acquisition costs........ (2,648) -- (2,648) (320) Underwriting and policy acquisition costs................ (708) 442 (g) (266) (32) Administrative expenses.................................. (3,005) 175 (2,830) (342) 17 (k) 17 (i) 205 (h) (64) (j) Other operating expenses................................. (704) 505 (k) (199) (24) Interest expense on bank borrowings...................... (5) 5 (k) -- -- Interest credited to policyholder contract deposits...... (4,109) 2,832 (e) (1,277) (154) Statutory insurance levy................................. (38) -- (38) (5) ------- ------- ------- ------ Total benefits, claims and expenses...................... (42,306) 17,543 (24,763) (2,992) ------- ------- ------- ------ Profit/(loss) before income tax expense and minority interests.............................................. (725) 5,284 4,559 551 Income tax expense....................................... (8) (1,406) (l) (1,414) (171) ------- ------- ------- ------ Profit/(loss) before minority interests.................. (733) 3,878 3,145 380 Minority interests....................................... 19 (19) (k) -- -- (17) (m) (17) (2) ------- ------- ------- ------ Net profit/(loss)........................................ (714) 3,842 3,128 378 ======= ======= ======= ====== U.S. GAAP Net profit.............................................. 3,128 378
51
For the six months ended June 30, 2002 ------------------------------------ Historical Adjustments Note Pro Forma ---------- ----------- ---- --------- (RMB in millions) Revenues Gross written premiums and policy fees........................ 34,164 (10,860) (a) 23,304 Less: premiums ceded to reinsurers............................ (765) -- (a) (765) ------- ------- ------- Net written premiums and policy fees.......................... 33,399 (10,860) (a) 22,539 Net change in unearned premium reserves....................... 306 -- (a) 306 ------- ------- ------- Net premiums earned and policy fees........................... 33,705 (10,860) (a) 22,845 ------- ------- ------- Net investment income......................................... 3,991 (1,977) (b) 2,014 Net realized gains/(losses) on investments.................... 684 (337) (b) 347 Net unrealized gains/(losses) on investments.................. (75) 37 (b) (38) Other income.................................................. 121 851 972 (58) (l) 892 (c) 17 (d) ------- ------- ------- Total revenues................................................ 38,426 (12,286) 26,140 ------- ------- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits...................... (3,869) 2,753 (e) (1,116) Accident and health claims and claim adjustment expenses..... (1,959) -- (e) (1,959) Increase in future life policyholder benefits................ (22,793) 9,527 (f) (13,266) Policyholder dividends and participation in profits........... (310) 2 (e) (308) Amortization of deferred policy acquisition costs............. (2,102) -- (2,102) Underwriting and policy acquisition costs..................... (822) 644 (g) (178) Administrative expenses....................................... (2,916) 156 (2,760) 10 (k) 20 (i) 190 (h) (64) (j) Other operating expenses...................................... (316) 160 (k) (156) Interest expense on bank borrowings........................... (4) 4 (k) -- Interest credited to policyholder contract deposits........... (3,209) 2,524 (e) (685) Statutory insurance levy...................................... (30) -- (30) ------- ------- ------- Total benefits, claims and expenses........................... (38,330) 15,770 (22,560) ------- ------- ------- Profit/(loss) before income tax expense and minority interests 96 3,484 3,580 Income tax expense............................................ (3) (1,003) (l) (1,006) ------- ------- ------- Profit/(loss) before minority interests....................... 93 2,481 2,574 Minority interests............................................ (2) 2 (k) -- (11) (m) (11) ------- ------- ------- Net profit/(loss)............................................. 91 2,472 2,563 ------- ------- ------- U.S. GAAP Net profit................................................... 2,563
52
For the year ended December 31, 2002 ---------------------------------------------- Historical Adjustments Note Pro Forma Pro Forma ---------- ----------- ---- --------- --------- RMB RMB RMB US$ (in millions) Revenues Gross written premiums and policy fees................... 68,769 (21,692) (a) 47,077 5,687 Less: premiums ceded to reinsurers....................... (1,869) 4 (a) (1,865) (225) ------- ------- ------- ------ Net written premiums and policy fees..................... 66,900 (21,688) (a) 45,212 5,462 Net change in unearned premium reserves.................. (476) 12 (a) (464) (56) ------- ------- ------- ------ Net premiums earned and policy fees...................... 66,424 (21,676) (a) 44,748 5,406 ------- ------- ------- ------ Net investment income.................................... 8,347 (4,001) (b) 4,346 525 Net realized gains/(losses) on investments............... 266 (126) (b) 140 17 Net unrealized gains/(losses) on investments............. (1,067) 507 (b) (560) (68) Other income............................................. 338 1,728 2,066 250 (106) (l) 1,792 (c) 42 (d) ------- ------- ------- ------ Total revenues........................................... 74,308 (23,568) 50,740 6,130 ------- ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits................. (7,010) 4,702 (e) (2,308) (279) Accident and health claims and claim adjustment expenses (4,053) -- (e) (4,053) (490) Increase in future life policyholder benefits........... (45,374) 20,455 (f) (24,919) (3,010) Policyholder dividends and participation in profits...... (641) 3 (e) (638) (77) Amortization of deferred policy acquisition costs........ (3,832) -- (3,832) (463) Underwriting and policy acquisition costs................ (1,661) 1,106 (g) (555) (67) Administrative expenses.................................. (6,162) 256 (5,906) (713) 20 (k) 35 (i) 328 (h) (127) (j) Other operating expenses................................. (634) 204 (k) (430) (52) Interest expense on bank borrowings...................... (7) 7 (k) -- -- Interest credited to policyholder contract deposits...... (7,095) 5,527 (e) (1,568) (189) Statutory insurance levy................................. (73) -- (73) (9) ------- ------- ------- ------ Total benefits, claims and expenses...................... (76,542) 32,260 (44,282) (5,350) ------- ------- ------- ------ Profit/(loss) before income tax expense and minority interests.............................................. (2,234) 8,692 6,458 780 Income tax expense....................................... (14) (1,890) (l) (1,904) (230) ------- ------- ------- ------ Profit/(loss) before minority interests.................. (2,248) 6,802 4,554 550 Minority interests....................................... (2) 2 (k) -- -- (30) (m) (30) (4) ------- ------- ------- ------ Net profit/(loss)........................................ (2,250) 6,774 4,524 546 ======= ======= ======= ====== U.S. GAAP Net profit.............................................. 4,524 546
53
As of June 30, 2003 ----------------------------------------------- Historical Adjustments Note Pro Forma Pro Forma ---------- ----------- ---- --------- --------- RMB RMB RMB US$ (in millions) Pro Forma Consolidated Balance Sheet Data H.K. GAAP Assets Investments Fixed maturity securities........................ 82,017 (36,927) (n) 45,090 5,447 Equity securities................................ 14,797 (6,066) (n) 8,731 1,055 Term deposits.................................... 142,043 (44,480) (n) 97,563 11,786 Statutory deposits--restricted................... 992 3,008 (n) 4,000 483 Investments in associated companies.............. 1,993 (1,993) (n) -- -- Policy loans..................................... 136 (87) (n) 49 6 Securities purchased under agreements to resell.. 70,061 (23,724) (n) 46,337 5,598 Other............................................ 209 (209) (n) -- -- Cash and cash equivalents........................ 23,592 (12,910) (n) 10,682 1,290 320 (o) 320 39 -------- -------- ------- ------ Total investments................................. 335,840 (123,068) (n) 212,772 25,705 -------- -------- ------- ------ Other assets Accrued investment income........................ 4,277 (1,559) (n) 2,718 328 Premiums receivable.............................. 3,282 (540) 2,742 396 Reinsurance assets............................... 971 -- 971 117 Deferred policy acquisition costs................ 21,282 -- 21,282 2,571 Property, plant and equipment, net of accumulated depreciation................................... 18,610 (6,971) (n) 11,639 1,406 Other............................................ 3,676 (3,041) (n) 635 11 -------- -------- ------- ------ Total other assets................................ 52,098 (12,111) 39,987 4,831 -------- -------- ------- ------ Total assets...................................... 387,938 (135,179) 252,759 30,535 ======== ======== ======= ====== Liabilities and equity Future life policyholder benefits................ 328,555 (260,113) (p) 68,442 8,268 Policyholder contract deposits and other funds... 210,975 (80,551) (p) 130,424 15,756 Unearned premium reserves........................ 4,719 -- 4,719 570 Reserves for claims and claim adjustment expenses 910 -- 910 110 Other liabilities................................ 18,986 (10,463) (q) 8,523 1,030 Deferred tax..................................... -- 3,239 (r) 3,239 391 Commitments and contingencies.................... -- -- -- -- Minority interests............................... 146 (146) (n) -- -- 320 (o) 320 39 Owners' equity................................... (176,353) 212,535 36,182 4,371 -------- -------- ------- ------ Total liabilities and equity...................... 387,938 (135,179) 252,759 30,535 ======== ======== ======= ====== U.S. GAAP Total investments................................ 212,772 25,705 Total assets..................................... 252,759 30,535 Total liabilities and equity..................... 252,759 30,535
54 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 "Relationship with CLIC". Average cash and investment assets retained by CLIC for the year ended December 31, 2002 have been determined as if the restructuring had occurred on January 1, 2002. China Life's pro forma owners' equity on January 1, 2002 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 in the pro forma consolidated profit and loss accounts data has been determined on the basis of the percentage investment return on all of CLIC's cash and investment assets for 2002. (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) 2.50% of the actual premiums and deposits in respect of such policies collected during the semi-annual period. See "Relationship with CLIC". 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, 2002. (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 an asset management agreement between CLIC and the asset management joint venture in connection with the restructuring. See "Relationship with CLIC". 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, 2002. (e) Reflects the exclusion of amounts attributable to the non-transferred policies. (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. 55 (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 "Relationship with CLIC". (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, 2002 and the six-month periods ended June 30, 2002 and 2003. (m) Reflects CLIC's minority interests in the asset management joint venture. Pro Forma Consolidated Balance Sheet Data (n) 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 and deferred policy acquisition costs 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 29.6 billion, as determined under PRC valuation regulations. This was equivalent to RMB 36.2 billion 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. (o) Reflects CLIC's minority interests in the asset management joint venture. (p) Reflects the exclusion of reserves attributable to the non-transferred policies. (q) Reflects the exclusion of other liabilities and minority interests in subsidiaries retained by CLIC in the restructuring. (r) Deferred tax is provided in respect of the tax effect of differences between the book and tax bases as of June 30, 2003 arising as a result of the restructuring. 56 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 and the Unaudited Pro Forma Consolidated Financial Data and accompanying notes included elsewhere in this prospectus. 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. The restructuring was carried out to meet several objectives: . To establish a modern corporate governance structure and more effective management system. . To enable us to capture the opportunities offered by the rapid growth of China's insurance market and make us more competitive. . To obtain greater access to the capital markets and enhance our growth potential. 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 "The Restructuring". All other insurance policies were retained by CLIC. We refer to these policies as the "non-transferred policies". 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 three years ended and as of December 31, 2000, 2001 and 2002 and for the six-month periods ended and as of June 30, 2002 and 2003 present the financial results of our predecessor company, CLIC. Immediately following the restructuring, CLIC became our sole shareholder. We have agreed to provide 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 will be paid fees. For a description of the restructuring and the other arrangements entered into in connection with the restructuring, see "The Restructuring" and "Relationship with CLIC". 57 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 44 million individual and group life insurance policies, annuity contracts and long-term health insurance policies in force as of June 30, 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 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. Through this joint venture, we also intend to offer asset management products and services to other insurance companies. See "Business--Asset Management Business". We own 60% of the joint venture, with CLIC owning the remaining 40%. Financial overview of our business The historical financial statements included beginning on page F-1 of this prospectus represent the consolidated results of CLIC and its subsidiaries (including both the transferred policies and the non-transferred policies). These results are discussed in pages 72 to 89 of this prospectus. On a pro forma basis after giving effect to the restructuring, we had total gross written premiums and policy fees of RMB 47,077 million (US$5,687 million) and net income of RMB 4,524 million (US$547 million) in 2002 and total gross written premiums and policy fees of RMB 25,403 million (US$3,069 million) and net income of RMB 3,128 million (US$378 million) for the six months ended June 30, 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 37,662 million (US$4,550 million) in 2002 and RMB 20,370 million (US$2,461 million) for the six months ended June 30, 2003 and pro forma deposits of RMB 52,340 million (US$6,323 million) in 2002 and RMB 53,271 million (US$6,436 million) in the six months ended June 30, 2003, principally reflecting the continuing strong sales of our participating products, particularly participating endowment products. . Group life insurance had pro forma total gross written premiums and policy fees of RMB 477 million (US$58 million) in 2002 and RMB 267 million (US$32 million) for the six months ended June 30, 2003 and pro forma deposits of RMB 6,232 million (US$753 million) in 2002 and RMB 5,146 million (US$622 million) in the six months ended June 30, 2003, principally reflecting a shift in the weighting of group products toward investment-type products. 58 . Accident and health insurance had pro forma total gross written premiums of RMB 8,938 million (US$1,080 million) in 2002 and RMB 4,766 million (US$576 million) for the six months ended June 30, 2003, principally reflecting stable premium levels and strong overall financial performance in our accident insurance business and growth in premiums but weaker overall results in our 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 products. Our historical results, which present the historical results of our predecessor for the periods presented below, also 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. See "Life Insurance Industry in China". 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 December 31, 1999 and, accordingly, we have used an opening balance approach to prepare our financial statements for the year ended December 31, 2000. As of the beginning of the year ended December 31, 2000, there was a premium deficiency in respect of loss-making traditional insurance policies with a negative spread. Accordingly, a provision for future policy benefits of these traditional insurance policies was determined using actual and anticipated experience as of December 31, 1999. This provision was based on an assumed annual investment return of 3.8% to reflect the prevailing interest rate environment at the time and our estimates of policy administration, mortality and other experience, with no provision for adverse deviation. In accordance with U.S. GAAP accounting rules, no loss provision was recorded with respect to investment products. Therefore, interest was credited to policyholder contract deposits of non-transferred policies 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 3.8% in 2002, 4.1% in 2001 and 3.8% in 2000, resulting in a negative interest spread on those policies. The negative spread has continued to affect results attributable to the non-transferred policies in subsequent years. Reserves in respect of these policies, all of which were retained by CLIC in connection with the restructuring, were RMB 80,551 million as of June 20, 2003. 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 82.6% of total revenues in 2002 and 76.0% of total revenues for the six months ended June 30, 2003. . policy fees for investment-type contracts. Policy fees accounted for 6.7% of total revenues in 2002 and 9.2% of total revenues for the six months ended June 30, 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 10.2% of total revenues in 2002 and 14.5% of total revenues for the six months ended June 30, 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 provide to CLIC. Since incorporation of the asset management joint venture, CLIC pays asset management fees to the asset management joint venture, which is a subsidiary of ours. See "Relationship with CLIC--Policy Management Agreement". 59 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; . our mortality and morbidity experience; . our persistency 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; and . 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. 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 amounts 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 60 obligations. 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. 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 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 "Regulation--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 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. 61 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 periods indicated.
For the six For the year ended months ended December 31, June 30, - ----------------- ----------- 2000 2001 2002 2002 2003 - ---- ---- ---- ---- ---- (RMB in millions) Fixed maturity securities (28) -- (59) (36) (7) Equity securities........ (3) (11) (2) -- -- --- --- --- --- -- Total................. (31) (11) (61) (36) (7) === === === === ==
The increase in impairments in 2002 related to a government bond deposited with a local broker that encountered financial difficulties in 2002, resulting in an impairment charge of RMB 36 million. Non-trading securities were comprised of the following asset classes as of June 30, 2003 and December 31, 2002.
As of December 31, 2002 As of June 30, 2003 - -------------------- -------------------- Cost or Cost or amortized Estimated amortized Estimated cost fair value cost fair value - --------- ---------- --------- ---------- (RMB in millions) Fixed maturity securities Government bonds........ 49,661 50,979 58,754 59,836 Government agency bonds. 20,615 20,815 17,193 17,182 Corporate bonds......... 3,212 3,323 4,095 4,172 ------ ------ ------ ------ Subtotal................ 73,488 75,117 80,042 81,190 ------ ------ ------ ------ Equity securities Common stocks, unlisted. 957 957 899 899 Funds................... 7,523 7,144 8,225 8,126 ------ ------ ------ ------ Subtotal................ 8,480 8,101 9,124 9,025 ------ ------ ------ ------ Total.................... 81,968 83,218 89,166 90,215 ====== ====== ====== ======
CLIC had unrealized losses of RMB 44 million and RMB 228 million as of December 31, 2001 and 2000, which were less than 1% of total investment assets at those dates. These unrealized losses related primarily to valuation adjustments to government bonds. 62 The following tables set forth the length of time that each class of securities has continuously been in an unrealized loss position as of June 30, 2003 and December 31, 2002.
As of June 30, 2003 0-6 months 7-12 months 12-24 months Total - ------------------- ---------- ----------- ------------ ------ (RMB in millions) Fixed maturity securities Unrealized losses.................................... (478) -- (19) (497) Carrying amounts..................................... 33,170 -- 174 33,344 Unrealized losses as a percentage of carrying amounts 1.44% -- 10.92% 1.49% Equity securities Unrealized losses.................................... (105) -- -- (105) Carrying amounts..................................... 5,671 -- -- 5,671 Unrealized losses as a percentage of carrying amounts 1.86% -- -- 1.86% Total Total unrealized losses.............................. (583) -- (19) (602) Total carrying amounts............................... 38,841 -- 174 39,015 Unrealized losses as a percentage of carrying amounts 1.50% -- 10.92% 1.55%
0-6 7-12 12-24 As of December 31, 2002 months months 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; . 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 owners' 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". 63 As of June 30, 2003, CLIC's total investment assets were RMB 335,840 million (US$40,572 million) and the investment yield for the six months ended June 30, 2003 was 1.7%. The investment yield for this period primarily reflected a shift away from fixed maturity securities and toward lower-yielding resale agreements, as well as a decline in prevailing market interest rates. As of December 31, 2002, CLIC's total investment assets, before giving effect to the restructuring, were RMB 266,463 million (US$32,191 million) and the investment yield for the year ended December 31, 2002 was 3.8%. The investment yield for this period primarily reflected a shift away from resale agreements, which have a comparatively low yield, as well as poor conditions in the equity markets. As of December 31, 2001, CLIC's total investment assets, before giving effect to the restructuring, were RMB 188,869 million and the investment yield for the year ended December 31, 2001 was 4.1%. The investment yield for this period primarily reflected a comparatively high investment yield in the Chinese equity markets that year. As of December 31, 2000, CLIC's total investment assets, before giving effect to the restructuring, were RMB 129,998 million and the investment yield for the year ended December 31, 2000 was 3.8%. The investment yield for this period primarily reflected a relatively higher weighting of and investment yield on equity securities and fixed maturity securities. Mix of products The following table sets forth, on a pro forma basis after giving effect to the restructuring, premium and deposit information as of or for the years ended December 31, 2000, 2001 and 2002 by type of product in our individual life insurance business, group life insurance business and accident and health insurance business.
Compound As of or for the year ended annual December 31, growth rate ------------------------- ----------- 2000 2001 2002 2002 (2000-2002) ----- ------ ------ ----- ----------- RMB RMB RMB US$ (in millions) Individual life insurance business Whole life and term life insurance: Gross written premiums............... 6,084 9,111 12,289 1,485 42.1% Endowment: Gross written premiums............... 4,351 11,925 18,169 2,195 104.3% Deposits............................. 4,258 9,839 50,428 6,092 244.1% Annuities: Gross written premiums............... 1,481 1,883 3,129 378 45.4% Deposits............................. 7,050 5,323 1,912 231 (47.9)% Group life insurance business Whole life and term life insurance: Gross written premiums............... -- 985 344 42 -- Annuities: Gross written premiums............... -- 53 -- -- -- Deposits............................. 3,912 5,698 6,229 753 26.2% Accident and health insurance business Accident insurance premiums.......... 6,277 5,097 5,174 625 (9.2)% Health insurance premiums............ 1,116 2,687 3,764 455 83.7%
Our revenues and profitability are affected by changes in the mix of products we offer. In recent years the Chinese insurance market has been moving away from insurance policies offering fixed rates of return in favor of participating and investment-related products, and we expect these trends to continue. See "Life Insurance Industry in China--Industry Trends". Consistent with these trends, participating life insurance and annuity 64 products, which were introduced by our predecessor in 2000, have been our fastest-growing individual life insurance products. Participating products tend to present us with less market risk, since we have more flexibility to set the level of dividends and because participating products are subject to guaranteed rates which are lower than those of non-participating products. In addition, changes in interest rates have less of an impact on their surrender rates than on those of non-participating policies. Conversely, participating products tend to be less profitable for us than non-participating products, largely because the terms of these contracts effectively commit us to sharing a portion of our earnings from participating products with our policyholders. Pursuant to guidelines issued by the CIRC, we are required under participating products to pay to our policyholder dividends which are no less than 70% of the distributable earnings from participating products. However, participating products still provide us with attractive profit contributions given the growing level of sales volume they produce. Participating and other products classified as investment-type products also affect our revenues, since only a portion of the payments we receive under them are recorded in our consolidated profit and loss accounts as policy fees, while the majority of the payments are recorded as deposit liabilities on our balance sheet. For the six months ended June 30, 2003, total deposits were RMB 61,082 million, an increase of 41.1% from RMB 43,289 million in the same period in 2002. Although deposits are a measure of business volume and contribute to our profitability, they are not reflected in our revenues. Another factor affecting our revenue is the fact that a substantial amount of the premiums we receive on many individual and group life insurance products are made in single payments, rather than over the course of the policy. For the six months ended June 30, 2003, 33% of total first-year gross written premiums were from single premium products and in 2002, 48% of total first-year gross written premiums were from single premium products. We believe that the popularity of single premium products is in line with purchasing patterns and demand in China. Reinsurance The amounts presented in the historical consolidated statements of income for revenues and policyholder benefits are net of amounts ceded to reinsurers. Under the PRC insurance law and CIRC's regulations, starting in 1996, our predecessor was required to reinsure 20% of its short-term accident and health insurance risks with China Reinsurance Company, or China Re, as statutory reinsurer. Beginning in 2000, the insurance risks subject to statutory reinsurance also covered long-term health insurance risks. 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. We are also party to various reinsurance agreements with China Re for the reinsurance of individual risks, group risks and defined blocks of business. As of December 31, 2002, all of our predecessor's ceded premiums had been ceded to China Re. We expect to continue to reinsure a portion of our mortality risk with China Re, as well as with other reinsurers in the future. Regulation We operate in a highly regulated industry. Changes in regulation can have a significant impact on our revenues, expenses and profitability. China's insurance regulatory regime is undergoing significant changes toward a more transparent regulatory process and a convergent movement toward international standards. Among other things, recent changes to solvency requirements may affect the amount of capital we are required to maintain. See "Regulation". Critical Accounting Policies The preparation of financial statements in conformity with H.K. GAAP requires us to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial 65 statements. In applying these accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. The following sections discuss the accounting policies applied in preparing our financial statements that we believe are most dependent on the application of these judgments and estimates. Insurance claims and reserves Reserve for claims and claim adjustment expenses. These represent liabilities for claims arising under short-term accident and health insurance policies. Claims and claim adjustment expenses are charged to income as incurred. Unpaid claims and claim adjustment expense reserves represent the accumulation of estimates for ultimate claims and include provisions for claims incurred but not yet reported. The reserves represent estimates of future payments of reported and unreported claims for losses and related expenses with respect to insured events that have occurred. Future life policyholder benefits, policyholder contract deposits and other funds. These represent liabilities for estimated future policyholder benefits for traditional life insurance policies and investment contracts which are not investment-linked. Future life policyholder benefits for traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions as to mortality, morbidity, persistency, expenses and investment return, including a margin for adverse deviation. The assumptions are established at the time a policy is priced and issued and remain unchanged, except where premium deficiency occurs. Under policyholder contract deposits, the policyholders' share of unrealized gains or losses in respect of assets held by us, which may be paid to participating policyholders in the future, is included in liabilities for future life policyholder benefits offsetting the policyholders' share of the change in unrealized gains and losses during the year. Reserving is a complex process with inherent uncertainties, requiring the application of informed estimates and judgments. We establish the liabilities for obligations for future policy benefits and claims based on assumptions that are uncertain when 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 results. We charge changes in our liabilities to expenses 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, we may be required to increase our future life policyholder benefits. This increase could have a material adverse effect on our profitability and, if significant, our financial condition. Any deterioration in our solvency levels could change our customers' and our business associates' perception of our financial health, which in turn could affect our sales, earnings and operations. We establish liabilities for future life policyholder benefits in accordance with the provisions of Statement of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance Enterprises". In accordance with the provisions of this standard, the present value of estimated future policy benefits less the present value of estimated future net premiums to be collected from policyholders are accrued when premium revenue is recognized. We base these estimates on the following assumptions: . We base our assumptions for interest rates on estimates of future yields on our investments. We use discount rates which increase from 3.8% to 5.0%, with a margin of provision for adverse deviation ranging from 0.25% to 0.50%. In determining our interest rate assumptions, we consider past investment experience, the current and future mix of our investment portfolio and trends in yields. Actual investment yields in the years ended December 31, 2000, 2001 and 2002 were 3.8%, 4.1% and 3.8%, respectively. The interest rates we assume for future years reflect increased investment in higher yielding securities, including corporate bonds, longer duration securities and equity securities. 66 . We base our assumptions for mortality, morbidity and surrender rates, which vary by contract type, on expected experience at date of contract issue plus, where applicable, a margin for adverse deviation. Expected rates have been based upon actual experience for similar contract types, with allowances for any trends or expected differences. Actual mortality experience is based on the "CL" series of life tables issued by the People's Bank of China, adjusted based on the results of an analysis of death claims incurred by CLIC in 2001 and 2002. Actual surrender and morbidity experience is based on an analysis of lapses and morbidity incurred by CLIC in 2001 and 2002. We consider the analyses performed in 2001 and 2002 to be representative of policies in effect as of December 31, 1999 and those issued during the year ended December 31, 2000 due to the stable pattern of mortality, surrender and morbidity experience between 1999 and 2002. The aggregate number of deaths divided by in-force policies at the beginning of the year was 0.122% in 2000, 0.124% in 2001 and 0.127% in 2002. The aggregate number of lapses and terminations divided by the number of in-force policies at the beginning of the year was 9.30% in 2000, 9.56% in 2001 and 9.37% in 2002. . We have based our assumptions for expense rates on expected unit costs plus, where applicable, a margin for adverse deviation. We have based our assumptions for unit costs on an analysis of actual experience. We have estimated the per-policy costs to be 2% of premiums plus a fixed per-policy expense. For contract in loss recognition, our assumptions reflect best estimates of interest rates, mortality and expenses and with no provision for adverse deviation. For interest rates this was generally 3.8%. . Policyholder account balances for investment-type contracts are equal to the policy account values. Account values consist of an accumulation of gross premium payments less loadings for expenses, mortality and profit plus credited interest less withdrawals and other exits. We determine the amount of policyholder dividends to be paid annually. Policyholder dividends include life policyholders' share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments relating to future policyholder benefits and policyholder contract deposits vary according to the type of contract. Valuation of investments Fixed maturity securities which we have the ability and intent to hold to maturity are classified as held-to-maturity. These investments are carried at amortized cost. Fixed maturity securities and equity securities which we purchase with the intention to resell in the near term are classified as trading. Fixed maturity securities and equity securities other than those classified as held-to-maturity or trading are classified as non-trading securities. We regularly review the carrying value of our investments. If there is objective evidence of other-than-temporary impairment and if the carrying value of an investment is greater than the recoverable amount, the carrying value is reduced through a charge to profit and loss accounts. The following are the policies used: Held-to-maturity securities. Held-to-maturity securities are stated in the balance sheet at cost plus any discount or less any premium amortized to date. The discount or premium is amortized over the period to maturity and included as interest income or expense in the profit and loss accounts. Provision is made when there is a diminution in value which is other-than-temporary. The carrying amounts of individual held-to-maturity securities or holdings of the same securities are reviewed at the balance sheet date in order to assess the credit risk and whether the carrying amounts are expected to be recovered. Provisions are made when carrying amounts are not expected to be recovered and are recognized in the profit and loss accounts as an expense immediately. Trading securities. Trading securities are carried at fair value. At each balance sheet date, the net unrealized gains or losses arising from the changes in fair value of trading securities are recognized in the profit and loss accounts. Profits or losses on disposal of trading securities, representing the difference between the net sales proceeds and the carrying amounts, are recognized in the profit and loss accounts as they arise. Non-trading securities. Investments which are held for non-trading purposes are stated in the balance sheet at fair value at the balance sheet date. Changes in the fair value of individual securities are credited or 67 debited to the investment revaluation reserve until the security is sold, or is determined to be impaired. Upon disposal, the cumulative gains or losses representing the difference between the net sales proceeds and the carrying amount of the relevant securities, together with any surplus or deficit transferred from the investment revaluation reserve, is reflected in the profit and loss accounts. Where there is objective evidence that individual investments are impaired, the cumulative losses recorded in the revaluation reserve are transferred to the profit and loss accounts. The fair value of our fixed maturity securities and equity securities is determined as follows: Fixed maturity securities. For listed securities, fair value is based upon quoted market prices. For securities traded on the over-the-counter market, fair value is based on the average prices observed in transactions in the period 30 days before and 15 days after the period end. We do not currently hold any unlisted, untraded fixed maturity securities. Equity securities. Fair value for closed-end funds is based on quoted market prices. Fair value for open-end funds is based on the net asset value per unit of these funds as published daily by their fund managers. Unlisted common stocks are generally carried at cost as a reasonable estimate of their fair value unless there is evidence that fair value is materially different from cost. The assessment of whether other-than-temporary impairments have occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide 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 security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. In particular, the determination of fair values for securities where there are no quoted market values is based on valuation methodologies, securities we deem to be comparable and assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. Valuation of fixed assets In general, property, plant and equipment is stated at historical cost less accumulated depreciation and accumulated impairment loss. However, some property, plant and equipment on hand as of January 1, 1997 was acquired by our predecessor as a result of the prior restructuring in 1996 of People's Insurance Company of China, a state-owned enterprise. Our predecessor is unable to obtain historical cost information for assets which were transferred to it in that restructuring. As a result, this property, plant and equipment has been stated at deemed cost based on a valuation performed as of January 1, 2000, rather than at historical cost less depreciation, which is the method required by U.S. GAAP. We have not been able to quantify the effect of the difference in accounting treatment because we do not have available to us sufficiently detailed historical cost records relating to these assets. The fair market value recorded in the opening balance sheet as of January 1, 2000 has been carried forward as the deemed acquisition cost relating to these assets, for purposes of H.K. GAAP and U.S. GAAP. Deferred policy acquisition costs The costs of acquiring new business including commissions, underwriting and policy issue expenses, which vary with and are directly related to the production of new business, are deferred and amortized as described below. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and at the end of each accounting period. Future investment income is taken into account in assessing recoverability. 67 Deferred policy acquisition costs for traditional life insurance and annuity policies are amortized over the expected life of the contracts as a constant percentage of expected premiums. Expected premiums are estimated at the date of policy issue and are applied consistently throughout the life of the contract unless premium deficiency occurs. Deferred policy acquisition costs for investment-type contracts are amortized over the expected life of the contracts based on a constant rate of the present value of estimated gross profits expected to be realized over the life of the contract. Estimated gross profits include expected amounts to be assessed for mortality, administration, investment return and surrender less benefit claims in excess of policyholder balances, administrative expenses and interest credited. Estimated gross profits are revised regularly and the interest rate used to compute the present value of revised estimates of expected gross profits is the latest revised rate applied to the remaining benefit period. If there is a change in our estimates, the deviations of actual results from estimated experiences are reflected in the profit and loss accounts. Revenue recognition Recognition of premiums is carried out pursuant to guidelines which require the use of informed judgments. Premiums from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, are recognized as revenues when due from policyholders. Benefits and expenses are provided against such revenues to recognize profits over the estimated life of the policies. Moreover, for single premium and limited pay policies, premiums are recorded as revenues when due with profit recognized in income in a constant relationship to the insurance in force or, for annuities, the amount of expected benefit payments. Premiums from the sale of accident and health insurance policies are recorded when written and are recorded to revenues on a pro-rata basis over the term of the related policy coverage. However, for those contracts for which the period of risk differs significantly from the policy period, premiums are recognized over the period of risk in proportion to the amount of insurance protection provided. The unearned premium reserves represent the portion of the premiums written relating to the unexpired terms of coverage. Amounts collected as premiums from investment-type contracts are recorded as deposits. Revenue from these contracts consists of policy fees charged against the deposit amount for the cost of insurance, administration fees and gains on surrenders during the period. Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholder contract deposits and interest credited to policyholder contract deposits. Consolidated Results of Operations We present in this "Operating and Financial Review and Prospects" information and discussion regarding selected income and expense items from the consolidated historical profit and loss accounts included in this prospectus for the periods indicated. This discussion covers the financial results of our predecessor for the periods in question as well as, for some line items, financial information attributable to the policies transferred to us in the restructuring. Amounts attributable to the transferred policies are derived from these consolidated historical financial statements and reflect amounts directly attributable to those policies. 68 Since the consolidated financial statements contained in this prospectus and the following discussion regarding the financial results of our predecessor include the financial performance and assets and liabilities associated with both the operations transferred to us in the restructuring, as well as the assets, liabilities and operations retained by our predecessor, they will not necessarily be indicative of our future earnings, cash flows or financial position as a stand-alone company. Historical performance is not necessarily representative of our financial results for any future periods.
For the six months ended For the year ended December 31, June 30, --------------------------------- ------------------------ 2000 2001 2002 2002 2002 2003 2003 ------- ------- ------- ------ ------- ------- ------ RMB RMB RMB US$ RMB RMB US$ (in millions) Revenues Net written premiums and policy fees.......... 43,213 55,214 66,900 8,082 33,399 35,401 4,277 Net change in unearned premium reserves....... (314) (248) (476) (58) 306 17 2 ------- ------- ------- ------ ------- ------- ------ Net premiums earned and policy fees........... 42,899 54,966 66,424 8,025 33,705 35,418 4,279 ------- ------- ------- ------ ------- ------- ------ Net investment income......................... 4,374 6,276 8,347 1,008 3,991 5,070 612 Net realized gains/(losses) on investments.... (23) (6) 266 32 684 691 83 Net unrealized gains/(losses) on investments.. 298 (322) (1,067) (129) (75) 280 34 Other income.................................. 827 293 338 41 121 122 15 ------- ------- ------- ------ ------- ------- ------ Total revenues................................ 48,375 61,207 74,308 8,977 38,426 41,581 5,023 ------- ------- ------- ------ ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits...... (8,467) (10,099) (7,010) (847) (3,869) (4,580) (553) Accident and health claims and claim adjustment expenses........................ (2,767) (3,829) (4,053) (490) (1,959) (2,455) (297) Increase in future life policyholder benefits (27,738) (33,121) (45,374) (5,482) (22,793) (23,192) (2,802) Policyholder dividends and participation in profits..................................... (7) (177) (641) (77) (310) (862) (104) Amortization of deferred policy acquisition costs....................................... (1,745) (3,024) (3,832) (463) (2,102) (2,648) (320) Underwriting and policy acquisition costs..... (3,073) (2,176) (1,661) (201) (822) (708) (86) Administrative expenses....................... (4,318) (5,100) (6,162) (744) (2,916) (3,005) (363) Other operating expenses...................... (2,602) (1,110) (634) (77) (316) (704) (85) Interest expense on bank borrowings........... (29) (5) (7) (1) (4) (5) (1) Interest credited to policyholder contract deposits.................................... (4,505) (5,799) (7,095) (857) (3,209) (4,109) (496) Statutory insurance levy...................... (59) (64) (73) (9) (30) (38) (5) ------- ------- ------- ------ ------- ------- ------ Total benefits, claims and expenses........... (55,310) (64,504) (76,542) (9,247) (38,330) (42,306) (5,111) ------- ------- ------- ------ ------- ------- ------ Profit/(loss) before income tax expense and minority interests.......................... (6,935) (3,297) (2,234) (270) 96 (725) (88) Income tax expense............................ (14) (4) (14) (2) (3) (8) (1) ------- ------- ------- ------ ------- ------- ------ Profit/(loss) before minority interests....... (6,949) (3,301) (2,248) (272) 93 (733) (89) Minority interests............................ (41) 6 (2) (0) (2) 19 2 ------- ------- ------- ------ ------- ------- ------ Net profit/(loss)............................. (6,990) (3,295) (2,250) (272) 91 (714) (86) ======= ======= ======= ====== ======= ======= ======
69 The following tables provide a breakdown of the main revenue and expense items directly attributable to the non-transferred policies and the transferred policies. Because the CIRC reduced the maximum guaranteed rate payable to policyholders to 2.50% on June 10, 1999 for policies issued after that date, we have, since that time, monitored our policy performance by considering the non-transferred policies and the transferred policies separately. Following the restructuring only the transferred policies will be part of our company.
For the six months ended June 30, 2003 --------------------------------------- Amounts Amounts attributable to attributable to non-transferred transferred policies policies Total --------------- --------------- ------- (RMB in millions) Net premiums earned and policy fees...................... 10,688 24,730 35,418 Deposits................................................. 2,665 58,417 61,082 Insurance benefits and claims Life insurance death and other benefits................. (2,946) (1,634) (4,580) Accident and health claims and claim adjustment expenses -- (2,455) (2,455) Increase in future life policyholder benefits........... (10,638) (12,554) (23,192) ------- ------- ------- Subtotal................................................ (13,584) (16,643) (30,227)
For the six months ended June 30, 2002 --------------------------------------- Amounts Amounts attributable to attributable to non-transferred transferred policies policies Total --------------- --------------- ------- (RMB in millions) Net premiums earned and policy fees...................... 10,860 22,845 33,705 Deposits................................................. 2,663 40,626 43,289 Insurance benefits and claims Life insurance death and other benefits................. (2,753) (1,116) (3,869) Accident and health claims and claim adjustment expenses -- (1,959) (1,959) Increase in future life policyholder benefits........... (9,527) (13,266) (22,793) ------- ------- ------- Subtotal................................................ (12,280) (16,341) (28,621)
For the year ended December 31, 2002 --------------------------------------- Amounts Amounts attributable to attributable to non-transferred transferred policies policies Total --------------- --------------- ------- (RMB in millions) Net premiums earned and policy fees...................... 21,676 44,748 66,424 Deposits................................................. 6,002 58,572 64,574 Insurance benefits and claims Life insurance death and other benefits................. (4,702) (2,308) (7,010) Accident and health claims and claim adjustment expenses -- (4,053) (4,053) Increase in future life policyholder benefits........... (20,455) (24,919) (45,374) ------- ------- ------- Subtotal................................................ (25,157) (31,280) (56,437)
70
For the year ended December 31, 2001 --------------------------------------- Amounts Amounts attributable to attributable to non-transferred transferred policies policies Total --------------- --------------- ------- (RMB in millions) Net premiums earned and policy fees...................... 23,158 31,808 54,966 Deposits................................................. 6,464 20,868 27,332 Insurance benefits and claims Life insurance death and other benefits................. (9,047) (1,052) (10,099) Accident and health claims and claim adjustment expenses -- (3,829) (3,829) Increase in future life policyholder benefits........... (16,046) (17,075) (33,121) ------- ------- ------- Subtotal................................................ (25,093) (21,956) (47,049)
For the year ended December 31, 2000 --------------------------------------- Amounts Amounts attributable to attributable to non-transferred transferred policies policies Total --------------- --------------- ------- (RMB in millions) Net premiums earned and policy fees...................... 23,605 19,294 42,899 Deposits................................................. 7,855 15,220 23,075 Insurance benefits and claims Life insurance death and other benefits................. (8,069) (398) (8,467) Accident and health claims and claim adjustment expenses (1) (2,766) (2,767) Increase in future life policyholder benefits........... (18,252) (9,486) (27,738) ------- ------- ------- Subtotal................................................ (26,322) (12,650) (38,972)
Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002 Net premiums earned and policy fees Net premiums earned and policy fees increased by RMB 1,713 million, or 5.1%, to RMB 35,418 million in the six months ended June 30, 2003 from RMB 33,705 million in the six months ended June 30, 2002. This increase was primarily due to increases in net premiums earned and policy fees in the individual life insurance business, in particular from sales of whole life products and in policy fees, and the health insurance business, commensurate with the strong growth in this market overall in China. Net premiums earned and policy fees attributable to the transferred policies increased by RMB 1,885 million, or 8.3%, to RMB 24,730 million in the six months ended June 30, 2003 from RMB 22,845 million in the six months ended June 30, 2002. This increase was primarily due to the same reasons as for the business as a whole. Net premiums earned from participating products (all of which are attributable to the transferred policies) decreased by RMB 1,514 million, or 21.2%, to RMB 5,626 million in the six months ended June 30, 2003 from RMB 7,140 million in the six months ended June 30, 2002. This decrease was primarily due to a shift toward products which are classified as investment products. Of total net premiums earned in the six months ended June 30, 2003 and attributable to the transferred policies, RMB 2,123 million was attributable to single premium products and RMB 15,055 million was attributable to regular premium products (including both first-year and renewal premiums). Of total net premiums earned in the six months ended June 30, 2002 and attributable to the transferred policies, RMB 5,073 million was attributable to single premium products and RMB 11,819 million was attributable to regular premium products. Individual life insurance business Net premiums earned and policy fees from the individual life insurance business increased by RMB 929 million, or 3.1%, to RMB 30,956 million in the six months ended June 30, 2003 from RMB 30,027 million in the 71 six months ended June 30, 2002. This increase was primarily due to 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. Net premiums earned and policy fees from the individual life insurance business attributable to the transferred policies increased by RMB 1,020 million, or 5.3%, to RMB 20,370 million in the six months ended June 30, 2003 from RMB 19,350 million in the six months ended June 30, 2002. This increase was primarily due to the same reasons as for the individual life insurance business as a whole. Group life insurance business Net premiums earned and policy fees from the group life insurance business decreased by RMB 44 million, or 10.7%, to RMB 369 million in the six months ended June 30, 2003 from RMB 413 million in the six months ended June 30, 2002. This decrease was primarily due to a shift away from whole life products and annuity products in favor of products which are classified as investment products. Net premiums earned and policy fees from the group life insurance business attributable to the transferred policies decreased by RMB 34 million, or 11.0%, to RMB 267 million in the six months ended June 30, 2003 from RMB 301 million in the six months ended June 30, 2002. This decrease was primarily due to the same reason as for the group life insurance business as a whole. Accident and health insurance business Net premiums earned from the accident and health insurance business increased by RMB 828 million, or 25.4%, to RMB 4,093 million in the six months ended June 30, 2003 from RMB 3,265 million in the six months ended June 30, 2002. Gross written premiums from the accident insurance business decreased by RMB 89 million, or 3.6%, to RMB 2,359 million in the six months ended June 30, 2003 from RMB 2,448 million in the six months ended June 30, 2002 and gross written premiums from the health insurance business increased by RMB 1,131 million, or 88.6%, to RMB 2,407 million in the six months ended June 30, 2003 from RMB 1,276 million in the six months ended June 30, 2002. These changes were primarily due to strong growth in premiums from sales of short-term health and supplemental medical insurance. Sales of accident insurance have remained relatively flat in recent years, in line with the market overall. Net premiums earned from the accident and health insurance business attributable to the transferred policies increased by RMB 899 million, or 28.1%, to RMB 4,093 million in the six months ended June 30, 2003 from RMB 3,194 million in the six months ended June 30, 2002. Gross written premiums from the accident insurance business attributable to the transferred policies decreased by RMB 38 million, or 1.6%, to RMB 2,359 million in the six months ended June 30, 2003 from RMB 2,397 million in the six months ended June 30, 2002 and gross written premiums from the health insurance business attributable to the transferred policies increased by RMB 1,151 million, or 91.6%, to RMB 2,407 million in the six months ended June 30, 2003 from RMB 1,256 million in the six months ended June 30, 2002. These changes were primarily due to the same reasons as for the accident and health insurance business as a whole. Net investment income Net investment income increased by RMB 1,079 million, or 27.0%, to RMB 5,070 million in the six months ended June 30, 2003 from RMB 3,991 million in the six months ended June 30, 2002. This increase was primarily due to an overall increase in investment assets. As of June 30, 2003, total investment assets were RMB 335,840 million and the investment yield for the six months ended June 30, 2003 was 1.7%. 72 Net realized gains/losses on investments Net realized gains on investments increased by RMB 7 million, or 1.0%, to RMB 691 million in the six months ended June 30, 2003 from RMB 684 million in the six months ended June 30, 2002. This change was primarily due to higher net realized gains on debt securities, offset in part by lower net realized gains on securities investment funds. Net unrealized gains/losses on investments We reflect unrealized gains or losses on investments designated as trading in current period income. Net unrealized gains were RMB 280 million in the six months ended June 30, 2003, compared to net unrealized losses on investments of RMB 75 million in the six months ended June 30, 2002. This change reflected unrealized gains on securities investment funds as of June 30, 2003 resulting from favorable conditions in the equity markets in the first six months of 2003. Deposits and policy fees Deposits are gross additions to policyholder contract deposits. Total deposits increased by RMB 17,793 million, or 41.1%, to RMB 61,082 million in the six months ended June 30, 2003 from RMB 43,289 million in the six months ended June 30, 2002. Policy fees increased by RMB 681 million, or 21.7%, to RMB 3,819 million in the six months ended June 30, 2003 from RMB 3,138 million in the six months ended June 30, 2002. These increases were primarily due to increased sales of participating products in both the individual life insurance business and group life insurance business. Total deposits attributable to the transferred policies increased by RMB 17,791 million, or 43.8%, to RMB 58,417 million in the six months ended June 30, 2003 from RMB 40,626 million in the six months ended June 30, 2002. Policy fees attributable to the transferred policies increased by RMB 700 million, or 25.4%, to RMB 3,459 million in the six months ended June 30, 2003 from RMB 2,759 million in the six months ended June 30, 2002. These increases were primarily due to increased sales of participating products in both the individual life insurance business and group life insurance business. Total deposits from participating products (all of which are attributable to the transferred policies) increased by RMB 17,169 million, or 45.7%, to RMB 54,712 million in the six months ended June 30, 2003 from RMB 37,543 million in the six months ended June 30, 2002. Total policy fees from participating products increased by RMB 692 million, or 34.5%, to RMB 2,696 million in the six months ended June 30, 2003 from RMB 2,004 million in the six months ended June 30, 2002. Individual life insurance business Deposits in the individual life insurance business increased by RMB 15,336 million, or 38.3%, to RMB 55,350 million in the six months ended June 30, 2003 from RMB 40,014 million in the six months ended June 30, 2002. Policy fees from the individual life insurance business increased by RMB 669 million, or 22.5%, to RMB 3,641 million in the six months ended June 30, 2003 from RMB 2,972 million in the six months ended June 30, 2002. These increases were primarily due to increased sales of participating endowment products. Deposits in the individual life insurance business attributable to the transferred policies increased by RMB 15,907 million, or 42.6%, to RMB 53,271 million in the six months ended June 30, 2003 from RMB 37,364 million in the six months ended June 30, 2002. Policy fees from the individual life insurance business attributable to the transferred policies increased by RMB 693 million, or 25.8%, to RMB 3,378 million in the six months ended June 30, 2003 from RMB 2,685 million in the six months ended June 30, 2002. These increases were primarily due to increased sales of participating endowment products. Group life insurance business Deposits in the group life insurance business increased by RMB 2,457 million, or 75.0%, to RMB 5,732 million in the six months ended June 30, 2003 from RMB 3,275 million in the six months ended June 30, 2002. 73 Policy fees from the group life insurance business increased by RMB 12 million, or 7.2%, to RMB 178 million in the six months ended June 30, 2003 from RMB 166 million in the six months ended June 30, 2002. These increases were primarily due to increased sales of participating annuity products. Deposits in the group life insurance business attributable to the transferred policies increased by RMB 1,884 million, or 57.8%, to RMB 5,146 million in the six months ended June 30, 2003 from RMB 3,262 million in the six months ended June 30, 2002. Policy fees from the group life insurance business attributable to the transferred policies increased by RMB 7 million, or 11.0%, to RMB 81 million in the six months ended June 30, 2003 from RMB 74 million in the six months ended June 30, 2002. These increases were primarily due to increased sales of participating annuity products. Accident and health insurance business There are no deposits in our accident and health insurance business. Insurance benefits and claims Insurance benefits and claims, net of amounts ceded through reinsurance, increased by RMB 1,606 million, or 5.6%, to RMB 30,227 million in the six months ended June 30, 2003 from RMB 28,621 million in the six months ended June 30, 2002. This increase was primarily due to increases in insurance benefits and claims in the individual life insurance business and health insurance business. Life insurance death and other benefits increased by RMB 711 million, or 18.4%, to RMB 4,580 million in the six months ended June 30, 2003 from RMB 3,869 million in the six months ended June 30, 2002. This increase was primarily due to an increase in the number of policies in force. Life insurance death and other benefits as a percentage of gross written premiums and policy fees were 12.7% in the six months ended June 30, 2003, remaining fairly stable as compared with 11.3% in the six months ended June 30, 2002. Insurance benefits and claims, net of amounts ceded through reinsurance, attributable to the transferred policies increased by RMB 302 million, or 1.8%, to RMB 16,643 million in the six months ended June 30, 2003 from RMB 16,341 million in the six months ended June 30, 2002. This increase was primarily due to an increase in insurance benefits and claims in the health insurance business. Insurance benefits and claims, net of amounts ceded through reinsurance, attributable to participating products (all of which are attributable to the transferred policies) decreased by RMB 1,185 million, or 15.7%, to RMB 6,375 million in the six months ended June 30, 2003 from RMB 7,560 million in the six months ended June 30, 2002. Of these insurance benefits and claims attributable to participating products, life insurance death and other benefits increased to RMB 162 million in the six months ended June 30, 2003 from RMB 27 million in the six months ended June 30, 2002 and the increase in future life policyholder benefits decreased by RMB 1,320 million, or 17.5%, to RMB 6,213 million from RMB 7,533 million. Individual life insurance business Insurance benefits and claims for the individual life insurance business increased by RMB 980 million, or 3.7%, to RMB 27,191 million in the six months ended June 30, 2003 from RMB 26,211 million in the six months ended June 30, 2002. This increase was primarily due to the increase in business volume during the period. Of these insurance benefits and claims, life insurance death and other benefits increased by RMB 498 million, or 14.5%, to RMB 3,925 million in the six months ended June 30, 2003 from RMB 3,427 million in the six months ended June 30, 2002 and the increase in future life policyholder benefits rose by RMB 482 million, or 2.1%, to RMB 23,266 million in the six months ended June 30, 2003 from RMB 22,784 million in the six months ended June 30, 2002. Insurance benefits and claims for the individual life insurance business attributable to the transferred policies decreased by RMB 167 million, or 1.2%, to RMB 13,929 million in the six months ended June 30, 2003 74 from RMB 14,096 million in the six months ended June 30, 2002. This decrease was primarily due to a shift in product mix away from endowment products and toward whole life products, which have lower reserve requirements than endowment products. Of these insurance benefits and claims, life insurance death and other benefits increased by RMB 414 million, or 45.0%, to RMB 1,335 million in the six months ended June 30, 2003 from RMB 921 million in the six months ended June 30, 2002 and the increase in future life policyholder benefits decreased by RMB 581 million, or 4.4%, to RMB 12,594 million in the six months ended June 30, 2003 from RMB 13,175 million in the six months ended June 30, 2002. Group life insurance business Insurance benefits and claims for the group life insurance business increased by RMB 140 million, or 31.7%, to RMB 581 million in the six months ended June 30, 2003 from RMB 441 million in the six months ended June 30, 2002. This increase was primarily due to the continuing effects of negative spread among the non-transferred policies and increased surrenders of non-transferred policies subject to negative spread. Of these insurance benefits and claims, life insurance death and other benefits increased by RMB 223 million, or 51.6%, to RMB 655 million in the six months ended June 30, 2003 from RMB 432 million in the six months ended June 30, 2002 and future life policyholder benefits decreased by RMB 74 million in the six months ended June 30, 2003, compared with an increase of RMB 9 million in the six months ended June 30, 2002. Insurance benefits and claims for the group life insurance business attributable to the transferred policies decreased by RMB 17 million, or 6.2%, to RMB 259 million in the six months ended June 30, 2003 from RMB 276 million in the six months ended June 30, 2002. This decrease was primarily due to the decrease in business volume during the period. Of these insurance benefits and claims, life insurance death and other benefits increased by RMB 114 million, or 61.6%, to RMB 299 million in the six months ended June 30, 2003 from RMB 185 million in the six months ended June 30, 2002 and future life policyholder benefits decreased by RMB 40 million in the six months ended June 30, 2003, compared with an increase of RMB 91 million in the six months ended June 30, 2002. Accident and health insurance business Insurance benefits and claims for the accident and health insurance business increased by RMB 486 million, or 24.7%, to RMB 2,455 million in the six months ended June 30, 2003 from RMB 1,969 million in the six months ended June 30, 2002. All of these amounts were attributable to the transferred policies. This increase was primarily due to the increase in business volume in the health insurance business during the period. Of these insurance benefits and claims, accident and health claims and claim adjustment expenses increased by RMB 496 million, or 25.3%, to RMB 2,455 million in the six months ended June 30, 2003 from RMB 1,959 million in the six months ended June 30, 2002 and life insurance death and other benefits (comprised of long-term health benefits) were nil in the six months ended June 30, 2003, compared to RMB 10 million in the six months ended June 30, 2002. Policyholder dividends and participation in profits Policyholder dividends and participation in profits increased by RMB 552 million, or 178.1%, to RMB 862 million in the six months ended June 30, 2003 from RMB 310 million in the six months ended June 30, 2002. Virtually all of these amounts were attributable to the transferred policies because our predecessor only began to sell participating products in 2000. This increase was primarily due to an increase in the overall amount of participating policies in force. Amortization of deferred policy acquisition costs Amortization of deferred policy acquisition costs reflects the amortization of deferred policy acquisition costs attributable to the transferred policies. The majority of acquisition costs attributable to the transferred 75 policies are deferrable. Amortization of deferred policy acquisition costs increased by RMB 546 million, or 26.0%, to RMB 2,648 million in the six months ended June 30, 2003 from RMB 2,102 million in the six months ended June 30, 2002. This increase was primarily due to the increase in business volume during the period. Underwriting and policy acquisition costs Underwriting and policy acquisition costs primarily reflect acquisition costs attributable to non-transferred policies in the individual life insurance business and group life insurance business, as well as acquisition costs in the accident and health insurance business. Underwriting and policy acquisition costs decreased by RMB 114 million, or 13.9%, to RMB 708 million in the six months ended June 30, 2003 from RMB 822 million in the six months ended June 30, 2002. Underwriting and policy acquisition costs were 2.0% of net premiums earned and policy fees in the six months ended June 30, 2003, compared with 2.4% in the six months ended June 30, 2002. Of this amount, underwriting and policy acquisition costs in the individual life insurance business and group life insurance business together decreased by RMB 162 million, or 23.4%, to RMB 530 million in the six months ended June 30, 2003 from RMB 692 million in the six months ended June 30, 2002. This decrease was primarily due to declining commissions attributable to the non-transferred policies, since commissions generally decrease as policies are renewed in successive years. Underwriting and policy acquisition costs in the accident and health insurance business increased by RMB 48 million, or 36.9%, to RMB 178 million in the six months ended June 30, 2003 from RMB 130 million in the six months ended June 30, 2002, primarily due to the increase in business volume during the period. Administrative expenses Administrative expenses include the non-deferrable portion of policy acquisition costs attributable to the transferred policies, as well as compensation and other administrative expenses. Administrative expenses increased by RMB 89 million, or 3.1%, to RMB 3,005 million in the six months ended June 30, 2003 from RMB 2,916 million in the six months ended June 30, 2002. This increase was primarily due to the increase in business volume. Other operating expenses Other operating expenses, which primarily consist of employee housing benefits, expenses of any non-core businesses (which includes investments in property, hotels and other operations through subsidiaries) and legal and regulatory costs, increased by RMB 388 million, or 122.8%, to RMB 704 million in the six months ended June 30, 2003 from RMB 316 million in the six months ended June 30, 2002. This increase was primarily due to a revaluation of properties and an impairment taken on fixed assets. Interest credited to policyholder contract deposits Interest credited to policyholder contract deposits increased by RMB 900 million, or 28.0%, to RMB 4,109 million in the six months ended June 30, 2003 from RMB 3,209 million in the six months ended June 30, 2002. This increase was primarily due to an increase in the total policyholder account balance. Interest credited to policyholder contract deposits attributable to the transferred policies increased by RMB 592 million, or 86.4%, to RMB 1,277 million in the six months ended June 30, 2003 from RMB 685 million in the six months ended June 30, 2002. This increase was primarily due to an increase in the total policyholder 76 account balance. Interest credited to participating policyholder contract deposits (all of which are attributable to the transferred policies) increased by RMB 590 million, or 159.5%, to RMB 960 million in the six months ended June 30, 2003 from RMB 370 million in the six months ended June 30, 2002. Income tax Income tax expense was RMB 8 million in the six months ended June 30, 2003, compared to RMB 3 million in the six months ended June 30, 2002. All of these amounts were attributable to income taxes incurred by non-core businesses. No other income tax was incurred in the six months ended June 30, 2003, due to operating losses. In connection with the restructuring, we have 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 us in arriving at our taxable income for 2003. In the past, the deductibility of these expenses had no impact on our tax charge or net income because we were loss-making. The Ministry of Finance and State Tax Bureau will review the deductibility of these expenses on an annual basis, and will determine the level of deductibility based on such factors as our profitability and productivity. Net profit/loss For the reasons set forth above, net loss was RMB 714 million in the six months ended June 30, 2003, compared to a net profit of RMB 91 million in the six months ended June 30, 2002. Individual life insurance business Net loss in the individual life insurance business was RMB 499 million in the six months ended June 30, 2003, compared to a net loss of RMB 254 million in the six months ended June 30, 2002. This result was primarily due to the continuing effects of negative spread among the non-transferred policies. Group life insurance business Net loss in the group life insurance business was RMB 1,007 million in the six months ended June 30, 2003, an increase from a net loss of RMB 493 million in the six months ended June 30, 2002. This change was primarily due to the continuing effects of negative spread among the non-transferred policies. Accident and health insurance business Net profit in the accident and health insurance business increased by RMB 319 million, or 38.9%, to RMB 1,140 million in the six months ended June 30, 2003 from RMB 821 million in the six months ended June 30, 2002. This change was primarily due to an increase in business volume. Year Ended December 31, 2002 Compared with Year Ended December 31, 2001 Net premiums earned and policy fees Net premiums earned and policy fees increased by RMB 11,458 million, or 20.8%, to RMB 66,424 million in 2002 from RMB 54,966 million in 2001. This increase was primarily due to increased premiums from individual life insurance products, particularly endowment products, as well as increased premiums from accident and health products. This increase was offset in part by a decrease in net premiums earned and policy fees from group life insurance products. 77 Net premiums earned and policy fees attributable to the transferred policies increased by RMB 12,940 million, or 40.7%, to RMB 44,748 million in 2002 from RMB 31,808 million in 2001. This increase was primarily due to increased premiums from individual life insurance products, particularly endowment products, as well as increased premiums from accident and health products. This increase was offset in part by a decrease in net premiums earned and policy fees from group life insurance products. Net premiums earned from participating products were RMB 14,548 million in 2002, an increase of 112.1% from RMB 6,859 million in 2001. Of total net premiums earned in 2002 and attributable to the transferred policies, RMB 8,896 million was attributable to single premium products and RMB 25,035 million was attributable to regular premium products (including both first-year and renewal premiums). Of total net premiums earned in 2001 and attributable to the transferred policies, RMB 5,941 million was attributable to single premium products and RMB 18,016 million was attributable to regular premium products. Individual life insurance business Net premiums earned and policy fees from the individual life insurance business increased by RMB 11,331 million, or 23.8%, to RMB 58,902 million in 2002 from RMB 47,571 million in 2001. This increase was primarily due to a substantial increase in sales of endowment products and growth in policy fees, particularly those generated by participating endowment products, as well as a substantial increase in sales of whole life products and the introduction and rapid growth of products sold through bank channels. Net premiums earned and policy fees from the individual life insurance business attributable to the transferred policies increased by RMB 12,856 million, or 51.8%, to RMB 37,662 million in 2002 from RMB 24,806 million in 2001. This increase was primarily due to a substantial increase in sales of endowment products and growth in policy fees, as well as a substantial increase in sales of whole life products and the introduction and rapid growth of products sold through bank channels. Group life insurance business Net premiums earned and policy fees from the group life insurance business decreased by RMB 601 million, or 44.5%, to RMB 749 million in 2002 from RMB 1,350 million in 2001. This decrease was primarily due to a redeployment of the direct sales force to meet the demand for individual participating products, which impacted sales of group products, as well as a shift in the weighting of group products toward investment-type products. Net premiums earned and policy fees from the group life insurance business attributable to the transferred policies decreased by RMB 608 million, or 56.0%, to RMB 477 million in 2002 from RMB 1,085 million in 2001. This decrease was primarily due to a redeployment of the direct sales force to meet the demand for individual participating products, as well as a shift in the weighting of group products toward investment-type products. Accident and health insurance business Net premiums earned from the accident and health insurance business increased by RMB 728 million, or 12.0%, to RMB 6,773 million in 2002 from RMB 6,045 million in 2001. Gross written premiums from the accident insurance business increased by RMB 77 million, or 1.5%, to RMB 5,273 million in 2002 from RMB 5,196 million in 2001 and gross written premiums from the health insurance business increased by RMB 1,094 million, or 39.8%, to RMB 3,845 million in 2002 from RMB 2,751 million in 2001. These changes were primarily due to an increase in sales of health insurance products following recent reforms designed to promote the health insurance system. Sales of accident insurance products have remained relatively stable in recent years, reflecting the trend in the overall accident insurance market in China in those periods. Net premiums earned from the accident and health insurance business attributable to the transferred policies increased by RMB 692 million, or 11.7%, to RMB 6,609 million in 2002 from RMB 5,917 million in 2001. 78 Gross written premiums from the accident insurance business attributable to the transferred policies increased by RMB 77 million, or 1.5%, to RMB 5,174 million in 2002 from RMB 5,097 million in 2001 and gross written premiums from the health insurance business attributable to the transferred policies increased by RMB 1,077 million, or 40.1%, to RMB 3,764 million in 2002 from RMB 2,687 million in 2001. These increases were primarily due to an increase in sales of health insurance products following recent reforms designed to promote the health insurance system. Sales of accident insurance products have remained relatively stable in recent years, reflecting the trend in the overall accident insurance market in China in those periods. Net investment income Net investment income increased by RMB 2,071 million, or 33.0%, to RMB 8,347 million in 2002 from RMB 6,276 million in 2001. This increase was primarily due to an overall increase in investment assets, particularly negotiated bank deposits, fixed maturity securities and securities investment funds, as well as a shift away from resale agreements, which have a comparatively low investment yield. These factors were offset in part by poor conditions in the equity markets, which led to a fall in dividend income from equity investments in securities investment funds. As of December 31, 2002, total investment assets were RMB 266,463 million and the investment yield for the year ended December 31, 2002 was 3.8%. As of December 31, 2001, total investment assets were RMB 188,869 million and the investment yield for the year ended December 31, 2001 was 4.1%. Net realized gains/losses on investments Net realized gains on investments were RMB 266 million in 2002, compared to net realized losses on investments of RMB 6 million in 2001. This change was primarily due to net realized gains in 2002 of RMB 446 million on fixed maturity securities, offset in part by net realized losses of RMB 180 million on equity securities in securities investment funds. Net unrealized gains/losses on investments We reflect unrealized gains or losses on investments designated as trading in current period income. Net unrealized losses on investments increased by RMB 745 million, or 231.4%, to RMB 1,067 million in 2002 from RMB 322 million in 2001. The results in both 2002 and 2001 were due to a steep fall in the equity markets, which adversely impacted the value of equity investments in closed-end securities funds. Deposits and policy fees Deposits are gross additions to policyholder contract deposits. Total deposits increased by RMB 37,242 million, or 136.3%, to RMB 64,574 million in 2002 from RMB 27,332 million in 2001. Policy fees increased by RMB 2,193 million, or 77.8%, to RMB 5,010 million in 2002 from RMB 2,817 million in 2001. These increases were primarily due to an increase in deposits in both the individual life insurance business and the group life insurance business. Total deposits attributable to the transferred policies increased by RMB 37,704 million, or 180.7%, to RMB 58,572 million in 2002 from RMB 20,868 million in 2001. Policy fees attributable to the transferred policies increased by RMB 2,274 million, or 117.6%, to RMB 4,208 million in 2002 from RMB 1,934 million in 2001. These increases were primarily due to an increase in deposits in both the individual life insurance business, and the group life insurance business. Total deposits from participating products increased by RMB 42,866 million, or 450.1%, to RMB 52,390 million in 2002 from RMB 9,524 million in 2001. Total policy fees from participating products increased to RMB 2,563 million in 2002 from RMB 306 million in 2001. 79 Individual life insurance business Deposits in the individual life insurance business increased by RMB 36,794 million, or 171.0%, to RMB 58,308 million in 2002 from RMB 21,514 million in 2001. Policy fees from the individual life insurance business increased by RMB 2,086 million, or 81.9%, to RMB 4,633 million in 2002 from RMB 2,547 million in 2001. These increases were primarily due to a substantial increase in sales of participating endowment products, which our predecessor began selling nationwide in the second half of 2001, as well as increased policy fees from investment products, particularly new participating endowment products. Policy fees increased at a lower rate than the growth of deposits because of a relatively larger increase in participating products, which generate lower policy fees than other products. Deposits in the individual life insurance business attributable to the transferred policies increased by RMB 37,178 million, or 245.2%, to RMB 52,340 million in 2002 from RMB 15,162 million in 2001. Policy fees from the individual life insurance business attributable to the transferred policies increased by RMB 2,188 million, or 116.0%, to RMB 4,075 million in 2002 from RMB 1,887 million in 2001. These increases were primarily due to a substantial increase in sales of participating endowment products, as well as increased policy fees from investment products. Policy fees increased at a lower rate than the growth of deposits because of a relatively larger increase in participating products. Group life insurance business Deposits in the group life insurance business increased by RMB 448 million, or 7.7%, to RMB 6,266 million in 2002 from RMB 5,818 million in 2001. Policy fees from the group life insurance business increased by RMB 107 million, or 39.6%, to RMB 377 million in 2002 from RMB 270 million in 2001. These increases were due to a shift in the weighting of group products toward investment-type products and an increase in the total outstanding amount of such products. Deposits in the group life insurance business attributable to the transferred policies increased by RMB 526 million, or 9.2%, to RMB 6,232 million in 2002 from RMB 5,706 million in 2001. Policy fees from the group life insurance business attributable to the transferred policies increased by RMB 86 million, or 183.0%, to RMB 133 million in 2002 from RMB 47 million in 2001. These increases were due to a shift in the weighting of group products toward investment-type products and an increase in the total outstanding amount of such products. Accident and health insurance business There are no deposits in our accident and health insurance business. Insurance benefits and claims Insurance benefits and claims, net of amounts ceded through reinsurance, increased by RMB 9,388 million, or 20.0%, to RMB 56,437 million in 2002 from RMB 47,049 million in 2001. This increase was primarily due to an increase in insurance benefits in the individual life insurance business. Life insurance death and other benefits decreased by RMB 3,089 million, or 30.6%, to RMB 7,010 million in 2002 from RMB 10,099 million in 2001 and, as a percentage of gross written premiums and policy fees, decreased to 10.2% in 2002 from 17.8% in 2001. These decreases were principally due to payments made in 2001 in respect of certain types of products sold in 1998 which require payments to be made every three years. Fewer of these products were sold in 1999 because CLIC stopped selling these products in June 1999 when the CIRC capped the maximum guaranteed rate of return at 2.50%. Payments in respect of the 1998 products were RMB 3,670 million in 2001, compared with payments of RMB 986 million in 2002 in respect of the 1999 products. Insurance benefits and claims, net of amounts ceded through reinsurance, attributable to the transferred policies increased by RMB 9,323 million, or 42.5%, to RMB 31,279 million in 2002 from RMB 21,956 million in 2001. This increase was primarily due to an increase in insurance benefits in the individual life insurance 80 business. Insurance benefits and claims, net of amounts ceded through reinsurance, attributable to participating products increased by RMB 7,889 million, or 129.6%, to RMB 13,975 million in 2002 from RMB 6,086 million in 2001. Of these insurance benefits and claims attributable to participating products, life insurance death and other benefits increased to RMB 132 million in 2002 from RMB 26 million in 2001 and the increase in future life policyholder benefits increased by RMB 7,783 million, or 128.4%, to RMB 13,843 million in 2002 from RMB 6,060 million in 2001. Individual life insurance business Insurance benefits and claims for the individual life insurance business increased by RMB 9,228 million, or 22.2%, to RMB 50,739 million in 2002 from RMB 41,511 million in 2001. This increase was primarily due to an increase in business volume during the period. Of these insurance benefits and claims, life insurance death and other benefits decreased by RMB 3,488 million, or 39.9%, to RMB 5,252 million in 2002 from RMB 8,740 million in 2001 and the increase in future life policyholder benefits rose by RMB 12,716 million, or 38.8%, to RMB 45,487 million in 2002 from RMB 32,771 million in 2001. Insurance benefits and claims for the individual life insurance business attributable to the transferred policies increased by RMB 9,609 million, or 55.9%, to RMB 26,797 million in 2002 from RMB 17,188 million in 2001. This increase was primarily due to an increase in business volume during the period. Group life insurance business Insurance benefits and claims for the group life insurance business decreased by RMB 76 million, or 4.5%, to RMB 1,622 million in 2002 from RMB 1,698 million in 2001. This decrease was smaller in magnitude than the decrease in premiums, primarily due to the continuing effects of negative spread from investment-type contracts among the non-transferred policies. Of these insurance benefits and claims, life insurance death and other benefits increased by RMB 387 million, or 28.7%, to RMB 1,735 million in 2002 from RMB 1,348 million in 2001 and future life policyholder benefits decreased by RMB 113 million in 2002, compared with an increase of RMB 350 million in 2001. Insurance benefits and claims for the group life insurance business attributable to the transferred policies decreased by RMB 520 million, or 56.0%, to RMB 409 million in 2002 from RMB 929 million in 2001. This decrease was primarily due to the change in business volume during the period. Accident and health insurance business Insurance benefits and claims for the accident and health insurance business increased by RMB 236 million, or 6.1%, to RMB 4,076 million in 2002 from RMB 3,840 million in 2001. Of these amounts, accident and health claims and claim adjustment expenses increased by RMB 224 million, or 5.9%, to RMB 4,053 million in 2002 from RMB 3,829 million in 2001 and life insurance death and other benefits (comprised of long-term health benefits) increased by RMB 12 million, or 109.1%, to RMB 23 million in 2002 from RMB 11 million in 2001. These changes were primarily due to more favorable claims experience, which made insurance benefits and claims increase more slowly than premiums during the period. Insurance benefits and claims for the accident and health insurance business attributable to the transferred policies increased by RMB 234 million, or 6.1%, to RMB 4,073 million in 2002 from RMB 3,839 million in 2001. This increase was smaller in magnitude than the increase in premiums, primarily due to more favorable claims experience. Policyholder dividends and participation in profits Policyholder dividends and participation in profits increased by RMB 464 million, or 262.1%, to RMB 641 million in 2002 from RMB 177 million in 2001. Virtually all of these amounts were attributable to the transferred 81 policies because our predecessor only began to sell participating products in 2000. This increase was primarily due to an increase in the overall amount of participating policies in force, offset in part by a decline in dividend rates. Amortization of deferred policy acquisition costs Amortization of deferred policy acquisition costs reflects the amortization of deferred policy acquisition costs attributable to the transferred policies. The majority of acquisition costs attributable to the transferred policies are deferrable. Amortization of deferred policy acquisition costs increased by RMB 808 million, or 26.7%, to RMB 3,832 million in 2002 from RMB 3,024 million in 2001. This increase was primarily due to the increase in business volume during the period. Underwriting and policy acquisition costs Underwriting and policy acquisition costs primarily reflect acquisition costs attributable to non-transferred policies in the individual life insurance business and group life insurance business, as well as acquisition costs in the accident and health insurance business. Underwriting and policy acquisition costs decreased by RMB 515 million, or 23.7%, to RMB 1,661 million in 2002 from RMB 2,176 million in 2001. Underwriting and policy acquisition costs were 2.5% of net premiums earned and policy fees in 2002, compared with 4.0% in 2001. Of this amount, underwriting and policy acquisition costs in the individual life insurance business and group life insurance business together decreased by RMB 656 million, or 34.2%, to RMB 1,260 million in 2002 from RMB 1,916 million in 2001. This decrease was primarily due to declining commissions attributable to the non- transferred policies, since commissions generally decrease as policies are renewed in successive years. Underwriting and policy acquisition costs in the accident and health insurance business increased by RMB 141 million, or 54.2%, to RMB 401 million in 2002 from RMB 260 million in 2001. This increase was primarily due to the increase in business volume during the period. Administrative expenses Administrative expenses include the non-deferrable portion of policy acquisition costs attributable to the transferred policies, as well as compensation and other administrative expenses. Administrative expenses increased by RMB 1,062 million, or 20.8%, to RMB 6,162 million in 2002 from RMB 5,100 million in 2001. This increase was primarily due to growth in the business and the use of performance-related salaries, which increased compensation costs. Other operating expenses Other operating expenses, which primarily consist of employee housing benefits, expenses of any non-core businesses (which includes investments in property, hotels and other operations through subsidiaries) and legal and regulatory costs, decreased by RMB 476 million, or 42.9%, to RMB 634 million in 2002 from RMB 1,110 million in 2001. This decrease was primarily due to reduced losses on sales of employee housing, which has been phased out in accordance with PRC law, as well as a continuing reduction in the activities of operating subsidiaries in non-core businesses. Interest credited to policyholder contract deposits Interest credited to policyholder contract deposits increased by RMB 1,296 million, or 22.3%, to RMB 7,095 million in 2002 from RMB 5,799 million in 2001. This increase was primarily due to an increase in the total policyholder account balance. There is no interest credited to policyholders in the accident and health insurance business. 82 Interest credited to policyholder contract deposits attributable to the transferred policies increased by RMB 918 million, or 141.2%, to RMB 1,568 million in 2002 from RMB 650 million in 2001. This increase was primarily due to an increase in the total policyholder account balance. Interest credited to participating policyholder contract deposits increased to RMB 922 million in 2002 from RMB 48 million in 2001. Income tax Income tax expense was RMB 14 million in 2002, compared to RMB 4 million in 2001. All of these amounts were attributable to income taxes incurred by non-core businesses. No other income tax was incurred in 2002 due to operating losses. Net profit/loss For the reasons set forth above, net loss was RMB 2,250 million in 2002, an improvement from a net loss of RMB 3,295 million in 2001. Individual life insurance business Net loss in the individual life insurance business was RMB 1,070 million in 2002, an improvement from a net loss of RMB 2,338 million in 2001. This result was primarily due to the continuing effects of negative spread from investment-type contracts among the non-transferred policies, offset by an increase in business volume. Group life insurance business Net loss in the group life insurance business was RMB 2,475 million in 2002, an increase from a net loss of RMB 1,518 million in 2001. This change was primarily due to the continuing effects of negative spread from investment-type contracts among the non-transferred policies. Accident and health insurance business Net profit in the accident and health insurance business increased by RMB 700 million, or 142.9%, to RMB 1,190 million in 2002 from RMB 490 million in 2001. This change was primarily due to an increase in business volume, as well as more favorable claims experience. Year Ended December 31, 2001 Compared with Year Ended December 31, 2000 Net premiums earned and policy fees Net premiums earned and policy fees increased by RMB 12,067 million, or 28.1%, to RMB 54,966 million in 2001 from RMB 42,899 million in 2000. This increase was primarily due to a large increase in premiums from individual life insurance products, as well as increased premiums from accident and health products. Our predecessor introduced individual participating products in a limited number of cities in the first half of 2001 and began selling these products nationwide in the second half of 2001. The net change in unearned premium reserves was negative RMB 248 million in 2001, compared with negative RMB 314 million in 2000. The net change in unearned premium reserves relates only to policies in the accident and health business with a duration of more than twelve months. The net change in unearned premium reserves in 2001 was primarily due to a shift in product mix toward policies with a duration of twelve months or less. Net premiums earned and policy fees attributable to the transferred policies increased by RMB 12,514 million, or 64.9%, to RMB 31,808 million in 2001 from RMB 19,294 million in 2000. This increase was primarily due to a large increase in premiums from individual life insurance products, as well as increased premiums from accident and health products. Net premiums earned from participating products were RMB 6,859 83 million in 2001, an increase from RMB 135 million in 2000. Of total net premiums earned in 2001 and attributable to the transferred policies, RMB 5,941 million was attributable to single premium products and RMB 18,016 million was attributable to regular premium products (including both first-year and renewal premiums). Of total net premiums earned in 2000 and attributable to the transferred policies, RMB 1,923 million was attributable to single premium products and RMB 9,993 million was attributable to regular premium products. Individual life insurance business Net premiums earned and policy fees from the individual life insurance business increased by RMB 10,757 million, or 29.2%, to RMB 47,571 million in 2001 from RMB 36,814 million in 2000. This increase was primarily due to an increase in sales of endowment products and growth in policy fees, as well as increased premiums from whole life products and annuity products. Net premiums earned and policy fees from the individual life insurance business attributable to the transferred policies increased by RMB 11,320 million, or 83.9%, to RMB 24,806 million in 2001 from RMB 13,486 million in 2000. This increase was primarily due to an increase in sales of endowment products, as well as increased premiums from whole life products and annuity products. Group life insurance business Net premiums earned and policy fees from the group life insurance business increased by RMB 855 million, or 172.7%, to RMB 1,350 million in 2001 from RMB 495 million in 2000. This change was primarily due to increased premiums from whole life products, which offset a decline in policy fees from endowment policies classified as investment-type contracts. Net premiums earned and policy fees from the group life insurance business attributable to the transferred policies increased by RMB 857 million, or 375.9%, to RMB 1,085 million in 2001 from RMB 228 million in 2000. This change was primarily due to increased premiums from whole life products, which offset a decline in policy fees from endowment policies classified as investment-type contracts. Accident and health insurance business Net premiums earned from the accident and health insurance business increased by RMB 455 million, or 8.1%, to RMB 6,045 million in 2001 from RMB 5,590 million in 2000. Gross written premiums from the accident insurance business were RMB 5,196 million in 2001 and gross written premiums from the health insurance business were RMB 2,751 million in 2001. Both accident insurance and health insurance experienced increases in premium income. Net premiums earned from the accident and health insurance business attributable to the transferred policies increased by RMB 337 million, or 6.0%, to RMB 5,917 million in 2001 from RMB 5,580 million in 2000. This increase was primarily due to increased sales of both types of insurance. Gross written premiums from the accident insurance business attributable to the transferred policies were RMB 5,097 million in 2001 and gross written premiums from the health insurance business attributable to the transferred policies were RMB 2,687 million in 2001. Net investment income Net investment income increased by RMB 1,902 million, or 43.5%, to RMB 6,276 million in 2001 from RMB 4,374 million in 2000. This increase was primarily due to an overall increase in investment assets, particularly negotiated bank deposits, fixed maturity securities and securities investment funds, as well as the comparatively high investment yield in the Chinese equity markets that year and improved yield performance following the centralization of management of the investment portfolio and the establishment of a specialized investments department. 84 As of December 31, 2001, total investment assets were RMB 188,869 million and the investment yield for the year ended December 31, 2001 was 4.1%. As of December 31, 2000, total investment assets were RMB 129,998 million. Net realized gains/losses on investments Net realized losses on investments were RMB 6 million in 2001, compared to RMB 23 million in 2000. The results in 2001 were primarily due to net realized gains of RMB 188 million on fixed maturity securities, offset by net realized losses of RMB 194 million on equity securities, whereas the results in 2000 were primarily due to net realized losses of RMB 129 million on fixed maturity securities, offset by net realized gains of RMB 106 million on equity securities. Net unrealized gains/losses on investments We reflect unrealized gains or losses on investments designated as trading in current period income. Net unrealized losses on investments were RMB 322 million in 2001, compared to net unrealized gains on investments of RMB 298 million in 2000. These unrealized gains and losses were primarily due to declines in the value of equity investments in closed-end securities funds. Deposits and policy fees Deposits are gross additions to policyholder contract deposits. Total deposits increased by RMB 4,257 million, or 18.4%, to RMB 27,332 million in 2001 from RMB 23,075 million in 2000. Policy fees increased by RMB 194 million, or 7.4%, to RMB 2,817 million in 2001 from RMB 2,623 million in 2000. These increases were primarily due to an increase in deposits in both the individual life insurance business and the group life insurance business. Total deposits attributable to the transferred policies increased by RMB 5,648 million, or 37.1%, to RMB 20,868 million in 2001 from RMB 15,220 million in 2000. Policy fees attributable to the transferred policies increased by RMB 136 million, or 7.6%, to RMB 1,934 million in 2001 from RMB 1,798 million in 2000. These increases were primarily due to an increase in deposits in both the individual life insurance business and the group life insurance business. Total deposits from participating products were RMB 9,524 million in 2001. Total policy fees from participating products were RMB 306 million in 2001. No participating investment products were offered in 2000. Individual life insurance business Deposits in the individual life insurance business increased by RMB 2,544 million, or 13.4%, to RMB 21,514 million in 2001 from RMB 18,970 million in 2000. Policy fees from the individual life insurance business increased by RMB 381 million, or 17.6%, to RMB 2,547 million in 2001 from RMB 2,166 million in 2000. These increases were primarily due to sales of participating endowment products, which our predecessor began selling nationwide in the second half of 2001. Deposits in the individual life insurance business attributable to the transferred policies increased by RMB 3,854 million, or 34.1%, to RMB 15,162 million in 2001 from RMB 11,308 million in 2000. Policy fees from the individual life insurance business attributable to the transferred policies increased by RMB 317 million, or 20.2%, to RMB 1,887 million in 2001 from RMB 1,570 million in 2000. These increases were primarily due to sales of participating endowment products. Group life insurance business Deposits in the group life insurance business increased by RMB 1,713 million, or 41.7%, to RMB 5,818 million in 2001 from RMB 4,105 million in 2000. Policy fees from the group life insurance business decreased 85 by RMB 187 million, or 40.9%, to RMB 270 million in 2001 from RMB 457 million in 2000. These changes were primarily due to sales of a new product with annual charges in 2001, compared with sales of a new product with a front-end load in 2000. Deposits in the group life insurance business attributable to the transferred policies increased by RMB 1,794 million, or 45.9%, to RMB 5,706 million in 2001 from RMB 3,912 million in 2000. Policy fees from the group life insurance business attributable to the transferred policies decreased by RMB 181 million, or 79.4%, to RMB 47 million in 2001 from RMB 228 million in 2000. These changes were primarily due to the same reason as for the business overall. Accident and health insurance business There are no deposits in the accident and health insurance business. Insurance benefits and claims Insurance benefits and claims, net of amounts ceded through reinsurance, increased by RMB 8,077 million, or 20.7%, to RMB 47,049 million in 2001 from RMB 38,972 million in 2000. This increase was primarily due to the corresponding growth in business volume during the period. Life insurance death and other benefits, as a percentage of gross written premiums and policy fees, were 17.8% in 2001, compared to 18.9% in 2000. Insurance benefits and claims, net of amounts ceded through reinsurance, attributable to the transferred policies increased by RMB 9,306 million, or 73.6%, to RMB 21,956 million in 2001 from RMB 12,650 million in 2000. This increase was primarily due to growth in business volume. Insurance benefits and claims, net of amounts ceded through reinsurance, attributable to participating products were RMB 6,086 million in 2001. Of these insurance benefits and claims attributable to participating products, life insurance death and other benefits were RMB 26 million in 2001 and the increase in future life policyholder benefits was RMB 6,060 million. Individual life insurance business Insurance benefits and claims for the individual life insurance business increased by RMB 5,538 million, or 15.4%, to RMB 41,511 million in 2001 from RMB 35,973 million in 2000. This increase was primarily due to an increase in business volume during the period. Of these insurance benefits and claims, life insurance death and other benefits increased by RMB 778 million, or 9.8%, to RMB 8,740 million in 2001 from RMB 7,962 million in 2000 and the increase in future life policyholder benefits increased by RMB 4,760 million, or 17.0%, to RMB 32,771 million in 2001 from RMB 28,011 million in 2000. Insurance benefits and claims for the individual life insurance business attributable to the transferred policies increased by RMB 7,472 million, or 76.9%, to RMB 17,188 million in 2001 from RMB 9,716 million in 2000. This increase was primarily due to an increase in business volume during the period. Group life insurance business Insurance benefits and claims for the group life insurance business increased by RMB 1,472 million, or 651.3%, to RMB 1,698 million in 2001 from RMB 226 million in 2000. Of this amount, life insurance death and other benefits increased by RMB 849 million, or 170.1%, to RMB 1,348 million in 2001 from RMB 499 million in 2000 and future life policyholder benefits increased by RMB 350 million in 2001, compared with a decrease of RMB 273 million in 2000. These increases were primarily due to the continuing effects of negative spread from investment-type contracts among the non-transferred policies. Insurance benefits and claims for the group life insurance business attributable to the transferred policies increased by RMB 767 million, or 473.5%, to RMB 929 million in 2001 from RMB 162 million in 2000. This increase was primarily due to an increase in business volume. 86 Accident and health insurance business Insurance benefits and claims for the accident and health insurance business increased by RMB 1,067 million, or 38.5%, to RMB 3,840 million in 2001 from RMB 2,773 million in 2000. Of these amounts, accident and health claims and claim adjustment expenses increased by RMB 1,062 million, or 38.4%, to RMB 3,829 million in 2001 from RMB 2,767 million in 2000 and life insurance death and other benefits (comprised of long-term health benefits) increased by RMB 5 million, or 83.3%, to RMB 11 million in 2001 from RMB 6 million in 2000. These increases were primarily due to a reclassification into this category of health rider products which, on a stand-alone basis, had a higher claims ratio than other products, resulting in insurance claims and benefits increasing at a higher rate than the growth in premiums during the period. Insurance benefits and claims for the accident and health insurance business attributable to the transferred policies increased by RMB 1,067 million, or 38.5%, to RMB 3,839 million in 2001 from RMB 2,772 million in 2000. This increase was primarily due to a reclassification into this category of health rider products which, on a stand-alone basis, had a higher claims ratio than other products. Policyholder dividends and participation in profits Policyholder dividends and participation in profits were RMB 177 million in 2001, an increase from RMB 7 million in 2000. Virtually all of these amounts were attributable to the transferred policies. This increase was primarily due to an increase in the overall amount of participating products, offset by a small decline in dividend rates. Amortization of deferred policy acquisition costs Amortization of deferred policy acquisition costs reflects the amortization of deferred policy acquisition costs attributable to the transferred policies. The majority of acquisition costs attributable to the transferred policies are deferrable. Amortization of deferred policy acquisition costs increased by RMB 1,279 million, or 73.3%, to RMB 3,024 million in 2001 from RMB 1,745 million in 2000. This increase was primarily due to the increase in business volume during the period. Underwriting and policy acquisition costs Underwriting and policy acquisition costs primarily reflect acquisition costs attributable to non-transferred policies in the individual life insurance business and group life insurance business, as well as acquisition costs in the accident and health insurance business. Underwriting and policy acquisition costs decreased by RMB 897 million, or 29.2%, to RMB 2,176 million in 2001 from RMB 3,073 million in 2000. Underwriting and policy acquisition costs were 4.0% of net premiums earned and policy fees in 2001, compared with 7.2% in 2000. Of this amount, underwriting and policy acquisition costs in the individual life insurance business and group life insurance business together decreased by RMB 934 million, or 32.8%, to RMB 1,916 million in 2001 from RMB 2,850 million in 2000. This decrease was primarily due to declining commissions attributable to the non-transferred policies, since commissions generally decrease as policies are renewed in successive years. Underwriting and policy acquisition costs in the accident and health insurance business increased by RMB 37 million, or 16.6%, to RMB 260 million in 2001 from RMB 223 million in 2000. This increase was primarily due to the increase in business volume during the period. Administrative expenses Administrative expenses include the non-deferrable portion of policy acquisition costs attributable to the transferred policies, as well as compensation and other administrative expenses. Administrative expenses increased by RMB 782 million, or 18.1%, to RMB 5,100 million in 2001 from RMB 4,318 million in 2000. This 87 increase was primarily due to growth in business and the use of performance-related salaries, which generated increases in compensation costs. Other operating expenses Other operating expenses, which primarily consist of employee housing benefits, expenses of any non-core businesses (which includes investments in property, hotels and other operations through subsidiaries) and legal and regulatory costs, decreased by RMB 1,492 million, or 57.3%, to RMB 1,110 million in 2001 from RMB 2,602 million in 2000. This decrease was primarily due to reduced losses on sales of employee housing, as well as a reduction in the activities of operating subsidiaries in non-core businesses. Interest credited to policyholder contract deposits Interest credited to policyholder contract deposits increased by RMB 1,294 million, or 28.7%, to RMB 5,799 million in 2001 from RMB 4,505 million in 2000. This increase was primarily due to an increase in the total policyholder account balance. There is no interest credited to policyholders in the accident and health insurance business. Interest credited to policyholder contract deposits attributable to the transferred policies increased by RMB 309 million, or 90.6%, to RMB 650 million in 2001 from RMB 341 million in 2000. This increase was primarily due to an increase in the total policyholder account balance. Interest credited to participating policyholder contract deposits was RMB 48 million in 2001. Income tax Income tax expense was RMB 4 million in 2001, compared to RMB 14 million in 2000. All of these amounts were attributable to income taxes incurred by non-core businesses. No other income tax was incurred in 2001 due to operating losses. Net profit/loss For the reasons set forth above, net loss was RMB 3,295 million in 2001, an improvement from a net loss of RMB 6,990 million in 2000. Individual life insurance business Net loss in the individual life insurance business was RMB 2,338 million in 2001, an improvement from a net loss of RMB 6,773 million in 2000. This change was primarily due to the continuing effects of negative spread from investment-type contracts among the non-transferred policies, offset by an increase in business volume and more favorable claims experience. Group life insurance business Net loss in the group life insurance business was RMB 1,518 million in 2001, an increase from a net loss of RMB 769 million in 2000. This change was primarily due to the continuing effects of negative spread from investment-type contracts among the non-transferred policies. Accident and health insurance business Net profit in the accident and health insurance business decreased by RMB 181 million, or 27.0%, to RMB 490 million in 2001 from RMB 671 million in 2000. This decrease was primarily due to an increase in business volume, offset by less favorable claims experience. 88 Results of Operations--Pro Forma Basis We set forth below information and discussion regarding the pro forma effect of our restructuring for the six-month periods ended June 30, 2002 and 2003 and the year ended December 31, 2002, as if it had occurred at the start of the six-month periods ended June 30, 2002 or 2003, respectively or at the start of the year ended December 31, 2002. The unaudited pro forma consolidated financial information is not necessarily indicative of the results that could have been achieved had the restructuring in fact occurred on that date and is not necessarily indicative of the financial results for any future periods. For an explanation of the pro forma adjustments set forth below, see "Unaudited Pro Forma Consolidated Financial Data".
For the six months ended June 30, 2003 ----------------------------------------- Historical Adjustments Pro Forma Pro Forma ---------- ----------- --------- --------- RMB RMB RMB US$ (in millions) Revenues Net written premiums and policy fees..................... 35,401 (10,688) 24,713 2,986 Net change in unearned premium reserves.................. 17 -- 17 2 ------- ------- ------- ------ Net premiums earned and policy fees...................... 35,418 (10,688) 24,730 2,988 ------- ------- ------- ------ Net investment income.................................... 5,070 (2,032) 3,038 367 Net realized gains/(losses) on investments............... 691 (271) 420 51 Net unrealized gains/(losses) on investments............. 280 (110) 170 21 Other income............................................. 122 842 964 116 ------- ------- ------- ------ Total revenues........................................... 41,581 (12,259) 29,322 3,542 ------- ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits................. (4,580) 2,946 (1,634) (197) Accident and health claims and claim adjustment expenses (2,455) -- (2,455) (297) Increase in future life policyholder benefits........... (23,192) 10,638 (12,554) (1,517) Policyholder dividends and participation in profits...... (862) -- (862) (104) Amortization of deferred policy acquisition costs........ (2,648) -- (2,648) (320) Underwriting and policy acquisition costs................ (708) 442 (266) (32) Administrative expenses.................................. (3,005) 175 (2,830) (342) Other operating expenses................................. (704) 505 (199) (24) Interest expense on bank borrowings...................... (5) 5 -- -- Interest credited to policyholder contract deposits...... (4,109) 2,832 (1,277) (154) Statutory insurance levy................................. (38) -- (38) (5) ------- ------- ------- ------ Total benefits, claims and expenses...................... (42,306) 17,543 (24,763) (2,992) ------- ------- ------- ------ Profit/(loss) before income tax expense and minority interests.............................................. (725) 5,284 4,559 551 Income tax expense....................................... (8) (1,406) (1,414) (171) ------- ------- ------- ------ Profit/(loss) before minority interests.................. (733) 3,878 3,145 380 Minority interests....................................... 19 (36) (17) (2) ------- ------- ------- ------ Net profit/(loss)........................................ (714) 3,842 3,128 378 ======= ======= ======= ======
89
For the six months ended June 30, 2002 ------------------------------------- Historical Adjustments Pro Forma ---------- ----------- --------- (RMB in millions) Revenues Net written premiums and policy fees.......................... 33,399 (10,860) 22,539 Net change in unearned premium reserves....................... 306 -- 306 ------- ------- ------- Net premiums earned and policy fees........................... 33,705 (10,860) 22,845 ------- ------- ------- Net investment income......................................... 3,991 (1,977) 2,014 Net realized gains/(losses) on investments.................... 684 (337) 347 Net unrealized gains/(losses) on investments.................. (75) 37 (38) Other income.................................................. 121 851 972 ------- ------- ------- Total revenues................................................ 38,426 (12,286) 26,140 ------- ------- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits...................... (3,869) 2,753 (1,116) Accident and health claims and claim adjustment expenses..... (1,959) -- (1,959) Increase in future life policyholder benefits................ (22,793) 9,527 (13,266) Policyholder dividends and participation in profits........... (310) 2 (308) Amortization of deferred policy acquisition costs............. (2,102) -- (2,102) Underwriting and policy acquisition costs..................... (822) 644 (178) Administrative expenses....................................... (2,916) 156 (2,760) Other operating expenses...................................... (316) 160 (156) Interest expense on bank borrowings........................... (4) 4 -- Interest credited to policyholder contract deposits........... (3,209) 2,524 (685) Statutory insurance levy...................................... (30) -- (30) ------- ------- ------- Total benefits, claims and expenses........................... (38,330) 15,770 (22,560) ------- ------- ------- Profit/(loss) before income tax expense and minority interests 96 3,484 3,580 Income tax expense............................................ (3) (1,003) (1,006) ------- ------- ------- Profit/(loss) before minority interests....................... 93 2,481 2,574 Minority interests............................................ (2) (9) (11) ------- ------- ------- Net profit/(loss)............................................. 91 2,472 2,563 ======= ======= =======
90
For the year ended December 31, 2002 ----------------------------------------- Historical Adjustments Pro Forma Pro Forma ---------- ----------- --------- --------- RMB RMB RMB US$ (in millions) Revenues Net written premiums and policy fees..................... 66,900 (21,688) 45,212 5,462 Net change in unearned premium reserves.................. (476) 12 (464) (56) ------- ------- ------- ------ Net premiums earned and policy fees...................... 66,424 (21,676) 44,748 5,406 ------- ------- ------- ------ Net investment income.................................... 8,347 (4,001) 4,346 525 Net realized gains/(losses) on investments............... 266 (126) 140 17 Net unrealized gains/(losses) on investments............. (1,067) 507 (560) (68) Other income............................................. 338 1,728 2,066 250 ------- ------- ------- ------ Total revenues........................................... 74,308 (23,568) 50,740 6,130 ------- ------- ------- ------ Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits................. (7,010) 4,702 (2,308) (279) Accident and health claims and claim adjustment expenses (4,053) -- (4,053) (490) Increase in future life policyholder benefits........... (45,374) 20,455 (24,919) (3,010) Policyholder dividends and participation in profits...... (641) 3 (638) (77) Amortization of deferred policy acquisition costs........ (3,832) -- (3,832) (463) Underwriting and policy acquisition costs................ (1,661) 1,106 (555) (67) Administrative expenses.................................. (6,162) 256 (5,906) (713) Other operating expenses................................. (634) 204 (430) (52) Interest expense on bank borrowings...................... (7) 7 -- -- Interest credited to policyholder contract deposits...... (7,095) 5,527 (1,568) (189) Statutory insurance levy................................. (73) -- (73) (9) ------- ------- ------- ------ Total benefits, claims and expenses...................... (76,542) 32,260 (44,282) (5,350) ------- ------- ------- ------ Profit/(loss) before income tax expense and minority interests.............................................. (2,234) 8,692 6,458 780 Income tax expense....................................... (14) (1,890) (1,904) (230) ------- ------- ------- ------ Profit/(loss) before minority interests.................. (2,248) 6,802 4,554 550 Minority interests....................................... (2) (28) (30) (4) ------- ------- ------- ------ Net profit/(loss)........................................ (2,250) 6,774 4,524 546 ======= ======= ======= ======
Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002 Pro forma net premiums earned and policy fees Pro forma net premiums earned and policy fees increased by RMB 1,885 million, or 8.3%, to RMB 24,730 million in the six months ended June 30, 2003 from RMB 22,845 million in the six months ended June 30, 2002. This increase was primarily due to increases in net premiums earned and policy fees in the individual life insurance business and health insurance business. Of total pro forma net premiums earned in the six months ended June 30, 2003, RMB 2,123 million was attributable to single premium products and RMB 15,055 million was attributable to regular premium products (including both first-year and renewal premiums). 91 Individual life insurance business Pro forma net premiums earned and policy fees from the individual life insurance business increased by RMB 1,020 million, or 5.3%, to RMB 20,370 million in the six months ended June 30, 2003 from RMB 19,350 million in the six months ended June 30, 2002. This increase was primarily due to 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 business Pro forma net premiums earned and policy fees from the group life insurance business decreased by RMB 34 million, or 11.0%, to RMB 267 million in the six months ended June 30, 2003 from RMB 301 million in the six months ended June 30, 2002. This decrease was primarily due to a shift away from whole life products and annuity products in favor of products which are classified as investment products. Accident and health insurance business Pro forma net premiums earned from the accident and health insurance business increased by RMB 899 million, or 28.1%, to RMB 4,093 million in the six months ended June 30, 2003 from RMB 3,194 million in the six months ended June 30, 2002. Pro forma gross written premiums from the accident insurance business decreased by RMB 38 million, or 1.6%, to RMB 2,359 million in the six months ended June 30, 2003 from RMB 2,397 million in the six months ended June 30, 2002 and pro forma gross written premiums from the health insurance business increased by RMB 1,151 million, or 91.6%, to RMB 2,407 million in the six months ended June 30, 2003 from RMB 1,256 million in the six months ended June 30, 2002. These changes were primarily due to strong growth in premiums from sales of short-term health and supplemental medical insurance. Sales of accident insurance have remained relatively flat in recent years, in line with the market overall. Net investment income Pro forma net investment income increased by RMB 1,024 million, or 50.8%, to RMB 3,038 million in the six months ended June 30, 2003 from RMB 2,014 million in the six months ended June 30, 2002. This increase was primarily due to an overall increase in investment assets. Net realized gains/losses on investments Pro forma net realized gains on investments were RMB 420 million in the six months ended 2003, compared to RMB 347 million in the six months ended June 30, 2002. This change was primarily due to higher net realized gains on debt securities, offset in part by lower net realized gains on securities investment funds. Net unrealized gains/losses on investments We reflect unrealized gains or losses on investments designated as trading in current period income. Pro forma net unrealized gains on investments were RMB 170 million in the six months ended June 30, 2003, compared to net unrealized losses on investments of RMB 38 million in the six months ended June 30, 2002. This change reflected unrealized capital gains on securities investment funds due to favorable conditions in the equity markets. Insurance benefits and claims Pro forma insurance benefits and claims, net of amounts ceded through reinsurance, increased by RMB 302 million, or 1.8%, to RMB 16,643 million in the six months ended June 30, 2003 from RMB 16,341 million in the six months ended June 30, 2002. This increase was primarily due to an increase in insurance benefits and claims in the health insurance business. Of this amount, pro forma life insurance death and other benefits increased by 92 RMB 518 million, or 46.4%, to RMB 1,634 million in the six months ended June 30, 2003 from RMB 1,116 million in the six months ended June 30, 2002, pro forma accident and health claims and claim adjustment expenses increased by RMB 496 million, or 25.3%, to RMB 2,455 million in the six months ended June 30, 2003 from RMB 1,959 million in the six months ended June 30, 2002 and the pro forma increase in future life policyholder benefits decreased by RMB 712 million, or 5.4%, to RMB 12,554 million in the six months ended June 30, 2003 from RMB 13,266 million in the six months ended June 30, 2002. The increase in pro forma life insurance death and other benefits was primarily due to an increase in the number of policies in force. Pro forma life insurance death and other benefits, as a percentage of pro forma gross written premiums and policy fees, were 6.4% in the six months ended June 30, 2003, a slight increase from 4.8% in the six months ended June 30, 2002. Individual life insurance business Pro forma insurance benefits and claims for the individual life insurance business decreased by RMB 167 million, or 1.2%, to RMB 13,929 million in the six months ended June 30, 2003 from RMB 14,096 million in the six months ended June 30, 2002. This decrease was primarily due to a shift in product mix away from endowment products and toward whole life products, which have lower reserve requirements than endowment products. Of these pro forma insurance benefits and claims, pro forma life insurance death and other benefits increased by RMB 414 million, or 45.0%, to RMB 1,335 million in the six months ended June 30, 2003 from RMB 921 million in the six months ended June 30, 2002 and the pro forma increase in future life policyholder benefits decreased by RMB 581 million, or 4.4%, to RMB 12,594 million in the six months ended June 30, 2003 from RMB 13,175 million in the six months ended June 30, 2002. Group life insurance business Pro forma insurance benefits and claims for the group life insurance business decreased by RMB 17 million, or 6.2%, to RMB 259 million in the six months ended June 30, 2003 from RMB 276 million in the six months ended June 30, 2002. This decrease was primarily due to the decrease in business volume during the period. Of these pro forma insurance benefits and claims, pro forma life insurance death and other benefits increased by RMB 114 million, or 61.6%, to RMB 299 million in the six months ended June 30, 2003 from RMB 185 million in the six months ended June 30, 2002 and pro forma future life policyholder benefits decreased by RMB 40 million in the six months ended June 30, 2003, compared with an increase of RMB 91 million in the six months ended June 30, 2002. Accident and health insurance business Pro forma insurance benefits and claims for the accident and health insurance business increased by RMB 486 million, or 24.7%, to RMB 2,455 million in the six months ended June 30, 2003 from RMB 1,969 million in the six months ended June 30, 2002. This increase was primarily due to the increase in business volume in the health insurance business during the period. Of these pro forma insurance benefits and claims, pro forma accident and health claims and claim adjustment expenses increased by RMB 496 million, or 25.3%, to RMB 2,455 million in the six months ended June 30, 2003 from RMB 1,959 million in the six months ended June 30, 2002 and pro forma life insurance death and other benefits (comprised of long-term health benefits) were nil in the six months ended June 30, 2003, compared to RMB 10 million in the six months ended June 30, 2002. Policyholder dividends and participation in profits Pro forma policyholder dividends and participation in profits increased by RMB 554 million, or 179.9%, to RMB 862 million in the six months ended June 30, 2003 from RMB 308 million in the six months ended June 30, 2002. This increase was primarily due to an increase in the overall amount of participating policies in force. Amortization of deferred policy acquisition costs The majority of acquisition costs are deferrable. Pro forma amortization of deferred policy acquisition costs increased by RMB 546 million, or 26.0%, to RMB 2,648 million in the six months ended June 30, 2003 from 93 RMB 2,102 million in the six months ended June 30, 2002. This increase was primarily due to the increase in business volume during the period. Underwriting and policy acquisition costs Pro forma underwriting and policy acquisition costs primarily reflect acquisition costs in the accident and health insurance business. Pro forma underwriting and policy acquisition costs increased by RMB 88 million, or 49.4%, to RMB 266 million in the six months ended June 30, 2003 from RMB 178 million in the six months ended June 30, 2002. This increase was primarily due to the increase in business volume during the period. Administrative expenses Pro forma administrative expenses include the non-deferrable portion of policy acquisition costs attributable to the insurance policies as well as compensation and other administrative expenses. Pro forma administrative expenses increased by RMB 70 million, or 2.5%, to RMB 2,830 million in the six months ended June 30, 2003 from RMB 2,760 million in the six months ended June 30, 2002. This increase was primarily due to the increase in business volume. Other operating expenses Pro forma other operating expenses, which primarily consist of employee housing benefits and legal and regulatory costs, increased by RMB 43 million, or 27.6%, to RMB 199 million in the six months ended June 30, 2003 from RMB 156 million in the six months ended June 30, 2002. Interest credited to policyholder contract deposits Pro forma interest credited to policyholder contract deposits increased by RMB 592 million, or 86.4%, to RMB 1,277 million in the six months ended June 30, 2003 from RMB 685 million in the six months ended June 30, 2002. This increase was primarily due to an increase in the total policyholder account balance. Income tax Pro forma income tax expense was RMB 1,414 million in the six months ended June 30, 2003, compared to RMB 1,006 million in the six months ended June 30, 2002. This result was primarily attributable to a pro forma profit before tax and minority interests of RMB 4,559 million. The pro forma effective tax rate of 31.0% reflects the income tax rate that CLIC would have been subject to in the six months ended June 30, 2003 assuming the restructuring had occurred as of January 1, 2002 and assuming no tax losses were carried forward from prior years. Net profit/loss For the reasons set forth above, pro forma net profit increased by RMB 565 million, or 22.0%, to RMB 3,128 million in the six months ended June 30, 2003 from RMB 2,563 million in the six months ended June 30, 2002. Year Ended December 31, 2002 Net premiums earned and policy fees Pro forma net premiums earned and policy fees were RMB 44,748 million in 2002. This result was primarily due to sales of our individual life insurance products, particularly sales of endowment products. 94 Individual life insurance business Pro forma net premiums earned and policy fees from the individual life insurance business were RMB 37,662 million in 2002. This result was primarily attributable to sales of and policy fees from investment products as well as the introduction and rapid growth of products sold through bank channels. Group life insurance business Pro forma net premiums earned and policy fees from the group life insurance business were RMB 477 million in 2002. Sales of our group life insurance products were impacted by our decision to utilize our direct sales force to sell individual participating products to meet demand, as well as a high ratio of investment-type products in the overall sales mix of group products. Accident and health insurance business Pro forma net premiums earned from the accident and health insurance business were RMB 6,609 million in 2002. Pro forma gross written premiums from the accident insurance business were RMB 5,174 million in 2002 and pro forma gross written premiums from the health insurance business were RMB 3,764 million in 2002. These results were primarily due to strong sales of health insurance products following recent reforms designed to promote the health insurance system. Sales of accident insurance products have remained relatively stable in recent years, reflecting the trend in the overall accident insurance market in China in those periods. Net investment income Pro forma net investment income was RMB 4,346 million in 2002. This result was primarily due to investments in negotiated bank deposits, fixed maturity securities and securities investment funds, and a shift away from resale agreements, which have a comparatively low investment yield. We also experienced poor conditions in the equity markets, which affected dividend income from equity investments in securities investment funds. Net realized gains/losses on investments Pro forma net realized gains on investments were RMB 140 million in 2002. This result included net realized gains on investments of RMB 446 million in our fixed maturity securities. Net unrealized losses on investments We reflect unrealized gains or losses on investments designated as trading in current period income. Pro forma net unrealized losses were RMB 560 million in 2002. This result primarily reflected a steep fall in the equity markets, which adversely impacted the value of equity investments in closed-end securities funds. Insurance benefits and claims Pro forma insurance benefits and claims, net of amounts ceded through reinsurance, were RMB 31,280 million in 2002. Of this amount, pro forma life insurance death and other benefits were RMB 2,308 million, pro forma accident and health claims and claim adjustment expenses were RMB 4,053 million and the pro forma increase in future life policyholder benefits was RMB 24,919 million. Individual life insurance business Pro forma insurance benefits and claims for the individual life insurance business were RMB 26,797 million in 2002. This result was primarily due to the business volume during the period. 95 Group life insurance business Pro forma insurance benefits and claims for the group life insurance business were RMB 409 million in 2002. This result was primarily due to unfavorable claims experience during the period. Accident and health insurance business Pro forma insurance benefits and claims for the accident and health insurance business were RMB 4,073 million in 2002. These results were primarily due to favorable claims experience. Policyholder dividends and participation in profits Pro forma policyholder dividends and participation in profits were RMB 638 million in 2002. Our dividends reflected higher overall amounts of participating policies in force, offset in part by a decline in dividend rates. Amortization of deferred policy acquisition costs Pro forma amortization of deferred policy acquisition costs was RMB 3,832 million in 2002. Underwriting and policy acquisition costs Pro forma underwriting and policy acquisition costs were RMB 555 million in 2002. Administrative expenses Pro forma administrative expenses were RMB 5,906 million in 2002. This result was primarily due to the growth in business and the use of performance-related salaries, which impacted compensation costs. Other operating expenses Pro forma other operating expenses, which primarily consist of employee housing benefits and legal and regulatory costs, were RMB 430 million in 2002. Interest credited to policyholder contract deposits Pro forma interest credited to policyholder contract deposits was RMB 1,568 million in 2002. This result was primarily due to the policyholder account balance during the period. Income tax Pro forma income tax was RMB 1,904 million in 2002. This result was primarily attributable to a pro forma profit before tax and minority interests of RMB 6,458 million. The pro forma effective tax rate of 29.5% reflects the income tax rate that CLIC would have been subject to in 2002 assuming the restructuring had occurred as of January 1, 2002 and assuming no tax losses were carried forward from prior years. Net profit/loss For the reasons set forth above, pro forma net profit was RMB 4,524 million in 2002. 96 Liquidity and Capital Resources Liquidity Sources Our principal cash inflows come from insurance premiums, deposits, policy fees and annuity considerations. The primary liquidity concern with respect to these cash inflows is the risk of early contract holder and policyholder withdrawal. Our principal cash inflows also result from repayments of principal and proceeds from sales of investment assets and investment income. The primary liquidity concerns with respect to these cash inflows are the risks of default by debtors, interest rate changes and other market volatilities. We closely monitor and manage these risks. See "Business--Investments". Additional sources of liquidity to meet unexpected cash outflows are available from our portfolio of cash and investment assets. As of June 30, 2003 and without giving effect to the restructuring, the amount of cash and cash equivalents was RMB 23,592 million. In addition, substantially all of our term deposits with banks allow us to withdraw funds on deposit, subject to a penalty interest charge. As of June 30, 2003 and without giving effect to the restructuring, the amount of term deposits was RMB 142,043 million. Our portfolio of investment securities also may provide us with a source of liquidity to meet unexpected cash outflows. As of June 30, 2003 and without giving effect to the restructuring, investments in fixed maturity securities had a fair value of RMB 82,072 million. As of June 30, 2003 and without giving effect to the restructuring, investments in equity securities, primarily through securities investment funds, had a fair value of RMB 14,797 million. However, the PRC securities market is still at an early stage of development, and we are subject to market liquidity risk because the market capitalization and trading volumes of the public exchanges are much lower than in more developed financial markets. We also are subject to market liquidity risk due to the large size of our investments in some of the markets in which we invest. We believe that some of our positions in fixed maturity securities may be large enough to have an influence on the market value. These factors may limit our ability to sell these investments at an adequate price, or at all. Liquidity Uses Our principal cash outflows primarily relate to the liabilities associated with our various life insurance, annuity and accident and health insurance products, dividend and interest payments on our insurance policies and annuity contracts, operating expenses, income taxes and dividends that may be declared and payable to our shareholders. Liabilities arising from our insurance activities primarily relate to benefit payments under these insurance products, as well as payments for policy surrenders, withdrawals and loans. We believe that our sources of liquidity are sufficient to meet our current cash requirements. Consolidated Cash Flows The following sets forth information regarding consolidated cash flows for the periods indicated. Net cash provided by operating activities was RMB 19,572 million in the six months ended June 30, 2003, a decrease from RMB 20,712 million in the six months ended June 30, 2002. This decrease was primarily due to a change in working capital which used cash in the six months ended June 30, 2003, compared with providing cash in the six months ended June 30, 2002. Net cash provided by operating activities was RMB 44,059 million in 2002, an increase from RMB 33,833 million in 2001. Net cash provided by operating activities was RMB 33,833 million in 2001, an increase from RMB 20,051 million in 2000. The increase in cash provided by operating activities over both of these periods was primarily due to the rapid growth in new policies, and the lag time between receipt of premium income and the payment of claims under those policies. Net cash used in investing activities was RMB 65,060 million in the six months ended June 30, 2003, an increase from RMB 54,834 million in the six months ended June 30, 2002. Net cash used in investing activities was RMB 95,898 million in 2002, an increase from RMB 51,964 million in 2001. Net cash used in investing 97 activities was RMB 51,964 million in 2001, an increase from RMB 29,441 million in 2000. The increase in cash used in investing activities over all of these periods was primarily due to the growth in premiums and deposits, particularly those relating to sales of participating products, which are classified as investment-type products. Net cash provided by financing activities was RMB 54,551 million in the six months ended June 30, 2003, an increase from RMB 33,842 million in the six months ended June 30, 2002. Net cash provided by financing activities was RMB 48,513 million in 2002, an increase from RMB 12,711 million in 2001. Net cash provided by financing activities was RMB 12,711 million in 2001, an increase from RMB 12,677 million in 2000. The increase in cash provided by financing activities over all of these periods was primarily due to the growth in premiums and deposits, particularly those relating to sales of participating products, which are classified as investment-type products and are therefore attributed to financing activities. Insurance 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 level of the company (which is its net assets determined in accordance with PRC GAAP, less specified excluded items) by the minimum solvency level it is required to meet. See "Regulation--Insurance Company Regulation--Solvency requirements". The following table shows our solvency ratio as of June 30, 2003, on a pro forma basis after giving effect to the restructuring:
As of June 30, 2003 ----------------------- (RMB in millions, except percentage data) Actual solvency. 29,195 Minimum solvency 10,435 Solvency ratio.. 280%
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" of four or more of the ratios can lead to regulatory action 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. Our first report will not be due until April 30, 2004. On a pro forma basis after giving effect to the restructuring, our solvency level as of June 30, 2003 was more than 2.8 times the minimum regulatory requirement. We have not yet calculated any of the twelve financial ratios. 98 Contractual Obligations and Commitments The following tables set out the contractual obligations and commitments of our predecessor, other than on insurance policies and annuity contracts, as of June 30, 2003 and December 31, 2002 and 2001.
Not Later than later 1 year but Later than not later than 1 year than 5 years 5 years Total ------ ------------ ------- ------ (RMB in millions) As of June 30, 2003 Securities sold under agreements to repurchase -- -- -- -- Short-term bank borrowings.................... 309 -- -- 309 Long-term bank borrowings..................... 2 -- -- 2 Operating leases.............................. 64 120 12 196 Capital commitments........................... 532 -- -- 532 ------ --- -- ------ Total......................................... 907 120 12 1,039 ====== === == ====== As of December 31, 2002 Securities sold under agreements to repurchase 3,602 -- -- 3,602 Short-term bank borrowings.................... 311 -- -- 311 Long-term bank borrowings..................... 2 -- -- 2 Operating leases.............................. 63 169 22 254 Capital commitments........................... 752 -- -- 752 ------ --- -- ------ Total......................................... 4,730 169 22 4,921 ====== === == ====== As of December 31, 2001 Securities sold under agreements to repurchase 14,608 -- -- 14,608 Short-term bank borrowings.................... 370 -- -- 370 Long-term bank borrowings..................... -- 9 -- 9 Operating leases.............................. 17 97 33 147 Capital commitments........................... 238 -- -- 238 ------ --- -- ------ Total......................................... 15,233 106 33 15,372 ====== === == ======
Note: Capital commitments represent our commitments with respect to the acquisition of property, plant and equipment. Market Risk and Risk Management Market risk Our exposure to financial market risks relates primarily to changes in interest rates, equity prices and exchange rates. Interest rate risk Our profitability is affected by changes in interest rates. We are currently experiencing the lowest interest rate environment in several years. 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 a lower interest rate. For the six months ended June 30, 2003, the investment yield was 1.7% and for the years ended December 31, 2002 and 2001, the investment yield was 3.8% and 4.1%, respectively. Traditional insurance policies with an 99 investment component and investment contracts are generally priced with guaranteed interest rates, subject to a cap on guaranteed rates set by the CIRC, which is currently 2.50%. Dividends on participating policies are required to be at least 70% of distributable earnings attributable to such policies. The following tables set forth selected assets and liabilities with exposure to interest rates as of June 30, 2003 and December 31, 2002.
Expected maturity date ----------------------------------------------------------- Fair 2003 2004 2005 2006 2007 Thereafter Total value As of June 30, 2003 ------ ----- ----- ------ ------ ---------- ------- ------- (in millions) Assets Other-than-trading Fixed rate bonds............ 5,931 912 1,598 8,145 4,550 53,127 74,263 74,318 Average interest rate....... 6.11% 3.13% 3.61% 4.59% 5.49% 3.61% 4.02% Term deposits in RMB...................... 2,717 913 8,642 35,083 64,605 29,372 141,332 141,332 Average interest rate....... 2.87% 3.76% 4.35% 4.55% 3.88% 3.63% 4.02% in US$...................... 402 -- -- -- -- -- 402 402 Average interest rate....... 2.99% 2.99% in Japanese yen............. 104 -- -- -- -- -- 104 104 Average interest rate....... 4.50% 4.50% in HK$...................... 106 3 -- -- -- -- 109 109 Average interest rate....... 3.08% 1.50% 3.08% in other currencies......... 96 -- -- -- -- -- 96 96 Average interest rate....... 2.50% 2.50% Securities purchased under agreements to resell...... 70,061 -- -- -- -- -- 70,061 70,061 Average interest rate....... 2.45% 2.45% Variable rate bonds......... -- -- -- -- 73 7,681 7,754 7,754 Average interest rate....... 2.36% 2.72% 2.72% Liabilities Investment contract reserves 4,620 5,410 6,125 8,067 79,162 107,591 210,975 211,493 Average interest rate....... 6.47% 5.89% 5.64% 4.93% 2.82% 5.13% 4.32%
100
Expected maturity date ----------------------------------------------------------- Fair 2003 2004 2005 2006 2007 Thereafter Total value As of December 31, 2002 ------ ----- ----- ------ ------ ---------- ------- ------- (in millions) Assets Other-than-trading Fixed rate bonds............ 3,619 881 5,615 6,378 5,147 47,540 69,180 70,617 Average interest rate....... 6.36% 3.29% 6.09% 5.20% 5.45% 3.80% 4.36% Term deposits in RMB...................... 4,792 552 9,661 35,281 64,406 8,101 122,793 122,793 Average interest rate....... 3.75% 4.22% 4.33% 4.56% 3.88% 3.94% 4.11% in US$...................... 1,232 -- -- -- -- -- 1,232 1,232 Average interest rate....... 1.49% 1.49% in Japanese yen............. 111 -- -- -- -- -- 111 111 Average interest rate....... 0.01% 0.01% in HK$...................... 399 3 -- -- -- -- 402 402 Average interest rate....... 1.25% 1.50% 1.25% in other currencies......... 127 -- -- -- -- -- 127 127 Average interest rate....... 1.12% 1.12% Securities purchased under agreements to resell...... 36,388 -- -- -- -- -- 36,388 36,388 Average interest rate....... 3.16% 3.16% Variable rate bonds......... -- -- -- -- 673 5,020 5,693 5,773 Average interest rate....... 2.36% 2.99% 2.91% Liabilities Investment contract reserves 4,141 4,624 5,124 6,332 50,031 86,021 156,273 165,727 Average interest rate....... 6.85% 6.41% 6.21% 5.57% 3.08% 5.76% 4.96%
Due to the negative spread which came to exist in respect of investment contracts issued prior to June 10, 1999, the average interest rate on investment contract reserves is significantly higher than the guaranteed rates which apply to policies issued in the three years ended December 31, 2002, which were at or below 2.50%. Equity price risk Our investments in securities investment funds or equity securities expose us to changes in equity prices. We manage this risk on an integrated basis with other risks through our asset-liability management strategies. We also manage equity price risk through industry and issuer diversification and asset allocation techniques. 101 The following table sets forth the exposure to equity securities of our predecessor as of June 30, 2003 and as of December 31, 2000, 2001 and 2002.
As of December 31, As of June 30, --------------------------------------------- --------------- 2000 2001 2002 2003 -------------- -------------- --------------- --------------- Carrying Fair Carrying Fair Carrying Fair Carrying Fair amount value amount value amount value amount value -------- ----- -------- ----- -------- ------ -------- ------ (RMB in millions) Equity securities 6,794 6,794 7,698 7,698 12,171 12,171 14,797 14,797 Trading......... 5,675 5,675 5,696 5,696 4,070 4,070 5,772 5,772 Non-trading..... 1,119 1,119 2,002 2,002 8,101 8,101 9,025 9,025
A hypothetical 10% decline in the December 31, 2002 and June 30, 2003 value of the equity securities held for non-trading would result in an unrealized loss of approximately RMB 810 million and RMB 902 million, respectively. A hypothetical 10% decline in the December 31, 2002 and June 30, 2003 value of the equity securities held for trading would result in a charge to the income statement of approximately RMB 407 million and RMB 577 million, respectively. The selection of a 10% immediate change in the value of equity securities should not be construed as a prediction by us of future market events but rather as an illustration of the potential impact of such an event. Foreign exchange risk Our exposure to fluctuations in foreign currency exchange rates against RMB results primarily from our holdings in non-RMB denominated term deposits. Our indebtedness and capital expenditures are predominantly in RMB and the principal currencies which create foreign currency exchange rate risk in our deposits are the U.S. dollar, Japanese yen and Hong Kong dollar. Future movements in the exchange rate of RMB against the U.S. dollar and other foreign currencies may adversely affect our results of operations and financial condition. The following tables set forth assets denominated in currencies other than RMB as of June 30, 2003 and December 31, 2002.
Expected maturity date ------------------------------------------------- Fair 2003 2004 2005 2006 2007 Thereafter Total value As of June 30, 2003 ----- ----- ---- ---- ---- ---------- ----- ----- (in millions) Term deposits in US$............... 402 -- -- -- -- -- 402 402 Average interest rate 2.99% 2.99% 2.99% in Japanese yen...... 104 -- -- -- -- -- 104 104 Average interest rate 4.50% 4.50% 4.50% in HK$............... 106 3 -- -- -- -- 109 109 Average interest rate 3.08% 1.50% 3.08% 3.08% in other currencies.. 96 -- -- -- -- -- 96 96 Average interest rate 2.50% 2.50% 2.50%
102
Expected maturity date ------------------------------------------------- Fair 2003 2004 2005 2006 2007 Thereafter Total value As of December 31, 2002 ----- ----- ---- ---- ---- ---------- ----- ----- (in millions) Term deposits in US$................ 1,232 -- -- -- -- -- 1,232 1,232 Average interest rate. 1.49% 1.49% 1.49% in Japanese yen....... 111 -- -- -- -- -- 111 111 Average interest rate. 0.01% 0.01% 0.01% in HK$................ 399 3 -- -- -- -- 402 402 Average interest rate. 1.25% 1.50% 1.25% 1.25% in other currencies... 127 -- -- -- -- -- 127 127 Average interest rate. 1.12% 1.12% 1.12%
First Set of Financial Statements Our H.K. GAAP financial statements for the year ending December 31, 2003 will be prepared on a consolidated basis and will include the following financial information: . The audited results of CLIC for the six months ended June 30, 2003 included in the audited consolidated financial statements beginning on page F-1 of this prospectus. . The audited results of CLIC for the period July 1 to September 30, 2003, the date the restructuring agreement and the other agreements referred to in "Relationship with CLIC" were entered into and the date on which the restructuring is treated as having occurred for accounting purposes. . The audited results of the transferred business for the period October 1 to December 31, 2003. The audited results for the six months ended June 30, 2003 and for the period July 1 to September 30, 2003 include the results of the transferred business and the non-transferred business. As of June 30, 2003, CLIC had net liabilities of RMB 176,353 million. The restructuring agreement provides that our owners' equity should be RMB 36,182 million as of that date, as determined in accordance with H.K. GAAP. The difference of RMB 212,535 million will be recorded in owners' equity, with RMB 20,000 million accounted for as fully paid-up share capital, RMB 16,182 million as capital surplus and RMB 176,353 million to eliminate the deficit on owners' equity as of June 30, 2003. In accordance with the restructuring agreement, the results of the non-transferred business for the period July 1 to September 30, 2003 are for the account of CLIC. Since the restructuring agreement was not signed until September 30, 2003, H.K. GAAP requires these results to be included in the consolidated profit and loss accounts for the year ending December 31, 2003. A capital contribution from, or distribution to, CLIC will be recorded to offset the losses borne by, or profits attributable to, CLIC for this period. Recently Issued Accounting Standards SFAS No. 143 In June 2001, the U.S. Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. Our predecessor was required to adopt SFAS No. 143 on January 1, 2003. We have not determined the impact that adoption of SFAS No. 143 will have on our consolidated financial statements. 103 SFAS No. 146 In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which applies to costs associated with an exit activity (including restructuring) or with the disposal of long-lived assets. SFAS No. 146 requires an entity to record a liability for costs associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only our intended future actions and does not meet the requirement for recognizing a liability and the related expense. An entity is required to disclose information about its exit and disposal activities, the related costs and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit or disposal activity is initiated and in any subsequent period until the activity is completed. Our predecessor was required to adopt SFAS No. 146 on January 1, 2003. The provisions of SFAS No. 146 are required to be applied prospectively after the adoption date to newly exited or disposed activities. Therefore, we cannot determine the impact that the adoption of SFAS No. 146 will have on our consolidated financial statements. SFAS No. 148 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to require prominent disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The amendments to SFAS No. 123 in paragraphs 2(a)-2(e) of the statement will be effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 in paragraph 2(f) of the statement and the amendment to Opinion 28 in paragraph 3 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. We do not expect that the adoption of SFAS No. 148 will have a material impact on our consolidated financial statements. SFAS No. 149 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement clarifies when a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component. This statement also amends the definition of an underlying to conform to the language contained in FASB Interpretation No., or FIN, 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. We are currently assessing the impact of this statement on our results of operations, financial position and cash flows upon adoption and have not yet completed that assessment. SFAS No. 150 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity, but now requires these instruments to be classified as liabilities (or assets in some circumstances) in the balance sheet. Further, SFAS No. 150 requires disclosure regarding the terms of these instruments and settlement alternatives. The 104 guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We are currently assessing the impact of this statement on our results of operations, financial position and cash flows upon adoption and have not yet completed that assessment. FIN 45 In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees". FIN 45 requires a guarantor to recognize a liability at the inception of certain guarantees for the fair value of the obligation, including the ongoing obligation to stand ready to perform over the term of the guarantee. Guarantees, as defined in FIN 45, include contracts that contingently require us to make payments to a guaranteed party based on changes in an underlying that is related to an asset, liability or equity security of the guaranteed party, performance guarantees, indemnification agreements or indirect guarantees of indebtedness of others. This new accounting is effective for certain guarantees issued or modified after December 31, 2002. We do not expect that the adoption of FIN 45 will have a material impact on our financial position or results of operations. FIN 46 In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin No. 51. FIN 46 provides a new framework for identifying variable interest entities, or VIEs, and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of VIEs in its consolidated financial statements. FIN 46 requires VIEs to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIEs' activities or is entitled to receive a majority of the entity's residual returns, or both. FIN 46 is effective immediately for VIEs created after January 31, 2003 and is effective January 1, 2004 for VIEs created prior to February 1, 2003. We are currently assessing the impact of FIN 46 on our financial position and results of operations. SOP 03-1 In July 2003, the Accounting Standards Executive Committee issued Statement of Position, or SOP, 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for Separate Accounts". SOP 03-1 provides guidance on accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. SOP 03-1 is effective for financial statements for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. SOP 03-1 may not be applied retroactively to prior years' financial statements, and initial application should be as of the beginning of an entity's fiscal year. We do not expect that the adoption of SOP 03-1 will have a material impact on our financial position or results of operations. Reconciliation of Hong Kong Generally Accepted Accounting Principles (H.K. GAAP) and United States Generally Accepted Accounting Principles (U.S. GAAP) The consolidated financial statements contained in this prospectus have been prepared in accordance with H.K. GAAP, which differs in certain significant respects from U.S. GAAP. Differences between H.K. GAAP and U.S. GAAP may have a significant impact on consolidated net profit/(loss) and consolidated owners' equity. 105 The effect on net profit/(loss) of significant differences between H.K. GAAP and U.S. GAAP for the six months ended June 30, 2003 and for the years ended 31 December 2000, 2001 and 2002 is as follows:
Six months Year Ended December 31, ended ---------------------- June 30, 2000 2001 2002 2003 - ------ ------ ------ -------- (RMB in millions) Net profit/(loss) under H.K. GAAP............... (6,990) (3,295) (2,250) (714) U.S. GAAP adjustments Depreciation of investment properties.......... (36) (41) (67) (23) Deficit on revaluation of investment properties -- -- -- 181 ------ ------ ------ ---- Net profit/(loss) under U.S. GAAP............... (7,026) (3,336) (2,317) (556) ====== ====== ====== ====
The effect on owners' equity of significant differences between H.K. GAAP and U.S. GAAP as of June 30, 2002 and 2003 and December 31, 2000, 2001 and 2002 is as follows:
Six months Year ended December 31, ended June 30, - ---------------------------- ------------------ 2000 2001 2002 2002 2003 - -------- -------- -------- -------- -------- (RMB in millions) Owners' equity under H.K. GAAP......... (170,045) (172,348) (175,463) (171,381) (176,353) U.S. GAAP adjustments Accumulated depreciation of investment properties.......................... (70) (111) (178) (141) (201) Deficit on revaluation of investment properties.......................... -- -- -- -- 181 -------- -------- -------- -------- -------- Owners' equity under U.S. GAAP......... (170,115) (172,459) (175,641) (171,522) (176,373) ======== ======== ======== ======== ========
Investment properties Under H.K. GAAP, investment properties are valued on an open market value basis. Under U.S. GAAP, investment properties are stated at historical cost less accumulated depreciation and accumulated impairment loss. Cost of investment properties, less residual value, is depreciated using a straight line method over its estimated useful life. 106 Accumulated other comprehensive income/(loss) Accumulated other comprehensive income/(loss) represents the cumulative gains and losses on items that are not reflected in earnings. The balances and activities for the six months ended June 30, 2002 and 2003 and for the years ended December 31, 2000, 2001, and 2002 are as follows:
Six months Year ended December 31, ended June 30, ---------------------- ------------- 2000 2001 2002 2002 2003 ------ ----- ---- ---- ---- (RMB in millions) Changes in net unrealized gains/(losses) on investment securities: Net unrealized gains/(losses) arising during the period.... (1,048) 1,601 (234) 826 (191) Reclassification adjustment for gains/(losses) included in net earnings............................................. 18 (387) (747) 157 (10) ------ ----- ---- ---- ---- Changes in net unrealized gains/(losses) on investment securities............................................... (1,030) 1,214 (981) 983 (201) ------ ----- ---- ---- ---- Adjustments for: Deferred acquisition costs................................. 124 (166) 110 (103) 25 ------ ----- ---- ---- ---- Total other comprehensive income/(loss).................... (906) 1,048 (871) 880 (176) ====== ===== ==== ==== ====
107 PROSPECTIVE FINANCIAL INFORMATION In accordance with customary practice in securities offerings in Hong Kong, we have prepared the following prospective financial information for the year ending December 31, 2003. Although we will become a reporting company after the global offering and will have ongoing disclosure obligations under U.S. federal securities laws, we do not intend to update information prior to the announcement of our results of operations for the year or to publish this information in future years. PricewaterhouseCoopers have not examined, compiled or otherwise applied procedures to the prospective financial information for the purpose of its inclusion in this prospectus and, accordingly, do not express any opinion or any form of assurance on it. The report of PricewaterhouseCoopers included in this prospectus relates to our historical combined financial statements. It does not extend to the prospective financial information and should not be read to do so. We did not prepare this information with a view towards compliance with published guidelines of the American Institute of Certified Public Accountants, or AICPA, regarding forecasts and projections. Accordingly, this information does not include disclosure of all information required by the AICPA guidelines on prospective financial information. The prospective financial information was prepared for use in the Hong Kong offering in accordance with local market practice in Hong Kong. This information is necessarily based upon a number of assumptions and estimates that, while presented with numerical specificity and considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and upon assumptions with respect to future business decisions which are subject to change. This information also assumes the success of our business strategy. The success of this strategy is subject to uncertainties and contingencies beyond our control, and no assurance can be given that the strategy will be effective or that the anticipated benefits from the strategy will be realized in the periods for which forecasts have been prepared, or at all. Accordingly, we cannot provide any assurance that these results will be realized. The prospective financial information may vary materially from our actual results. We make no representation that these results will be achieved. Prospective investors in the ADSs and H shares are cautioned not to place undue reliance on this information. Forecast for the Year Ending December 31, 2003 Forecast loss after taxation and minority interests but before extraordinary items for the year ending December 31, 2003............................... No more than (RMB million) ------------------------------
The forecast loss for the year ending December 31, 2003 includes the results of the transferred policies and the non-transferred policies for the nine months ended September 30, 2003 and the forecast results of the transferred policies only for the three months ending December 31, 2003. Basis and Assumptions Our management has prepared our forecast consolidated profit after taxation and minority interests but before extraordinary items for the year ending December 31, 2003, on the basis of the audited financial statements for the six months ended June 30, 2003 and a forecast of the results for the remaining six months ending December 31, 2003. Our management is not aware of any extraordinary items which have arisen or are 109 likely to arise in respect of the year ending December 31, 2003. The forecast has been prepared on a basis of the accounting policies consistent in all material respects with those adopted by us as set out in the audited consolidated financial statements beginning on page F-1 of this prospectus, and on the following bases and assumptions: . There will be no material change in existing political, legal, fiscal, market or economic conditions in China. . There will be no changes in legislation, regulations or rules in China, Hong Kong or any other country or territory with which we have arrangements or agreements, which materially adversely affect our business. . There will be no material changes in the bases or rates of taxation in China. . There will be no material changes in interest rates or foreign currency exchange rates from those currently prevailing. 109 EMBEDDED VALUE In order to provide investors with an additional tool to understand our economic value and business results, we have disclosed information regarding our embedded value, as discussed below. These measures are based on a discounted cash flow valuation determined using commonly applied actuarial methodologies. Standards with respect to the calculation of embedded value are still evolving, however, and there is no single adopted standard for either the form, determination or presentation of the embedded value of an insurance company. Moreover, because of the technical complexity involved in embedded value calculations and the fact that embedded value estimates vary materially as key assumptions are changed, you should read the following discussion as well as "Annex A--Actuarial Consultants' Report of Tillinghast-Towers Perrin" in their entirety, and you should use special care when interpreting embedded value results. See also "Forward-Looking Statements". We report our profits in financial statements that are prepared in accordance with H.K. GAAP. An alternative method of measuring the value and profitability of a life insurance company is the embedded value method. Embedded value is an actuarially determined estimate of the economic value of the life insurance business of an insurance company based on a particular set of assumptions as to future experience, excluding any economic value attributable to any future new business. In addition, the value of one year's sales represents an actuarially determined estimate of the economic value arising from new life insurance business issued in one year. We believe that reporting our embedded value provides useful information to investors, in that it reports the total amount of distributable earnings, in present value terms, that is expected to emerge over time, in accordance with the assumptions used, from business already sold and still in force. In addition, the value of new business issued in a year provides useful information as to the value being created for investors by new business activity and hence the future potential of the business. Since our business includes policies written only since 1999, we believe that it is appropriate to disclose such information, as a supplement to H.K. GAAP financials, to more fully illustrate our potential. Tillinghast-Towers Perrin, or Tillinghast, consulting actuaries, has prepared a report providing information as to our embedded value as of June 30, 2003 and the value of one year's sales, in respect of new policies issued for the 12 months ending on June 30, 2003, on a range of assumptions. See "Experts". A copy of Tillinghast's report is included as Annex A to this prospectus. See "Annex A--Actuarial Consultants' Report of Tillinghast-Towers Perrin". This report does not constitute an audit opinion of the financial information used in the report. Since the scope of Tillinghast's work was to report on the embedded value of our existing life insurance business and the value of one year's sales in respect of our new insurance business, Tillinghast has not considered the financial effect on us of the policy management agreement, asset management agreement, property leasing agreement, trademark license agreement and noncompetition agreement we have entered into with CLIC in connection with the restructuring. See "The Restructuring" and "Relationship with CLIC". In its calculation of embedded value and the value of one year's sales, Tillinghast has relied on data and information supplied by us, including the policy data files, advice as to management's operational plans and other unaudited financial information. Tillinghast's report provides further information regarding its use of, and reliance on, the data and information supplied to it. In Tillinghast's report, values have been shown under a range of assumptions given the particular uncertainties associated with the future investment environment in the PRC and other future operational uncertainties in relation to our portfolio of policies. We advise you to consider the range of values contained in Tillinghast's report in order to gain an understanding of the impact on those values arising from the use of alternative assumptions as to future investment and operational experience. Moreover, the values shown do not necessarily encompass the full range of potential outcomes. 110 Since actual market value is determined by investors based on a variety of information available to them and their own investment criteria, embedded value should not be construed to be a direct reflection of actual market value. In particular, embedded value does not include the potential contribution arising from new business to be issued in the future which will depend on, among other things, the prospects for the life insurance market in the PRC, our future position in that market and the profitability of new business issued in the future. Further, in the current environment in the PRC and worldwide markets, material uncertainty exists with respect to asset valuations, a key component of embedded value. 111 LIFE INSURANCE INDUSTRY IN CHINA Unless otherwise indicated, the financial and market share information set forth in this section is based on information reported by insurance companies to the CIRC. The reported information includes premium and deposit information that is not determined in accordance with H.K. GAAP or U.S. GAAP. Our market share information set forth in this prospectus is estimated by computing the market share of our predecessor company, CLIC, based on premium and deposit information reported by insurance companies to the CIRC, and adjusting it to give effect to our restructuring. History and Background The modern practice of China's life insurance industry dates back to the establishment in 1949 of the People's Insurance Company of China, or PICC, by the People's Republic of China. PICC achieved monopoly status in China's insurance market by the mid-1950s, by which time all foreign 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. Initially, the life insurance market focused principally on the group insurance sector, and life insurance products lacked diversity. In the late 1980s, more life insurance companies started to enter the market, with the establishment of two Chinese companies, Ping An Insurance Company of China and China Pacific Insurance Company, and the entry of foreign insurance companies. Distribution channels for individual life insurance products began to emerge and agency sales forces began to be developed. Meanwhile, China's first insurance law was introduced in 1995 and the CIRC was established in 1998 to regulate the insurance industry. PICC Life, the predecessor of CLIC, was established as a specialized life insurance subsidiary of the PICC group following its restructuring in 1996. In 1999 the PICC group was further restructured into four independent legal entities: People's Insurance Company of China, a property insurance company; China Reinsurance Company, at the time China's only insurance company licensed to operate reinsurance businesses; China Insurance H.K. (Holdings) Company Limited, which subsumed all overseas business institutions and operations of the former PICC group; and CLIC, our predecessor, the only state-owned insurance company licensed to operate life insurance businesses in China. Industry Overview Rapid growth in life insurance industry The life insurance industry in China has experienced rapid growth in recent years. According to the CIRC, total life insurance premiums from life insurance, annuity, accident insurance and health insurance products grew from RMB 87,210 million in 1999 to RMB 227,464 million (US$27,479 million) in 2002, representing a compound annual growth rate of 37.7%. During the same period, total insurance premiums in China grew from RMB 139,322 million to RMB 305,415 million (US$36,897 million), representing a compound annual growth rate of 29.9%. According to the CIRC, for the year ended December 31, 2002, total life insurance premiums accounted for 74.5% of the total insurance premiums of the Chinese insurance industry for that year, representing an increase of 59.8% from the year before. 112 China's "life insurance depth", measured by total life insurance premiums as a percentage of gross domestic product, and "life insurance density", measured by total life insurance premiums per capita, have both been rising steadily during the recent years. The following table sets forth the life insurance premiums in China, as well as China's life insurance depth and life insurance density, as of or for the year ended on December 31, 2002.
China's China's China's Life Year-to- life life life insurance year insurance insurance insurance premiums growth depth density density - ------------ --------- --------- --------- --------- (RMB in billions) (Percent) (Percent) (RMB) (US$) 1992 10.6 -- 0.4% 9.00 1.09 1993 10.0 (6)% 0.3% 8.45 1.02 1994 23.7 137% 0.5% 19.80 2.39 1995 25.7 8% 0.4% 21.24 2.57 1996 36.0 40% 0.5% 29.39 3.55 1997 60.9 69% 0.8% 49.29 5.95 1998 74.8 23% 1.0% 59.97 7.24 1999 87.2 17% 1.1% 69.33 8.38 2000 99.7 14% 1.1% 78.70 9.51 2001 142.4 43% 1.5% 111.57 13.48 2002 227.5 60% 2.2% 177.04 21.38
- -------- Sources: China Economic Information Center; China Insurance Yearbook. Notwithstanding its rapid growth during the past decade, the life insurance industry in China at present is still in its early stages of development. China's life insurance depth and life insurance density in 2001 were significantly lower than average life insurance depth and life insurance density in Asia and worldwide. The following table sets forth life insurance depth and life insurance density information for selected countries, as well as Asia average and world average in 2001.
Life Life insurance insurance depth density - --------- --------- (Percent) (US$) U.K.......... 10.7% 2,568 Japan........ 8.9% 2,806 South Korea.. 8.7% 763 Taiwan....... 6.0% 761 Hong Kong.... 5.1% 1,250 U.S.......... 4.4% 1,602 Asia average. 5.8% 125 World average 4.7% 235
- -------- Source: Swiss Reinsurance Company, Sigma Report. Life insurance companies There were a total of 23 insurance companies in China operating life insurance businesses as of December 31, 2002. We are the leading life insurance company, with a market share of 45% in 2002, after giving effect to our restructuring. Ping An Insurance Company of China, Ltd. and China Pacific Insurance Co. Ltd. had respective market shares of 24% and 11%. The foreign-invested insurance companies accounted for less than 2% of the nationwide market share of life insurance products in 2002. 113 The following table sets forth life insurance premiums of major insurance companies offering life insurance, annuities, accident insurance and health insurance products in China for the year ended December 31, 2002.
Total Total premium premiums market share - ------------ ------------- (RMB (Percent) in millions) CLIC/(1)/............................... 128,768 57% Ping An Insurance Company of China, Ltd. 53,539 24% China Pacific Life Insurance Co. Ltd.... 24,903 11% New China Life Insurance Co. Ltd........ 7,983 4% Taikang Life Insurance Co. Ltd.......... 6,563 3% Others/(2)/............................. 5,708 3% ------- ---- Total................................... 227,464 100% ======= ==== China Life/(3)/......................... 101,839 45%
- -------- (1) Information concerning CLIC, our predecessor, does not give effect to the restructuring. (2) Others include China United Insurance Co., Taiping Life Insurance Co. Ltd., Tianan Insurance Co. Ltd., American International Assurance Co., Ltd., Shanghai, Guangzhou, Shenzhen, Beijing and Suzhou branches, Manulife-Sinochem Life Insurance Co. Ltd., ING 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) PRC GAAP premiums; adjusted to give effect to the restructuring. Source: China Insurance Yearbook 2003. See "Business--Competition" for market share information for each insurance segment in which we do business. Industry Trends We believe that the future development of the life insurance industry in China will be characterized by the following trends: Economic growth leading to growing demand for insurance products China's economy has grown rapidly in recent years, resulting in an increase in income per capita, which we believe will foster a growing demand for insurance products and services. As China's economy develops, the per capita annual income of rural households and the per capita annual disposable income of urban households have been rising rapidly. The following table sets forth key data for China, including gross domestic product, income level and total life insurance premiums since 2000.
As of or for the year ended Compound annual December 31, growth rate --------------------------- --------------- 2000 2001 2002 (2000-2002) ----- ----- ------ --------------- GDP (RMB in billions)........................................ 8,947 9,730 10,240 7.0% Real GDP growth (%).......................................... 8.0 7.5 8.0 -- Population (in millions)..................................... 1,267 1,276 1,285 0.7% GDP per capita (RMB)......................................... 7,086 7,651 7,997 6.2% Per capita annual net income of rural households (RMB)....... 2,253 2,366 2,476 4.8% Per capita annual disposable income of urban households (RMB) 6,280 6,860 7,703 10.8% Total life insurance premiums (RMB in billions)/(1)/......... 100 142 228 51.0%
- -------- (1) Include life, accident and health insurance premiums. Sources: National Bureau of Statistics of China; China Insurance Yearbook 2001, 2002 and 2003. 114 The following table sets forth premiums of life insurance, accident and health insurance products in China for the years ended December 31, 2000, 2001 and 2002.
For the year ended December 31, ---------------------- 2000 2001 2002 ------ ------- ------- (RMB in millions) Life insurance products.... 84,551 128,822 207,280 Accident insurance products 7,945 7,447 7,951 Health insurance products.. 5,546 6,091 12,155
We believe that rising income levels in China are likely to foster growing demand of Chinese consumers for insurance products and services as there is more demand for the protection and investment features that life insurance products provide, and greater capacity to pay for premiums. We believe that the high savings rate of Chinese consumers relative to other countries will make them particularly receptive to the protection and investment features offered by life insurance and annuity products. Continued growth due to the changing demographics of China's large population We believe China's large population can potentially develop into one of the largest markets for life insurance products in the world. We believe China's growing middle class, as they increasingly turn to insurance products and services for protection and financial security, will continue to be the driving force in this market. China's population is also ageing at a faster rate than in many industrialized countries. According to the U.S. Census Bureau, China's percentage of population aged 65 or above is expected to rise from 7% to 14% of the total population in 27 years, compared to 69 years for the U.S. We believe China's ageing population will lead to greater demand for the protection and savings products offered by insurance companies. The Chinese public has also become increasingly aware of the need and attractiveness of insurance products, further fostering demand for insurance products. Continued growth fostered by social welfare reform China's social welfare system has undergone rapid change in recent years, further fueling the demand for insurance products and services. China's social welfare system since the founding of the People's Republic of China had been designed to deliver most social welfare, benefits and services through state-owned enterprises or governmental agencies. Recent reform efforts in social welfare have focused on shifting the provision of social welfare benefits to a mix of private and public providers. A social welfare and security system is gradually being established to provide basic social welfare protection of pension, medical and unemployment insurance. Insurance companies are expected to act as private providers of supplemental social welfare protection by offering group insurance products to groups and individual insurance products to individuals and groups. Even though the purchase of group insurance products to supplement the basic protections offered by the social welfare and security system is not required by law, we believe more businesses, as they seek to improve the overall welfare and benefits of their employees, will consider purchasing group annuities and group life and group health insurance, resulting in further growth in these products. We believe reform efforts in social welfare will also result in increasing demand for individual life, annuity and health products and other insurance products and services. Regulatory reform permitting greater flexibility in product design and investment options The Chinese life insurance industry is highly regulated. Historically, the CIRC focused on establishing product regulations and guidelines that determined the pricing and terms of the insurance products offered by life insurance companies. These regulations and guidelines generally regulated market behavior with the goal of bringing China's insurance practice in line with international standards. Recently, the CIRC has shifted its 115 regulatory attention toward setting more stringent solvency requirements and giving more flexibility to insurers to determine the pricing and other terms of the products they offer. We believe these changes will allow greater freedom for insurance companies to develop products to meet market needs, and devote more attention to solvency requirements. Life insurance companies in China are subject to significant restrictions on their investments. Recent trends in investment regulations demonstrate a gradual shift by the CIRC toward diversification of permitted investments. For instance, prior to June 2003, insurance companies were only allowed to invest in bonds issued by four types of government-related enterprises. Life insurance companies are now permitted under the CIRC rules to invest in corporate bonds that have a rating of AA or higher, as rated by China Chengxin International Credit Rating Co., Ltd., Dagong Global Credit Rating Agency, China Lianhe Credit Rating Co., Ltd. or Shanghai Far East Credit Rating Co., Ltd., subject to specified investment amount restrictions. For further information on these regulations, see "Regulation--Insurance Company Regulation--Regulation of investments". Growing demand for participating products Traditionally, Chinese life insurance companies had very limited choices in terms of investing insurance premiums. These options typically were limited to bank savings deposits and government bonds. In order to stimulate domestic demand, the Chinese government has made several cuts in interest rates since 1996 and, as a result of these rate cuts, many life insurance companies in China, including CLIC, experienced "negative spreads" on many life insurance policies issued before the rate cuts. "Negative spread" refers to the scenario in which the investment yield of an insurance company falls below the rates of return that it commits to pay under the policies it issues. In response to these rate cuts and resulting negative spreads, the CIRC required insurance companies in China to reduce guaranteed rates for new fixed rate return insurance products, making these less attractive products. As these trends continue, we expect that the insurance market will continue to move away from the traditional fixed rate return products in favor of participating products in which the policyholder is entitled to share in the distributable earnings of the insurer derived from the participating products through policy dividends. According to the CIRC, premiums from participating products were RMB 112,172 million (US$13,551 million) for the year ended December 31, 2002, representing 49% of total premiums of the life insurance industry for that year. The life insurance market in China has also seen in recent years more sophisticated investment-related insurance products, such as universal life and variable life products. However, due to the immaturity of the Chinese stock markets generally, these investment-related insurance products have not made any significant progress in capturing insurance market share. Increasing competition in the life insurance market The Chinese life insurance industry is increasingly competitive, with competition arising 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 14 licensed life insurance companies in China as of December 31, 2000, 17 as of December 31, 2001, 23 as of December 31, 2002 and 27 as of June 30, 2003. 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. 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. 116 We also face potential competition from other financial services providers, primarily licensed mutual fund companies, trust companies and securities brokerage companies licensed to manage separate accounts. Recent changes in the regulatory environment in China's relaxing rules on the formation of mutual funds and sales of securities has 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 of the products we offer, including participating life insurance products and annuities. Continued growth in the health insurance sector China's health insurance market has been growing steadily over the past several years. According to the CIRC, health insurance premium income grew from RMB 5,546 million in 2000 to RMB 12,155 million (US$1,500 million) in 2002, representing a compound annual growth rate of 48.0%. With governmental health care providers accounting for approximately 30% and insurance companies accounting for approximately 1% of China's total health care spending in 1998, a vast majority of health care spending in China remains uninsured. The Chinese government has encouraged the growth of health insurance systems for companies by implementing reforms that shift the provision of social welfare benefits from state-owned enterprises or governmental agencies to a mix of social security funds and insurance companies. The Chinese government has also encouraged the establishment of health insurance as a separate business segment within life insurance companies and the development of managed care schemes in order to facilitate growth in the health insurance sector. The Chinese government has particularly sought to encourage growth in the group health insurance sector and, as a result, group health insurance, especially group supplemental health care, has experienced the fastest growth among all health insurance sectors in 2001 and 2002. Recent government measures may encourage corporate employers to increase the health care benefits they provide to their employees. PRC companies are required by law to allocate each year a portion of their after-tax profits to an employee welfare fund and employee health care benefits including health insurance premiums are generally paid out of this fund. The new government measures allow companies to treat the portion of health insurance premiums that exceeds the amount of the welfare funds available for the payment of insurance premiums as tax deductible costs, thereby reducing the employers' cost of providing health benefits. We anticipate that government policies and measures such as these will continue and will foster the growth of the health insurance market. 117 BUSINESS Unless the context otherwise indicates, all company data for periods ending on or prior to June 30, 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 "The 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 prospectus 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. Overview of Our Business We are the leading life insurance company in China. We sell our products through the most extensive distribution network of exclusive agents, direct sales representatives and dedicated and non-dedicated agencies throughout China. We had more than 44 million individual and group life insurance policies, annuity contracts and long-term health insurance policies in force as of June 30, 2003. We also offer accident and short-term health insurance policies to individuals and groups. We are ranked number one in life insurance in China, with a market share of 45% in 2002, determined on a pro forma basis after giving effect to CLIC's restructuring described below. We are: . The leading provider of individual life insurance and annuity products, with a market share of 51% in 2002, nearly three times that of our nearest competitor. . A leading provider of group life insurance and annuity products, with a market share of 18% in 2002. We insure the employees of many of China's largest companies and institutions, including many of the Fortune Global 500 companies operating in China. . The leading accident insurance provider, with a market share of 69% in 2002, and a leading health insurance provider, with a market share of 34% in 2002 in this fast-growing market. . One of the largest asset managers and institutional investors, with investment assets of RMB 212,452 million (US$25,666 million), after giving effect to the restructuring, and, together with CLIC's investment assets, of RMB 335,840 million (US$40,572 million) as of June 30, 2003. Through an asset management joint venture established by us and CLIC, following the restructuring we are managing our investment assets and substantially all of those of CLIC. Those assets under management accounted for more than one-half of all assets under management held by Chinese life insurance companies in 2002. We have been able to generate significant revenue growth and, on a pro forma basis after giving effect to the restructuring, we earned significant net profit in 2002 and in the six months ended June 30, 2003. Our total gross premiums and policy fees from the policies transferred in the restructuring grew from RMB 23,304 million (US$2,815 million) for the six months ended June 30, 2002 to RMB 25,403 million (US$3,069 million) for the six months ended June 30, 2003, representing an increase of 9.0%. Total deposits from the transferred policies grew from RMB 40,626 million (US$4,908 million) for the six months ended June 30, 2002 to RMB 58,417 million (US$7,057 million) for the six months ended June 30, 2003, representing an increase of 43.8%. Total gross premiums and policy fees from the transferred policies grew from RMB 21,107 million for the year ended 118 December 31, 2000 to RMB 47,077 million (US$5,687 million) for the year ended December 31, 2002, representing a compound annual growth rate of 49.3%. Total deposits from the transferred policies grew from RMB 15,220 million for the year ended December 31, 2000 to RMB 58,572 million (US$7,076 million) for the year ended December 31, 2002, representing a compound annual growth rate of 96.2%. On a pro forma basis after giving effect to the restructuring, we had a net profit of RMB 3,128 million (US$378 million) for the six months ended June 30, 2003 and a net profit of RMB 4,524 million (US$547 million) for the year ended December 31, 2002. We provide the following products and services: Individual Life Insurance. Our individual life insurance business offers life insurance and annuity products to individuals, primarily through a distribution force comprised of approximately 650,000 exclusive agents operating in approximately 8,000 field offices throughout China. We also sell individual life insurance and annuity products through non-dedicated agencies located in approximately 78,000 outlets of commercial banks, post offices and savings cooperatives throughout China. Our individual life insurance gross written premiums and policy fees from the transferred policies totaled RMB 20,370 million (US$2,461 million) for the six months ended June 30, 2003 and RMB 37,662 million (US$4,550 million) for the year ended December 31, 2002, constituting 80.2% and 80.0% of our total gross written premiums and policy fees for those periods. Our individual life insurance deposits (gross additions to policyholder contract deposits for the period) from the transferred policies totaled RMB 53,271 million (US$6,436 million) for the six months ended June 30, 2003 and RMB 52,340 million (US$6,323 million) for the year ended December 31, 2002, constituting 91.2% and 89.4% of our total deposits for those periods. In connection with the restructuring, CLIC has agreed to transfer its entire exclusive agency sales force to us. Group Life Insurance. Our group life insurance business offers life insurance and annuity products to companies and institutions, primarily through approximately 10,000 direct sales representatives operating in more than 4,800 branch offices. We also sell our group life products through dedicated insurance agencies and insurance brokerage companies. Our group life insurance gross written premiums and policy fees from the transferred policies totaled RMB 267 million (US$32 million) for the six months ended June 30, 2003 and RMB 477 million (US$58 million) for the year ended December 31, 2002, constituting 1.1% and 1.0% of our total gross written premiums and policy fees for those periods. Our group life insurance deposits from the transferred policies totaled RMB 5,146 million (US$622 million) for the six months ended June 30, 2003 and RMB 6,232 million (US$753 million) for the year ended December 31, 2002, constituting 8.8% and 10.6% of our total deposits for those periods. Accident and Health Insurance. Our accident and health insurance business offers accident and health insurance products to individuals and groups, either as primary products, as riders or as supplementary products packaged with our life insurance and annuity products. We sell accident and health insurance products primarily through the same distribution channels that we use to sell our life insurance and annuity products. Our accident insurance gross written premiums from the transferred policies totaled RMB 2,359 million (US$285 million) for the six months ended June 30, 2003 and RMB 5,174 million (US$625 million) for the year ended December 31, 2002, constituting 9.3% and 11.0% of our total gross written premiums and policy fees for those periods. Our health insurance gross written premiums from the transferred policies totaled RMB 2,407 million (US$291 million) for the six months ended June 30, 2003 and RMB 3,764 million (US$455 million) for the year ended December 31, 2002, constituting 9.5% and 8.0% of our total gross written premiums and policy fees for those periods. Asset Management. An asset management joint venture established by us and CLIC manages our investment assets and, separately, substantially all of those of CLIC pursuant to two asset management agreements, one with us and one with CLIC. Through this joint venture, we expect to be able to offer asset management products and services to other insurance companies. See "Business--Asset Management Business". We own 60% of the joint venture, with CLIC owning the remaining 40%. 119 The following table sets forth selected financial data regarding the transferred policies for the periods indicated.
Compound For the year annual For the six months ended December 31, growth rate ended June 30, -------------------------- ----------- ------------------- 2000 2001 2002 2002 (2000-2002) 2002 2003 2003 ------ ------ ------ ----- ----------- ------ ------ ----- RMB RMB RMB US$ RMB RMB US$ (in millions, except as otherwise indicated) Individual life insurance: Gross written premiums and policy fees................ 13,486 24,806 37,662 4,550 67.1% 19,350 20,370 2,461 First-year gross written premiums................... 9,695 14,812 17,973 2,171 36.2% 9,992 5,903 713 Deposits..................... 11,308 15,162 52,340 6,323 115.1% 37,364 53,271 6,436 First-year deposits.......... 10,824 13,396 48,925 5,911 112.6% 36,010 48,502 5,859 Group life insurance: Gross written premiums and policy fees................ 228 1,085 477 58 44.6% 301 267 32 First-year gross written premiums................... 0 1,032 313 38 NA 209 163 20 Deposits..................... 3,912 5,706 6,232 753 26.2% 3,262 5,146 622 First-year deposits.......... 3,912 5,706 6,232 753 26.2% 3,262 5,146 622 Accident and health insurance: Gross written premiums....... 7,393 7,784 8,938 1,080 10.0% 3,653 4,766 576 Total gross written premiums and policy fees................... 21,107 33,675 47,077 5,687 49.3% 23,304 25,403 3,069 Total individual and group deposits...................... 15,220 20,868 58,572 7,076 96.2% 40,626 58,417 7,057
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. All other insurance policies were retained by CLIC. We assumed all obligations and liabilities of CLIC under the policies transferred to us by CLIC in connection with the restructuring. CLIC continues to be responsible for its liabilities and obligations under the policies retained by it following the effective date. 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. In connection with the restructuring, CLIC transferred to us a portion of its cash, specified investment assets and various other assets. CLIC retained the balance of 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. 120 We have agreed to provide policy management and other services to CLIC, and CLIC will remain our controlling shareholder. Competitive Strengths As the leading provider of life insurance, annuity, accident insurance and health insurance products in China, we believe that our competitive strengths will enable us to benefit from the increasing demand for these products. Our competitive strengths include: . Leading position in the life insurance market in China. We are the leading life insurance company in China, with a market share of 45% in 2002. Among China's 31 provinces, autonomous regions and municipalities nationwide, we were the market leader in 29 in 2002. In 2002, we were also the leading individual life insurer with a market share of 51%; a leading group life insurer with a market share of 18%; the leading accident insurer with a market share of 69%; and a leading health insurer with a market share of 34%. . Largest customer base nationwide. We are the only life insurance company in China with both a nationwide business license and a nationwide distribution network. We believe we have the largest customer base among all life insurance companies in China. We had more than 44 million individual and group life insurance policies, annuity contracts and long-term health insurance policies in force as of June 30, 2003. We also offer accident and short-term health insurance policies to individuals and groups. We will also service the policies and contracts retained by CLIC in the restructuring, which numbered over 68 million as of June 30, 2003. . Most recognized life insurance brand name. Through our predecessors, we began to offer life insurance products in China more than 50 years ago. We believe our history as the oldest and largest life insurance business in China, our leading market share and our nationwide customer base have given us the highest brand recognition of any life insurance company in China. We believe that the China Life brand name is the most recognized life insurance brand name among customers in China. . Largest, multi-channel distribution network. We believe we have the largest distribution force with the most extensive geographic reach as compared to any of our competitors. Our distribution network reaches almost every county in China. Throughout China, we have approximately 650,000 exclusive agents operating in approximately 8,000 field offices for our individual products and approximately 10,000 direct sales representatives in more than 4,800 branch offices for our group products. We have a multi-channel distribution network, which allows us to take advantage of fast growing distribution channels, such as bancassurance. Our distribution network includes non-dedicated agencies located in approximately 78,000 outlets of commercial banks, post offices and savings cooperatives, as well as dedicated insurance agencies and insurance brokerage companies. . Nationwide customer support. We believe we have the most extensive customer service network in the Chinese life insurance industry. We deliver customer services through approximately 3,000 customer service units operating in our branch and field offices throughout China. We also deliver customer services through a sophisticated telephone call center network, complementing the customer services provided by our customer service units. Our dedicated, nationwide inquiry line "95519" allows customers to make product and service inquiries, file complaints, report claims and losses and make appointments on a "24 hours/7 days" basis in key cities. We believe our customer support services enhance the attractiveness of our products and the loyalty of our customers. . Leading asset manager. Following the restructuring, we are managing our investment assets and, through our asset management joint venture, substantially all of those of CLIC. As of June 30, 2003, before giving effect to the restructuring, CLIC had RMB 335,840 million (US$40,572 million) of investment assets. After giving effect to the restructuring, we had RMB 212,452 million (US$25,666 121 million) of investment assets as of the same date. Based on CIRC data, our assets under management accounted for more than one-half of all investment assets under management by Chinese life insurance companies in 2002. We are one of the largest institutional investors in China in terms of assets under management. We believe our scale and experience position us well for the expected easing of restrictions on investments, which would allow Chinese life insurance companies to invest in a broader range of asset classes in the coming years. . Strong financial position. As of June 30, 2003, on a pro forma basis after giving effect to the restructuring, we had total net assets of RMB 36,182 million (US$4,371 million) and our solvency level was more than 2.8 times the minimum regulatory requirement. See "Regulation--Insurance Company Regulation--Solvency requirements". On a pro forma basis after giving effect to the restructuring, we had total gross written premiums and policy fees of RMB 25,403 million (US$3,069 million) and a net profit of RMB 3,128 million (US$378 million) for the six months ended June 30, 2003 and total gross written premiums and policy fees of RMB 47,077 million (US$5,687 million) and a net profit of RMB 4,524 million (US$547 million) in 2002. We believe our strong financial condition gives us the resources to support our fast-growing businesses and the flexibility to develop new products and enter into new markets. . Experienced management team. Our management team has in-depth industry knowledge and extensive managerial experience in life insurance, finance and asset management. The team is focused on formulating innovative business initiatives and capturing attractive business opportunities, drawing on expertise in diverse areas. We believe our management team will be able to develop and execute our business strategies effectively, while quickly responding to changes in our business environment. Business Strategy Our goal is to build on our position as China's leading life insurance company and become one of the top life insurance companies worldwide. Our objectives are to achieve sustainable growth of our businesses and to create long-term shareholder value. To achieve these objectives, we intend to capitalize on our leading position in China's life insurance market. We intend to pursue the following business strategies: Capitalize on our market leading position and capture the high growth opportunities in the Chinese life insurance market The life insurance market in China has experienced rapid growth, with total life insurance premiums, as reported to the CIRC, experiencing a compound annual growth rate of 37.7% from 1999 through 2002. We intend to capitalize on our market leading position by pursuing the following growth strategies in our individual, group and accident and health insurance segments: . Build on our leading market position in the mass market and focus on the emerging mass affluent market. We will continue actively to serve the mass market, which currently constitutes our largest market, to meet the growing demand for financial protection and investment products. We also seek to capitalize on the market opportunities in the growing mass affluent segment of China's population, which we believe offers us attractive opportunities for growing our individual life insurance business. We seek to accomplish this through a new segment-based sales approach, implementing a new sales force structure and compensation scheme, rolling out pilot product initiatives and improving training and recruiting. . Capture opportunities in the fast growing group pension and annuity businesses. We intend to expand our pension and annuity and other group businesses through a customer segmentation approach, 122 differentiating among large state-owned enterprises, large private Chinese companies, small- and medium-sized enterprises and foreign joint ventures. In addition, to serve our group customers more effectively, we are in the process of creating key account managers and building the skills of our salespeople in marketing to corporate customers. . Strengthen leadership in accident insurance and improve the financial performance of health insurance. We intend to continue to grow our profitable accident insurance business through innovative products and expanded distribution channels, and pursue stable, long-term growth of our health business. To improve the financial performance of our health business, we are strengthening our product development, pricing, sales, underwriting and claims and risk management practices. We will further focus our health insurance business on key cities to create regional scale and lower operating costs. Capitalize on our existing customer base and provide products and services tailored to specific customer groups As the leading provider in China's life insurance market, with over 44 million individual and group life insurance policies, annuity contracts and long-term health insurance policies in force as of June 30, 2003, as well as accident and short-term health insurance policies, we have a broader customer base than any of our competitors. We will also service the policies and contracts retained by CLIC in the restructuring, which numbered over 68 million as of June 30, 2003. We believe this customer base provides enormous growth potential. We intend to capitalize on the relationship with our existing customers by offering products and services that meet their specific requirements and providing the highest level of customer support in China. Enhance the productivity of our core distribution channels and expand our multi-channel distribution network We believe we have the largest distribution force with the most extensive geographic reach of any of our competitors. We intend to implement the following measures to enhance further the productivity of our core distribution channels and broaden the reach of our multi-channel distribution network: . Individual sales agents. We believe we have the largest exclusive agency distribution system in China, and believe that this will continue to be a key factor in the success of our business. We will seek to enhance this competitive advantage by improving our agent recruitment, training, performance evaluation process and compensation scheme to help us attract and retain the most productive agents. We intend to continue to build our professional agency sales force through training programs conducted by internal staff and external market experts, and have engaged a leading international consulting firm to help us improve the skills and efficiency of our agency sales force. We are modifying how we evaluate and compensate our agents with a view to improving their productivity and our profitability. . Direct sales force. We will continue to enhance the skills and professional expertise of our direct sales force for group insurance to serve the different customer segments of our group business effectively, with a particular focus on key accounts. We also intend to realign our group sales force to cover key urban markets more effectively. . Bancassurance. We have bancassurance arrangements with major banks 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 a stand-alone bancassurance department, to develop our bancassurance business, with a focus on key cities. We intend to explore strategic alliances with one or more banks. In the interim, we plan 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 bank partners. 123 . Other distribution channels. We are exploring opportunities to develop cooperative distribution arrangements with dedicated insurance agencies and insurance brokerage companies. At the same time, we are monitoring the feasibility of distributing products through the Internet, as well as other direct sales distribution channels. Build on our widely recognized brand name We believe China Life is the most widely recognized life insurance brand name in China. The China Life brand name is a significant advantage in an increasingly crowded life insurance marketplace. We will continue to build on China Life's reputation as a provider of comprehensive and competitive products and solutions and of reliable and convenient services, and strengthen this perception through corporate image building programs. Build on our competitive product design capabilities to meet changing customer needs The products and services offered by the insurance industry in China continue to evolve as the needs of customers change. We intend to be at the forefront of the insurance industry in offering innovative and competitive products to our customers. We offer more than 130 different products, ranging from traditional protection products and participating life insurance products to accident and health insurance, to meet the insurance needs throughout a customer's lifetime. We regularly evaluate our products in order to rationalize our product design strategy. We seek to develop products and services which meet the requirements of specific customer groups and generate attractive margins. In addition, we are focusing on reducing the time it takes us to develop and introduce new products. Build on our asset management strength We view our asset management business as an important value creator. As of June 30, 2003, before giving effect to the restructuring, CLIC had RMB 335,840 million (US$40,572 million) of investment assets. After giving effect to the restructuring, we had RMB 212,452 million (US$25,666 million) of investment assets as of the same date. Based on CIRC data, our assets under management accounted for more than one-half of all investment assets held by Chinese life insurance companies in 2002, making us one of the largest institutional investors in China's capital markets. We expect that as the restrictions on investments by insurance companies are relaxed, we will be able to invest in a broader range of asset classes. We will seek to improve our technological and managerial skills and enhance our ability to match the duration of our assets and liabilities with a view to reducing risk and improving profitability. We believe that the asset management company will give us better access to technology and expertise, greater flexibility to align our compensation with performance and the ability to attract and retain top asset managers. Strengthen risk management Our increasingly broad product range and the expected increase in the range of investment opportunities available to us present significant challenges, as well as opportunities. We plan to devote significant resources to enhance our risk management policies and procedures in light of our rapidly developing business. Specific steps include: . Prudent management of pricing, underwriting and claims. We regularly monitor our mortality, morbidity and lapse experience, as well as our investment returns, with a view to ensuring that our product pricing is consistent with our pricing objectives. We are also establishing a comprehensive training program for underwriting and claims management. Our senior management includes a position for a chief actuary whom we intend to appoint. We also plan to increase significantly the size of our professional actuarial staff. . Asset-liability management. We focus on managing our asset and liability risks and actively monitor these risks through reports to senior management on a regular basis. We intend to take advantage of the 124 expected relaxation of investment restrictions to improve our asset-liability matching. In addition, we 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. . Monitoring by board of directors. We intend to establish a risk management committee of our board of directors. We have an internal risk management department with responsibility to monitor risk and asset-liability duration mismatch. We are consolidating our risk management functions to provide more streamlined management of the risks involved in our overall operations. Continue to enhance efficiency through active cost control management As a result of our attention to maintaining low expenses, we believe we have achieved significant operating efficiencies in our businesses. To enhance our efficiency further, we are consolidating functions and management layers in our organizational structure at both the headquarters and local branch levels. We are also centralizing our policy management, purchasing, financial and operating management functions, re-engineering our operating processes and upgrading our information technology systems. We believe these actions will allow us to increase our efficiency while maintaining high quality services for our customers. Implement advanced information technology systems We have developed our information technology strategy with a view to increasing our operational and managerial efficiency. Relying on advanced information technology, we intend to build on our capacity to respond to market feedback and various contingencies and enhance the quality of our customer services and our risk management capabilities. As a result, we expect to improve our overall management skills, achieve sustainable development in our businesses and enhance our competitiveness. Our goal is to provide a sophisticated technology platform, advanced technological solutions and effective service support to all aspects of our business, including operations, business development, customer service and risk control. For instance, we are providing our more productive exclusive agents with personal electronic devices to further enhance their marketing time management and customer service capabilities. We seek to be a leader in China in establishing a standardized, efficient, stable and sophisticated information technology system. We have retained a leading international consulting firm to assist us in developing our overall information technology strategy. We plan to execute the new IT strategy over the next several years, with a focus on database centralization, core system reconciliation, e-commerce and customer relationship management, as well as the standardization, consolidation and rationalization of resources. Enhance performance-oriented corporate structure and compensation systems We are dedicated to improving the performance orientation of our organizational structure and our compensation systems in order to maximize shareholder value. In connection with our restructuring, we are pursuing the following measures: . Create an organizational structure with clear accountability. We have engaged a leading international consulting firm to design a customer-oriented corporate structure with clear accountability, which we believe will provide a better platform for delivering our services more efficiently, better satisfy market demand and better serve our corporate development strategy. We believe this will enable us to operate with high efficiency and strict risk control across our business operations nationwide. . Implement performance-based incentive compensation systems. We are establishing goals and key performance indicators for our management at every level of the organization intended to ensure that we 125 compensate and promote the best people for each position and deliver the strongest possible financial results for our shareholders. We have engaged a leading consulting firm to formulate market-based incentive programs for our personnel to ensure that compensation reflects individual performance, market demands and contributions to return on equity. We have introduced incentives and rewards to align the interests of our senior management team with those of our shareholders. In addition, we intend to link the compensation of all employees to individual and company-wide performance measures. Continue to enhance training and development Superior management personnel and employees are key to our future success. We seek to attract and retain the most talented individuals in the industry and improve their skills, productivity and career development opportunities through advanced human resources management. We are building a system in which our talented employees can grow with us and share in our success. We also plan to establish a nationwide training program through regional training centers throughout China. In addition to on-the-job training, we will continue to send selected employees to leading educational institutions both in the PRC and abroad for advanced training. 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 650,000 exclusive agents operating in approximately 8,000 field offices throughout China, as well as other non-dedicated agencies located at branch offices of banks, post offices and other organizations. Gross written premiums and policy fees generated by our individual life insurance and annuity products totaled RMB 20,370 million (US$2,461 million) for the six months ended June 30, 2003 and RMB 37,662 million (US$4,550 million) for the year ended December 31, 2002, constituting 80.2% and 80.0% of our total gross written premiums and policy fees for those periods. The figure for 2002 represented a 51.8% increase over 2001. First-year gross written premiums from individual life insurance products in 2002 were RMB 17,973 million (US$2,171 million), representing a 21.3% increase over 2001. First-year single gross written premiums for the same period were RMB 8,590 million (US$1,038 million), representing 47.8% of first-year individual life insurance gross written premiums. Deposits generated by our individual life insurance and annuity products totaled RMB 53,271 million (US$6,436 million) for the six months ended June 30, 2003 and RMB 52,340 million (US$6,323 million) for the year ended December 31, 2002, constituting 91.2% and 89.4% of our total deposits for those periods. The figure for 2002 represented a 245.2% increase over 2001. 126 The following table sets forth selected financial and other data regarding our individual life insurance business as of the dates or for the periods indicated.
Compound As of or for the year ended annual As of or for the six months December 31, growth rate ended June 30, -------------------------- ----------- --------------------------- 2000 2001 2002 2002 (2000-2002) 2002 2003 2003 ------ ------ ------ ----- ----------- ------ ------- ------ RMB RMB RMB US$ RMB RMB US$ (in millions, except as otherwise indicated) Individual life gross written premiums and policy fees..................... 13,486 24,806 37,662 4,550 67.1% 19,350 20,370 2,461 First-year single gross written premiums............................ 1,923 4,986 8,590 1,038 111.4% 4,867 1,975 239 First-year regular gross written premiums............................ 7,772 9,826 9,383 1,134 9.9% 5,125 3,928 475 ------ ------ ------ ----- ------ ------- ------ First-year gross written premiums............................ 9,695 14,812 17,973 2,171 36.2% 9,992 5,903 713 Individual life insurance deposits.... 11,308 15,162 52,340 6,323 115.1% 37,364 53,271 6,436 First-year single deposits............ 8,869 10,598 43,679 5,277 121.9% 32,139 45,532 5,501 First-year regular deposits........... 1,955 2,798 5,246 634 63.8% 3,871 2,970 359 ------ ------ ------ ----- ------ ------- ------ First-year deposits................... 10,824 13,396 48,925 5,911 112.6% 36,010 48,502 5,859 Future life policyholder benefits..... 13,626 29,839 54,745 6,614 100.4% 43,013 67,338 8,135 Policyholder contract deposits........ 12,988 21,443 65,629 7,929 124.8% 54,449 114,719 13,859
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 33 million non-participating policies and 11 million participating policies as of June 30, 2003. Non-participating products provide a fixed rate of return with a guaranteed benefit. The holder of a participating product also 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. We believe that the enhanced return profile of these products will continue to make them attractive products in the market. 127 The following table sets forth selected financial information regarding our individual life insurance and annuity products for the periods indicated.
For the six months ended For the year ended December 31, June 30, ------------------------------- ------------------------ 2000 2001 2002 2002 2002 2003 2003 ----- ------ ------ ----- ------ ------ ----- RMB RMB RMB US$ RMB RMB US$ (in millions) Whole life and term life insurance: Gross written premiums............. 6,084 9,111 12,289 1,485 5,888 7,847 948 First-year gross written premiums.. 4,766 4,347 4,491 543 2,266 2,252 272 Total single gross written premiums 501 331 211 25 99 99 12 Endowment: Gross written premiums............. 4,351 11,925 18,169 2,195 9,291 7,382 892 First-year gross written premiums.. 3,650 9,222 11,431 1,381 6,707 2,803 339 Deposits........................... 4,258 9,839 50,428 6,092 36,405 52,471 6,339 First-year deposits................ 3,880 8,225 47,259 5,709 35,149 47,808 5,776 Annuities: Gross written premiums............. 1,481 1,883 3,129 378 1,486 1,763 213 First-year gross written premiums.. 1,279 1,243 2,051 248 1,019 848 102 Deposits........................... 7,050 5,323 1,912 231 959 800 97 First-year deposits................ 6,944 5,171 1,666 201 861 694 84
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, predetermined 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. Some of our term life insurance products also provide guaranteed benefits upon the occurrence of specified events within the coverage period, for instance when a child of the insured reaches a certain age. 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. 128 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 25 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 product lines. Among our participating endowment products, Hong Tai Endowment and Qian Xi Wealth Management are our most successful products. Hong Tai Endowment had RMB 45,347 million (US$5,478 million) of deposits in 2002, representing 86.6% of total deposits of our individual life insurance business. Qian Xi Wealth Management had RMB 12,070 million (US$1,458 million) of gross written premiums in 2002, representing 32.0% of total gross written premiums and policy fees of our individual life insurance business. First-year deposits of Hong Tai Endowment for the year ended December 31, 2002 were RMB 44,918 million (US$5,426 million), representing an 803.4% increase over 2001 and 91.8% of total first-year deposits of our individual life insurance business. First-year gross written premiums of Qian Xi Wealth Management for the year ended December 31, 2002 were RMB 9,912 million (US$1,197 million) of deposits, representing a 59.7% increase from the year before, or 55.1% of total first-year gross written premiums of our individual life insurance business. The following table sets forth selected financial information regarding our Hong Tai Endowment and Qian Xi Wealth Management Products for the periods indicated.
As of or for the year ended As of or for the six months December 31, ended June 30, --------------------------- --------------------------- 2000 2001 2002 2002 2002 2003 2003 ---- ----- ------ ----- ------ ------ ----- RMB RMB RMB US$ RMB RMB US$ (in millions) Hong Tai Endowment: Deposits......................... -- 4,972 45,347 5,478 34,047 18,354 2,217 First-year deposits.............. -- 4,972 44,918 5,426 34,047 15,634 1,889 Qian Xi Wealth Management: Gross written premiums........... 58 6,248 12,070 1,458 6,079 4,011 485 First-year gross written premiums 58 6,205 9,912 1,197 5,761 2,190 265
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 or other fees upon an early surrender or withdrawal of the contract. 129 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 or other fees 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 650,000 exclusive agents operating in approximately 8,000 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. Over time we plan to expand this sales approach to all exclusive agents nationwide. 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 4,800 branch offices as well as insurance agency and insurance brokerage companies. Gross written premiums and policy fees generated from our group life insurance and annuity products totaled RMB 267 million (US$32 million) for the six months ended June 30, 2003 and RMB 477 million (US$58 million) for the year ended December 31, 2002, constituting 1.1% and 1.0% of our total gross written premiums and policy fees for those periods. The figure for 2002 represented a 56.0% decrease from 2001. First-year gross written premiums from group life insurance and annuity products for 2002 were RMB 313 million (US$38 million), representing a 69.7% decrease from 2001. First-year single gross written premiums for 2002 were RMB 306 million (US$37 million), representing 97.8% of first-year group life insurance gross written premiums. Deposits generated by our group life insurance and annuity products totaled RMB 5,146 million (US$622 million) for the six months ended June 30, 2003 and RMB 6,232 million (US$753 million) for the year ended December 31, 2002, constituting 8.8% and 10.6% of our total deposits for those periods. The figure for 2002 represented a 9.2% increase from 2001. 130 The following table sets forth selected financial and other data regarding our group life insurance business as of the dates or for the periods indicated.
Compound As of or for the year ended annual As of or for the six months December 31, growth rate ended June 30, ------------------------ ----------- --------------------------- 2000 2001 2002 2002 (2000-2002) 2002 2003 2003// ----- ----- ------ ----- ----------- ----- ------ ----- RMB RMB RMB US$ RMB RMB US$ (in millions, except as otherwise indicated) Group life gross written premiums and policy fees........................ 228 1,085 477 58 44.6% 301 267 32 First-year single gross written premiums........................... -- 955 306 37 NA 206 148 18 First-year regular gross written premiums........................... -- 77 7 1 NA 3 15 2 ----- ----- ------ ----- ----- ------ ----- First-year premiums.................. -- 1032 313 38 NA 209 163 20 Group life insurance deposits........ 3,912 5,706 6,232 753 26.2% 3,262 5,146 622 First-year single deposits........... 3,912 5,676 6,231 753 26.2% 3,260 5,128 620 First-year regular deposits.......... -- 30 1 -- NA 2 18 2 ----- ----- ------ ----- ----- ------ ----- First-year deposits.................. 3,912 5,706 6,232 753 26.2% 3,262 5,146 622 Future life policyholder benefits.... 268 1,130 1,143 138 106.5% 1,221 1,104 133 Policyholder contract deposits....... 4,771 8,135 12,369 1,494 61.0% 9,601 15,705 1,897
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 2000. The following table sets forth selected financial information regarding our group life insurance and annuity products for the periods indicated.
For the six months For the year ended December 31, ended June 30, ------------------------------- ---------------- 2000 2001 2002 2002 2002 2003 2003 ----- ----- ----- ---- ----- ----- ---- RMB RMB RMB US$ RMB RMB US$ (in millions) Group annuities: Premiums................................ -- 53 -- -- -- -- -- Deposits................................ 3,912 5,698 6,229 753 3,262 5,146 622 Group whole life and term life insurance: Premiums................................ -- 985 344 42 228 186 22
Group annuities. In our non-participating group annuities, interest on an annuitant's deposits is credited to each participating employee's personal account, with annuity payments made from the account to the employee. Annuity payments are either pre-determined in the policy contracts or 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. 131 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, 2002, total combined deposits of Yong Tai Annuity and Group Annuity (Retirement Supplement) were RMB 5,910 million (US$714 million), constituting 94.8% of total deposits of our group life insurance business for that year, representing a 33.6% increase from the year before. The following table sets forth total combined deposits of our Yong Tai Annuity and Group Annuity (Retirement Supplement) products for the periods indicated.
For the year ended For the six months December 31, ended June 30, --------------------- ---------------- 2000 2001 2002 2002 2002 2003 2003 ---- ----- ----- ---- ----- ----- ---- RMB RMB RMB US$ RMB RMB US$ (in millions) Yong Tai Annuity and Group Annuity (Retirement Supplement): Deposits..................................... -- 4,425 5,910 714 3,042 4,482 464
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. 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 for the six months ended June 30, 2003. Accident and Health Insurance We are the leading accident insurance and a leading health insurance provider in China. 132 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.
Compound As of or for the year ended annual As of or for the six December 31, growth gate months ended June 30, --------------------------- ----------- --------------------- 2000 2001 2002 2002 (2000-2002) 2002 2003 2003// ----- ----- ----- ---- ----------- ----- ----- ----- RMB RMB RMB US$ RMB RMB US$ (in millions, except as otherwise indicated) Accident insurance premiums................ 6,277 5,097 5,174 625 (9.2)% 2,403 2,359 285 Health insurance premiums.................. 1,116 2,687 3,764 455 83.7% 1,250 2,407 291 Accident and health reserves for claims and claim adjustment expenses (gross)........ 716 867 879 106 10.8% 1,010 910 110 Accident and health insurance unearned premium reserves (net)................... 3,304 3,553 4,028 487 10.4% 3,246 4,011 485
Accident insurance We are the leading accident insurance provider in China. We offer a broad array of accident insurance products to both individuals and groups through our direct sales force and after June 30, 2003, primarily through intermediaries. Our accident insurance gross written premiums totaled RMB 2,359 million (US$285 million) for the six months ended June 30, 2003 and RMB 5,174 million (US$625 million) for the year ended December 31, 2002, constituting 9.3% 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. 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 133 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 2,407 million (US$291 million) for the six months ended June 30, 2003 and RMB 3,764 million (US$455 million) for the year ended December 31, 2002, constituting 9.5% and 8.0% of our total gross written premiums and policy fees for those periods. The figure for 2002 represented a 40.1% increase from 2001. 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. 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 134 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 650,000 exclusive agents operating in approximately 8,000 field offices for our individual products and more than 10,000 direct sales representatives in more than 4,800 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. We support our agents and representatives through training programs, sales materials and information technology systems. Exclusive agent force Our exclusive agent force of approximately 650,000 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, As of June 30, ----------------------- --------------- 2000 2001 2002 2002 2003 ------- ------- ------- ------- ------- Number of exclusive agents (approximately) 300,000 450,000 600,000 580,000 650,000 Number of field offices................... 3,958 4,873 7,295 5,469 7,949
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, 2000 to June 30, 2003, the number of our exclusive agents increased from approximately 300,000 to approximately 650,000. 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 "Regulation--Regulation of Insurance Agencies, 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% of our exclusive agents hold a CIRC qualification certificate, and essentially none has a business license. We are working with our agents to obtain the CIRC qualification. However, 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, our business may be materially and adversely affected. See "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." 135 We supervise and provide training to our exclusive agents through more than 100,000 field manager agents, more than 6,000 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, 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; . 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 4,800 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. 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. 136 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 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 a stand-alone bancassurance department, to develop our bancassurance business, with a focus on key cities. We intend to explore strategic alliances with one or more banks. In the interim, we plan 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 savings cooperatives, 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 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. . 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. 137 The following table sets forth market share information for the year ended December 31, 2002 in all segments of life insurance market in which we do business.
Individual life Group life Accident Health Total premiums premiums premiums premiums premiums market share market share market share market share 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% Taikang 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 Insurance Co., Taiping Life Insurance Co. Ltd., Tianan Insurance Co. Ltd., American International Assurance Co., Ltd., Shanghai, Guangzhou, Shenzhen, Beijing and Suzhou branches, Manulife-Sinochem Life Insurance Co. Ltd., ING 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 14 licensed life insurance companies in China as of December 31, 2000, 17 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. See "Risk Factors--Risks Relating to the PRC 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 have recently been 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 We have 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 138 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. Through this joint venture, we also intend to offer asset management products and services to other insurance companies. 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 members are Wang Xianzhang, the chairman of our board of directors and president, Miao Fuchun, our vice president, and Wu Yan, one of our directors. The remaining board members have not yet been appointed. 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, amending policy terms, 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. 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 are an important marketing tool and that they 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 140 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 five 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 two special service codes (95519 for China Unicom and 895519 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 for purposes of conducting field tests, 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.chinalife.com.cn). 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 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 purpose. 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. 140 See "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 are 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 "Regulation--Regulation of Insurance Companies". 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 Company, or 141 China Re, 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 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 Re 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. In general, our reinsurance agreements with China 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. For the year ended December 31, 2002, the amount of premiums ceded to our reinsurers, primarily China Re, totaled RMB 1,869 million (US$226 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 June 30, 2003, before giving effect to the restructuring, CLIC had RMB 335,840 million (US$40,572 million) of investment assets. After giving effect to the restructuring, we had RMB 212,452 million (US$25,666 million) of investment assets as of the same date. 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; 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 142 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 "The Restructuring" and "Relationship with CLIC". The information presented in this section sets forth the investment assets of CLIC, together with the investment assets transferred to us in connection with the restructuring. We own 60% of the asset management joint venture, with CLIC owning the remaining 40%. The initial board members will include Wang Xianzhang, the chairman of our board of directors and president, and Wu Yan, one of our directors. The remaining board members have not yet been appointed, but we expect that a majority of the board will include individuals representing China Life. 144 The following table summarizes information concerning CLIC's investment assets as of the dates or for the periods indicated, as well as investment assets that were transferred to us in connection with the restructuring, as of the dates or for the periods indicated.
CLIC investment assets /(1)/ CLIC investment As of December 31, assets/(1)/ Our investment -------------------------------------------- As of June 30, assets 2000 2001 2002 2003 As of June 30, 2003/(2)/ -------------- -------------- -------------- -------------- ------------------------ Carrying % of Carrying % of Carrying % of Carrying % of Carrying % of value total value total value total value total value total -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (RMB in millions, except as otherwise indicated) Cash and cash equivalents......... 23,275 17.9% 17,855 9.5% 14,529 5.5% 23,592 7.0% 10,682/(3)/ 5.0% Term deposits..................... 39,653 30.5% 76,083 40.3% 123,675 46.4% 142,043 42.3% 97,563 45.9% Statutory deposits-- restricted... 40 0.0% 990 0.5% 991 0.4% 992 0.3% 4,000 1.9% Fixed maturity securities, held to maturity......................... 1,598 1.2% 1,388 0.7% 1,220 0.5% 827 0.2% -- -- Fixed maturity securities, non- trading.......................... 36,086 27.8% 51,896 27.5% 75,117 28.2% 81,190 24.2% 45,090 21.2% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Fixed maturity securities......... 37,684 29.0% 53,284 28.2% 76,337 28.6% 82,017 24.4% 45,090 21.2% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Policy loans...................... 109 0.1% 107 0.1% 106 0.0% 136 0.0% 49 0.0% Equity securities, non-trading.... 1,119 0.9% 2,002 1.1% 8,101 3.0% 9,025 2.7% 4,588 2.1% Equity securities, trading........ 5,675 4.4% 5,696 3.0% 4,070 1.5% 5,772 1.7% 4,143 2.0% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Equity securities................. 6,794 5.2% 7,698 4.1% 12,171 4.6% 14,797 4.4% 8,731 4.1% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Repurchase agreements............. 19,840 15.3% 30,480 16.1% 36,388 13.7% 70,061 20.9% 46,337 21.8% Investments in associates/(3)/.... 2,031 1.6% 2,036 1.1% 2,035 0.8% 1,993 0.6% -- -- Other investments/(3)/............ 572 0.4% 336 0.2% 231 0.1% 209 0.1% -- -- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total investment assets........... 129,998 100% 188,869 100% 266,463 100% 335,840 100% 212,452 100% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Average cash and investment assets balance................... -- 159,434 227,666 301,152 Investment properties/(3)(4)/..... 841 2,993 3,011 2,819
- -------- (1) Does not give effect to the restructuring. (2) Pro forma to give effect to the restructuring. (3) Does not include CLIC's minority interest in the asset management joint venture. (4) 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 are being retained by CLIC following the restructuring. (5) 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; 144 . market valuation risk, relating to the changes in market value for our investments, particularly our securities investment fund holdings; and . 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 "Operating and Financial Review and Prospects--Market Risk Disclosure". Investment results In the restructuring, CLIC transferred to us investment assets with a book value of RMB 212,452 million (US$25,666 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 "The Restructuring--Transfer of Insurance Policies and Related Assets--Investment assets". The yield on CLIC's investment assets and investment properties, excluding net realized investment gains and losses, was 1.7% for the six months ended June 30, 2003, 3.8% for the year ended December 31, 2002 and 4.1% for the year ended December 31, 2001. 145 The following table sets forth the yields on average assets for each component of CLIC's investment portfolio, without giving effect to the restructuring, for the periods indicated.
----------- ----------- 2000 ----------- Yield /(2)/ ---------- Cash, cash equivalents and term deposits: Investment income........................ 3.4% Ending assets: cash and cash equivalents. Ending assets: statutory deposits--restricted.................... Ending assets: term deposits............. Ending assets............................ Fixed maturity securities: Investment income........................ 4.8% Net realized gains/(losses).............. Total.................................... Ending assets............................ Policy loans: Investment income........................ 3.0% Ending assets............................ Equity securities: Investment income........................ 6.7% Net realized gains/(losses).............. Total.................................... Ending assets............................ Resale and repurchase agreements: Resale agreements: Investment income........................ 2.8% Net realized gains/(losses).............. Total.................................... Ending assets............................ Repurchase agreements: Total.................................... Ending assets............................ Investments in associates/(4)/: Investment income/(losses)............... (2.2)% Ending assets............................ Investment properties/(4)(5)/: Investment income........................ (0.4)% Ending assets............................ Other investments/(4)/: Investment income........................ 1.5% Ending assets............................ Total investments: Net investment income/(5)/............... 3.8% Net realized gains/(losses)..............
CLIC /(1)/ ------------------------------------------------------------------- As of or for the years ended December 31, As of or for the six --------------------------------------------- months ended June 30, 2001 2002 2003 ------ ----------------- ------------------ -------------------- Amount Yield /(2)/ Amount Yield /(2)/ Amount Yield /(3)/ Amount ------ ---------- ------ ---------- ------- ---------- ------- (RMB in millions, except as otherwise indicated) Cash, cash equivalents and term deposits: Investment income........................ 1,910 3.4% 2,714 3.7% 4,310 1.8% 2,732 Ending assets: cash and cash equivalents. 23,275 17,855 14,529 23,592 Ending assets: statutory deposits--restricted.................... 40 990 991 992 Ending assets: term deposits............. 39,653 76,083 123,675 142,043 ------ ------ ------- ------- Ending assets............................ 62,968 94,928 139,195 166,627 Fixed maturity securities: Investment income........................ 1,776 4.2% 1,918 4.2% 2,723 1.8% 1,431 Net realized gains/(losses).............. (129) 188 446 558 ------ ------ ------- ------- Total.................................... 1,647 2,106 3,169 1,989 Ending assets............................ 37,684 53,284 76,337 82,017 Policy loans: Investment income........................ 4 2.8% 3 6.6% 7 2.5% 3 Ending assets............................ 109 107 106 136 Equity securities: Investment income........................ 371 12.3% 893 2.4% 240 1.4% 188 Net realized gains/(losses).............. 106 (194) (180) 133 ------ ------ ------- ------- Total.................................... 477 699 60 321 Ending assets............................ 6,794 7,698 12,171 14,797 Resale and repurchase agreements: Resale agreements: Investment income........................ 342 3.2% 815 3.3% 1,094 1.2% 653 Net realized gains/(losses).............. -- -- -- ------ ------ ------- ------- Total.................................... 815 1,094 653 Ending assets............................ 19,840 30,480 36,388 70,061 Repurchase agreements: Total.................................... -- (56) (71) (2) Ending assets............................ 90 14,608 3,602 0 Investments in associates/(4)/: Investment income/(losses)............... (45) (1.6)% (32) (0.3)% (6) 0.8% 16 Ending assets............................ 2,031 2,036 2,035 1,993 Investment properties/(4)(5)/: Investment income........................ (3) 1.5% 29 2.2% 67 2.0% 58 Ending assets............................ 841 2,993 3,011 2,819 Other investments/(4)/: Investment income........................ 21 0.9% 4 3.2% 9 3.2% 7 Ending assets............................ 572 336 231 209 Total investments: Net investment income/(5)/............... 4,374 4.1% 6,276 3.8% 8,347 1.7% 5,070 Net realized gains/(losses).............. (23) (6) 266 691
- -------- (1) Does not give effect to the restructuring. (2) Yields for a given year are calculated by dividing the investment income for that year by the average of the ending balances of that year and the previous year. (3) Yields for June 30, 2003 are calculated by dividing the investment income for the six months ended June 30, 2003 by the average of the ending balances of June 30, 2003 and December 31, 2002. (4) 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 are being retained by CLIC following the restructuring. (5) 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. 146 Term deposits Term deposits consist principally of term deposits with Chinese commercial banking institutions and represented 42.3% of total investment assets as of June 30, 2003, 46.4% as of December 31, 2002, 40.3% as of December 31, 2001 and, after giving effect to the restructuring, 45.9% as of June 30, 2003. 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 CLIC's term deposits by contractual maturity dates, without giving effect to the restructuring, as of the dates indicated.
As of As of December 31, June 30, ------------------- --------- 2001 2002 2003 --------- --------- --------- Amortized Amortized Amortized cost cost cost --------- --------- --------- (RMB in millions) Due in one year or less................... 5,929 6,621 4,100 Due after one year and through five years. 48,143 108,953 122,271 Due after five years and through ten years 21,011 7,101 14,670 Due after ten years....................... 1,000 1,000 1,002 ------ ------- ------- Total term deposits....................... 76,083 123,675 142,043 ====== ======= =======
The following table sets forth CLIC's term deposits outstanding to Chinese banking institutions, without giving effect to the restructuring, as of the dates indicated.
As of As of December 31, June 30, ------------------- --------- 2001 2002 2003 --------- --------- --------- Amortized Amortized Amortized cost cost cost --------- --------- --------- (RMB in millions) Industrial & Commercial Bank of China 9,624 24,027 23,959 Agriculture Bank of China............ 12,147 20,178 20,744 Bank of China........................ 12,140 11,748 10,428 China Construction Bank.............. 4,517 9,139 7,179 Other banks.......................... 37,655 58,583 79,733 ------ ------- ------- Total term deposits.................. 76,083 123,675 142,043 ====== ======= =======
Fixed maturity securities Fixed maturity securities consist of Chinese treasury bonds, Chinese government agency bonds and Chinese corporate bonds, and represented 24.4% of total investment assets as of June 30, 2003, 28.6% as of December 31, 2002 and 28.2% as of December 31, 2001. Based on estimated fair value, Chinese treasury bonds, Chinese government agency bonds and Chinese corporate bonds comprised 73.7%, 21.2% and 5.1% of total non-trading fixed maturity securities as of June 30, 147 2003, respectively, 67.9%, 27.7% and 4.4% as of December 31, 2002, respectively, and 75.3%, 20.9% and 3.8% as of December 31, 2001, respectively. Except for a few series of Chinese treasury bonds, which collectively had an estimated fair value of RMB 47,112 million (US$5,692 million) as of June 30, 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 two other approved rating agencies, China Lianhe and Shanghai Far East, both of whom have similar rating structures. Ratings given by these entities are not directly comparable to ratings given by U.S. rating agencies. The following table sets forth the amortized cost and estimated fair value of CLIC's fixed maturity securities, without giving effect to the restructuring, as of the dates indicated.
As of December 31, ----------------------------------------------------------------- 2001 2002 As of June 30, 2003 -------------------------------- -------------------------------- -------------------------------- Amortized % of Estimated % of Amortized % of Estimated % of Amortized % of Estimated % of cost total fair value total cost total fair value total cost total fair value total --------- ----- ---------- ----- --------- ----- ---------- ----- --------- ----- ---------- ----- (RMB in millions) Fixed maturity securities, non-trading: Treasury bonds.......... 37,016 72.5% 39,078 73.3% 49,661 66.5% 50,979 66.7% 58,754 72.7% 59,836 72.9% Government agency bonds.................. 10,688 20.9% 10,836 20.3% 20,615 27.6% 20,815 27.2% 17,193 21.3% 17,182 20.9% Corporate bonds......... 1,956 3.8% 1,982 3.7% 3,212 4.3% 3,323 4.4% 4,095 5.1% 4,172 5.1% ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total fixed maturity securities, non-trading............ 49,660 97.3% 51,896 97.3% 73,488 98.4% 75,117 98.3% 80,042 99.0% 81,190 98.9% Fixed maturity securities, held to maturity: Treasury bonds.......... 717 1.4% 750 1.4% 584 0.8% 602 0.8% 257 0.3% 267 0.3% Government agency bonds.................. -- -- -- -- -- -- -- -- -- -- -- -- Corporate bonds......... 671 1.3% 691 1.3% 636 0.9% 671 0.9% 570 0.7% 615 0.7% ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total fixed maturity securities, held to maturity............... 1,388 2.7% 1,441 2.7% 1,220 1.6% 1,273 1.7% 827 1.0% 882 1.1% ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total fixed maturity securities............. 51,048 100% 53,337 100% 74,708 100% 76,390 100% 80,869 100% 82,072 100% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
148 The following table shows the amortized cost and estimated fair value of CLIC's fixed maturity securities, without giving effect to the restructuring, by contractual maturity dates, as of the dates indicated.
As of December 31, ----------------------------------------- As of June 30, 2001 2002 2003 -------------------- -------------------- -------------------- Amortized Estimated Amortized Estimated Amortized Estimated cost fair value cost fair value cost fair value --------- ---------- --------- ---------- --------- ---------- (RMB in millions) Due in one year or less................... 1,606 1,641 3,583 3,621 6,187 6,327 Due after one year and through five years. 17,003 18,191 18,547 19,426 15,465 15,980 Due after five years and through ten years 23,443 24,356 33,009 33,767 37,252 37,881 Due after ten years....................... 8,996 9,149 19,569 19,576 21,965 21,884 ------ ------ ------ ------ ------ ------ Total fixed maturity securities........... 51,048 53,337 74,708 76,390 80,869 82,072 ====== ====== ====== ====== ====== ======
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. 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 June 30, 2003, the total amount of CLIC's policy loans, without giving effect to the restructuring, was RMB 136 million (US$16 million), and represented 0.04% of 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 4.2% of total investment assets as of December 31, 2002. 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 149 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 CLIC's investments in open-end and closed-end securities investment funds, without giving effect to the restructuring, as of the dates indicated.
As of December 31, ----------------------------- As of June 30, 2001 2002 2003 -------------- -------------- -------------- Carrying % of Carrying % of Carrying % of value total value total value total -------- ----- -------- ----- -------- ----- (RMB in millions, except as otherwise indicated) Open-end.. 1,130 16.8% 4,139 36.9% 7,783 56.0% Closed-end 5,605 83.2% 7,075 63.1% 6,115 44.0% ----- ----- ------ ----- ------ ----- Total..... 6,735 100% 11,214 100% 13,898 100% ===== ===== ====== ===== ====== =====
Repurchase agreements We enter into repurchase agreements, which consist of bond repurchase activities in repurchase exchange markets. Bonds repurchased under these agreements represented 20.9% of total cash and investment assets as of June 30, 2003, 13.7% as of December 31, 2002 and 16.1% of total investment assets at December 31, 2001. Without giving effect to the restructuring, CLIC had RMB 70,061 million of exchange market repurchases for the six months ended June 30, 2003, RMB 36,388 million of exchange market repurchases for the year ended December 31, 2002 and RMB 30,480 million of exchange market repurchases for the year ended December 31, 2001. Employees As of December 31, 2000, 2001 and 2002, our predecessor, CLIC, had approximately 43,800, 49,000 and 61,000 employees, and 49,000, 41,000 and 27,000 temporary employees, respectively. As of June 30, 2003, after giving effect to the restructuring, we had 66,886 employees and approximately 20,000 temporary employees. The following table sets forth the number of our employees by their functions as of June 30, 2003.
Number of % of employees total --------- ----- Management and administrative staff....................... 9,339 14.0% Financial and auditing staff.............................. 5,777 8.6% Sales and marketing staff /(1)/........................... 27,248 40.7% Underwriters, claim specialists and customer service staff 17,250 25.8% Other professional and technical staff /(2)/.............. 1,905 2.8% Other..................................................... 5,367 8.0% ------ ----- Total..................................................... 66,886 100% ====== =====
- -------- (1) Includes direct sales representatives. / / (2) Includes actuaries, product development personnel, investment management personnel and information technology specialists. As of December 31, 2000, 2001 and 2002, our predecessor, CLIC, had approximately 300,000, 450,000 and 600,000 exclusive agents, respectively. As of June 30, 2003, after giving effect to the restructuring, we had approximately 650,000 exclusive agents. We believe the increases in numbers of our exclusive agents reflect the growth in our individual business, and have enabled us to establish and maintain long-term business relationships with our individual customers. 150 None of our employees is subject to collective bargaining agreements governing employment with us. We believe that our employee relations are satisfactory. 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 first 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 databases, 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. 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 five 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. 151 Our predecessor has invested significantly in our information technology systems, investing RMB 362 million, RMB 630 million and RMB 130 million in 2002, 2001 and 2000. We plan to increase our investments significantly in 2003. We believe our investments in information technology systems are the largest in the Chinese life insurance industry. Our information technology systems are supported by approximately 1,430 experienced engineers, technicians and specialists, which we believe is the largest professional staff in the Chinese life insurance industry. Legal Proceedings We are involved in litigation involving our insurance operations on an ongoing basis. In addition, the CIRC makes inquiries and conducts examinations or investigations from time to time concerning our compliance with insurance laws. While we cannot predict the outcome of any pending or future litigation, examination or investigation, based on the amounts sought in pending actions against us and our history of resolving litigation matters in the past, as well as the advice of legal counsel, we do not believe that any pending legal matter will have a material adverse effect on our business, financial condition or results of operations. We currently have control procedures in place to monitor our litigation exposure. We have established a systematic prevention system whereby our management at each corporate level is responsible for compliance with laws, regulations and internal codes of conduct within their individual territories or departments. Our branches at the provincial level are required to report material litigation matters to our corporate headquarters on a timely basis. We plan to continue to improve our control and compliance policies in the future. We may penalize our employees or individual agents who commit misconduct or fraud, breach the terms of their employment or agency agreements, exceed their authorization limits or fail to follow prescribed procedures in delivering insurance policies and premium payments, in each case having regard to the severity of the offense. Employees or individual agents are required to reimburse us for any losses suffered by us resulting from their misconduct or fraud. In serious cases, we may terminate their employment or agency agreements. We report criminal offenses to the PRC authorities and may also bring concurrent civil actions against employees or individual agents. Trademarks We conduct our business under the "China Life" brand name and "ball" logo. The "ball" logo trademark has been registered in the PRC and CLIC has filed an application to register the trademark in the "China Life" name 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 "Relationship with CLIC--Trademark License Agreement". Properties Owned properties We own 3,443 properties, including our headquarters in Beijing, China. These 3,443 properties comprise a total gross floor area of approximately 3,997,000 m/2/ and are situated on 2,978 parcels of land with a total site area of approximately 3,145,000 m/2/. As of September 30, 2003, CLIC held land use right certificates in respect of 2,970 parcels of land with a total site area of approximately 3,138,000 m/2/ and, for the remaining 8 parcels of land with a total site area of approximately 6,462 m/2/, title documents were pending, and CLIC and we are in the process of applying for the relevant land use right certificates to be registered in our name. In addition, CLIC held building ownership certificates in respect of 3,368 properties with a total gross floor area of approximately 3,858,000 m/2/ and, for the remaining 75 properties with a total gross floor area of approximately 139,000 m/2/, title documents were pending and CLIC and we are in the process of applying for the relevant building ownership 152 certificates to be registered in our name. 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, we and CLIC are still in the process of applying to register all parcels of land and buildings owned by us in our name. 372 properties owned by us are leased to independent third parties. The remaining properties owned by us 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. Our PRC legal counsel, King & Wood, has advised us that (1) it is not aware of (a) any material legal impediment to the transfer from CLIC to us of the land use right certificates relating to the 2,970 parcels of land and the building ownership certificates of the 3,368 properties or (b) any matter which may cause any adverse effect or financial burden on the land use rights over these 2,970 parcels of land or the building ownership rights on these 3,368 properties; and (2) for the remaining 8 parcels of land and 75 properties in respect of which title documents are pending, CLIC and we are in the process of applying for the relevant land use right certificates and building ownership certificates in our name. 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. 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 m/2/; and (ii) 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 m/2/. See "Relationship with CLIC--Property Leasing Agreement". As of September 30, 2003, CLIC held building ownership certificates in respect of 408 CLIC owned properties with a total gross floor area of approximately 352,000 m/2/ and, for the remaining 425 CLIC owned properties with a total gross floor area of approximately 285,000 m/2/, 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. 153 Properties under construction As of September 30, 2003, there were 65 properties under construction situated on the parcels of land and CLIC had obtained all necessary construction approvals in relation to 57 properties under construction, which upon completion will have an estimated total gross floor area of approximately 309,000 m/2/. For the remaining properties under construction, which upon completion will have an estimated total gross floor area of approximately 41,000 m/2/, CLIC is in the process of applying for the necessary construction approvals. 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 the remaining 8 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. 154 REGULATION 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 minimum requirements for registered capital levels, ownership, 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. . 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 approval; 155 . 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 short-term accident and 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; . 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 ownership, 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 virtually 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. The minimum paid-in capital for an insurance company licensed to conduct business on a nationwide basis is RMB 500 million. The minimum paid-in capital of a regional insurance company is RMB 200 million. Additional capital is required if a regional insurer opens more than two branch offices or if a nationwide insurer opens more than three branch offices. The minimum incremental capital for each additional branch office beyond the allotted two or three branches, as described above, is RMB 50 million. In general, no additional capital will be required when the paid-in capital has reached RMB 1,500 million for a nationwide insurer or RMB 500 million for a regional insurer, and the insurer is in good financial condition. 156 The CIRC has published for comment proposed regulations which would reduce the minimum paid-in capital for nationwide insurance companies. Restriction of ownership in joint stock insurance companies. Generally, any transfer of shares in an insurance company requires the approval of the CIRC; however, this restriction will not apply to publicly traded shares of a listed insurance company. Notwithstanding the foregoing, any acquisition of shares which results in the acquirer owning more than 10% of the registered capital of a joint stock insurance company, whether or not listed, requires the approval of the CIRC. In addition, except in the context of a public offering of shares by the joint stock insurance company and except where more than 25% of the insurance company is owned by foreign entities (in which case the regulations governing foreign-invested insurance companies will apply), foreign entities and wholly foreign-owned enterprises may not individually own more than 10%, nor collectively more than 25%, of the registered capital of a Chinese insurance company. 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. 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 the company's name, 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; . an amendment to the company's articles of association; . a transfer of an equity interest in the company other than through a public listing of shares; and . a dissolution or bankruptcy of the company. 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, 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 expenses 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 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 157 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. 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 158 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. 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 15% 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 in qualified domestic securities investment funds. 159 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 May 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 issuer's 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 issuer or 10% of the issue, whichever is lower. Since May 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. or Shanghai Far East Credit Rating Co., Ltd., 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. 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 net assets determined in accordance with PRC GAAP, less specific excluded items) 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 not in excess of RMB 100 million, plus 16% of the portion in excess of RMB 100 million; and . 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; 160 . 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. Our first report will not be due until April 30, 2004. On a pro forma basis after giving effect to the restructuring, our solvency level as of June 30, 2003 was more than 2.8 times the minimum regulatory requirement. We have not yet calculated any of the twelve financial ratios. 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. 161 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 July 2003, the CIRC issued a new regulation which affected the calculation of statutory reserves. 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. This regulation will come into effect as of December 31, 2003. 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 believes that, except as set out in the sections entitled "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 qualifications and registration requirements are enforced, our business may be materially and adversely affected" and "Regulation--Insurance Company Regulation--Licensing requirements" above, we have complied in all material respects with all applicable regulatory requirements set out above. 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 162 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 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. Essentially all of our exclusive agents 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% of our exclusive agents hold a CIRC qualification certificate, and essentially none has a business license. It is our understanding that the SAIC does not have procedures in place to effect the registration and licensing of individual insurance agents. See "Risk Factors--Risks Relating to the PRC Life Insurance Industry--All of our assets are required to be qualified and to be registered as business entities. If these qualification and registration requirements are enforced, 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. 163 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. 164 MANAGEMENT Our board of directors consists of five members. They were elected at the meetings of our shareholders held on June 30, 2003 and August 18, 2003, respectively. Our directors are elected to serve a term of three years, which is renewable upon re-election. The functions and powers of our board of directors include, among other things: (a) convening shareholders' meetings and reporting its work to shareholders at these meetings; (b) implementing shareholders' resolutions; (c) determining our business plans and investment proposals; (d) formulating our annual financial budget and report; (e) formulating our profit distribution plans and loss recovery plans; (f) formulating proposals for the increase or decrease in our registered capital and the issuance of debentures; (g) formulating our major acquisitions and disposal plans, and plans for merger, division or dissolution; (h) determining our internal management structure; (i) appointing or removing our vice presidents and other senior officers based on the recommendation of our president; (j) formulating our basic management system; (k) formulating proposals for any amendments to our articles of association; and (l) exercising any other powers conferred by shareholders by action at shareholders' meetings or under our articles of association. Except for items (f), (g) and (k) above, which require the affirmative vote of more than two-thirds of all of our directors, resolutions on any of the remaining items may be approved by the affirmative vote of a majority of our directors. In addition to board approval, the entry into profit distribution plans and loss recovery plans; changes in our registered capital; the issuance of debentures; amendments of our articles of association; and major corporate transactions, such as acquisitions, disposals, mergers, divisions or dissolutions, are required to be approved by our shareholders. The PRC company law requires a joint stock company with limited liability to establish a board of supervisors. Our board of supervisors is responsible for monitoring our financial matters and supervising the actions of our board of directors and our management personnel. Our board of supervisors consists of three members. One member of our board of supervisors must be a representative elected by our employees. The remaining members must be elected by our shareholders in a general meeting. One member of our board of supervisors is designated as the chairman. Members of our board of supervisors may not serve as director, president, vice president or financial controller of our company. The term of office for our supervisors is three years, which is renewable upon re-election. 165 The functions and powers of our board of supervisors include: . reviewing financial reports and other financial information which has been prepared by the board of directors and which are proposed to be presented at shareholders' meetings; and . overseeing our directors, president, vice presidents and other senior officers in order to prevent them from abusing their authority or infringing upon our interests. None of the members of our senior management is an appointee or representative of the Chinese government or currently connected with it in any stated official capacity. All of our directors and senior officers have been approved by the CIRC in accordance with relevant CIRC regulations. Directors and Senior Officers The following table sets forth information regarding our directors and executive officers as of October 1, 2003. Unless otherwise indicated, their business address is c/o China Life Insurance Company Limited, 16 Chaowai Avenue, Chaoyang District, Beijing 100020, China.
Name Age Position ---- --- -------- Wang Xianzhang 61 Chairman of the Board and President Miao Fuchun... 57 Director and Vice President Wan Feng...... 45 Vice President Lin Dairen.... 45 Vice President Li Liangwen... 52 Vice President Liu Jiade..... 40 Vice President Wu Yan........ 42 Non-executive director Long Yongtu... 60 Independent non-executive director Chau Tak Hay.. 60 Independent non-executive director
Wang Xianzhang has been chairman of our board of directors and president of our company in charge of our overall management since 2003. He is also chairman of the Insurance Industry Association of China and vice chairman of the Insurance Institute of China. Prior to joining China Life in connection with the restructuring, Mr. Wang served as the president of CLIC since 2000, where he remains as president. He served as chairman of the board of directors and president of China Insurance Company Limited from 1998 to 2000. Prior to that he served as vice chairman of the board of directors and president of China Insurance H.K. (Holding) Co., Ltd and vice president of People's Insurance Company of China, or PICC; vice president of PICC (Group); and general manager of the Liaoning branch of PICC. He graduated in 1965 from Liaoning University of Finance and Economics (now Northeast University of Finance and Economics) with a major in foreign economics and trade. Miao Fuchun has been a director and vice president of our company since 2003. Prior to joining China Life in connection with the restructuring, Mr. Miao served as a vice president of CLIC from 1999 to 2003 and director of the Central Finance and Economy Office from 1995 to 1999. Prior to that he served as director of the Administrative Office of MOFTEC, now the Ministry of Commerce, and deputy director and department chief of the Administrative Office of the State Council. Mr. Miao enrolled in Renmin University in 1965 and graduated from undergraduate studies in economics, in which discipline he also later received a Master's degree. Mr. Miao is a senior economist and experienced in macroeconomics and modern enterprise management. Mr. Miao has worked in the areas of economics and finance for more than 20 years. Wan Feng has been a vice president of our company since 2003. Prior to joining China Life in connection with the restructuring, Mr. Wan served as a vice president of CLIC and general manager of its Shenzhen branch since 1999 and director of China Life-CMG since 1999, where he remains as director. He served as general manager of the Shenzhen branch of PICC Life from 1997 to 1999. Prior to that, he served as a director and senior vice president of the Hong Kong branch of Tai Ping Life Insurance Company and as an assistant president of the 166 Hong Kong branch of CLIC and vice general manager of the life insurance department of the Jilin provincial branch of PICC. Mr. Wan has worked in the life insurance industry for 22 years. He graduated from Jilin College of Finance and Trade with a Bachelor of Arts degree in economics; City University of Hong Kong with a Master of Business Administration degree; and Nankai University in Tianjin with a doctorate in finance. Lin Dairen has been a vice president of our company since 2003. Prior to joining China Life in connection with the restructuring, Mr. Lin served as general manager of CLIC's Jiangsu branch from 1999 to 2003. He served as a vice general manager of PICC Life, Jiangsu branch from 1996 to 1999. Prior to that, he served as a vice division chief and later division chief of the life insurance division of PICC, Jiangsu Branch. Mr. Lin has 22 years of experience in operations and management in the insurance industry in China. He graduated in 1982 from Shandong Province Weifang Medical School with a bachelor's degree in medicine. Li Liangwen has been a vice president of our company since 2003. Prior to joining China Life in connection with the restructuring, Mr. Li served as general manager of product development department of CLIC since 2000 and as vice general manager of the Hebei branch of CLIC from 1996 to 2000. Prior to that, he served as vice general manager of the Hebei branch of PICC, general manager of the Qinhuangdao branch of PICC, and vice president of China Insurance (U.K.) Limited. Mr. Li has 28 years of experience in the insurance industry, including four years of experience overseas. He graduated in 1975 from Hebei Normal University with a major in English. Liu Jiade has been a vice president of our company since 2003. Prior to joining China Life in connection with the restructuring, Mr. Liu served as a vice director of the Finance Bureau of the Ministry of Finance since 2000, and department chief in the National Debt Finance Bureau of the Ministry of Finance from 1998 to 2000. Prior to that, he served as a vice country chief of the People's Government of Guan Tao County in Hebei Province, and a vice department chief and then department chief in the Commercial Finance Bureau in the Ministry of Finance. During Mr. Liu's tenure at the Ministry of Finance, he was involved in the administration of assets, finance and taxation of insurance companies, banks, trust companies and securities houses. Mr. Liu graduated in 1984 from Central Finance College (now Central University of Finance and Economics) with a major in finance and economics. Wu Yan has been a non-executive director of our company since 2003. Mr. Wu also serves as a vice president of CLIC. Prior to joining China Life in connection with the restructuring, he served as party secretary of the Central Finance league and president of the National Finance Youth Union from 1998 to 2003. Prior to that, he had served as a vice minister of a central Communist Youth League organization department; party secretary of the Communist Youth League of Xinjiang Autonomous Region; a member of the standing committee of Beortalar Autonomous County Communist Party Committee; and party secretary of the city of Bole. He graduated in 1981 from Xinjiang College of Finance and Economics with a major in finance. In 2002, he graduated from the China Academy of Social Sciences with a Ph.D. in National Economics. Long Yongtu has been an independent non-executive director of our company since 2003. Mr. Long is General Secretary of Boao Asian Forum. Prior to leaving government service in early 2003, Mr. Long served as Vice Minister and Chief Negotiation Representative of MOFTEC, now the Ministry of Commerce, since 1997. Prior to that, he served as Assistant to the Minister, Director of International Trade and Economic Affairs and Director of International Communication in that ministry. From 1979 to 1992, he served as a senior officer at the regional project department of UNDP, Deputy Representative of UNDP Korean Delegate Office and Deputy Director of China International Center for Economic and Technical Exchanges. Mr. Long graduated in 1965 from the Foreign Language Department of Guizhou University and studied from 1973 to 1974 at the London School of Economics. Chau Tak Hay has been an independent non-executive director of our company since 2003. Mr. Chau was appointed in 2002 as a special consultant to MOFTEC, now the Ministry of Commerce, regarding WTO matters. Previously, he served in a number of official positions in the Hong Kong Government, including Secretary for 167 Commerce and Industry, Secretary for Broadcasting, Culture and Sport, Secretary for Health and Welfare and Director General of Trade. Mr. Chau graduated from the University of Hong Kong in 1967. We intend to appoint a chief actuary, who will have overall responsibility over our actuarial work. We currently have approximately 100 employees performing actuarial functions, 19 of whom hold diplomas or degrees in actuarial science. Board of Supervisors Supervisors The following table sets forth information regarding our supervisors as of October 1, 2003.
Name Age Position ---- --- -------- Liu Yingqi.. 45 Chairman of Board of Supervisors Wu Weimin... 52 Supervisor Zhou Xinping 54 Employee Representative Supervisor
Liu Yingqi is the chairman of our board of supervisors. Prior to becoming chairman of our board of supervisors in connection with the restructuring, Ms. Liu served as general manager of the group insurance department of CLIC and vice general manager of the Anhui branch of CLIC since 1998. Prior to that, she served as division chief of the accident insurance division and deputy division chief of the life insurance division of the Anhui branch of PICC. She has 17 years of operational and management experience in the life insurance industry in China. Ms. Liu graduated in 1982 from Anhui University with a Bachelor's degree in economics. Wu Weimin is a supervisor of our company. Prior to joining China Life in connection with the restructuring, Mr. Wu served at CLIC as deputy secretary of the disciplinary committee, director of the supervision office, deputy general manager of the organization department and vice general manager of the personnel education department since 1998. Prior to that, he served at PICC (Group) as vice general manager of the human resources department and division chief of the compensation division from 1995 to 1998. Before joining the insurance industry, he held a position with the labor wages bureau of the Ministry of Communications. In 2000, he studied insurance in the China Insurance Management Staff Institute. Zhou Xinping is an employee representative supervisor of our company. Before joining China Life in connection with the restructuring, Mr. Zhou served at CLIC as vice president of the information technology department since 1996. Prior to that, he served at PICC, as vice president of the information technology department, vice president of the actuarial department and vice president of the computer department; and at China Life Electronic Co., Ltd. as president of the planning department. Mr. Zhou has 18 years of management experience in the insurance industry. Mr. Zhou graduated in 1969 from Beijing University of Science and Technology, majoring in applied computer science. For more information on our board of supervisors, see "Description of Share Capital--Board of Supervisors." Board Committees We have established standing audit, compensation, risk management and strategy committees. The primary duties of the audit committee are to review and supervise the financial reporting process and our internal control systems. Our audit committee is currently comprised of Wu Yan, Long Yongtu and Chau Tak Hay. 168 The primary duties of the compensation committee are to formulate the training and compensation policies for our senior management and to manage our senior management compensation system. Our compensation committee is currently comprised of Miao Fuchun, Long Yongtu and Chau Tak Hay. The primary duties of the risk management committee are to assist the management in managing our internal and external risks. Our risk management committee is currently comprised of Wang Xianzhang, Miao Fuchun and Wu Yan. The primary duties of the strategy committee are to formulate our overall development plans and investment decision-making procedures. Our strategy committee is currently comprised of Wang Xianzhang, Miao Fuchun and Wu Yan. Compensation of Directors, Supervisors and Officers We were incorporated on June 30, 2003. Prior to that, we did not exist as an independent legal entity and our operations were conducted by CLIC. The compensation information set forth below for our directors, supervisors and various other employees, in so far as it relates to periods prior to our incorporation, is stated at historical amounts as if our current structure had been in existence throughout the relevant periods. Our directors, supervisors and executive officers receive compensation in the form of salaries, bonuses, housing allowances and other benefits-in-kind, including our contribution to the pension plan on behalf of our directors, supervisors and executive officers. The aggregate fees or compensation paid to all our directors, supervisors and executive officers for the years ended December 31, 2002, 2001 and 2000 were RMB 3,139,152 (US$379,235), RMB 2,040,778 and RMB 1,112,295, respectively. As required by PRC regulations, we participate in various defined contribution retirement plans organized by provincial and municipal governments for our employees, including employees who are directors, supervisors and management personnel, to which we contributed RMB 65,335 for our directors and executive officers for the year ended December 31, 2002. The aggregate amount of compensation we paid to our five highest paid individual employees during the year ended December 31, 2002 was approximately RMB 2,079,551 (US$251,226). Senior Management Compensation System In order to provide better incentives for our senior management and to enhance further the alignment between our senior management's performance and our shareholders' value, our shareholders, upon the recommendation of our board of directors, has adopted a compensation system for our senior management, which was designed with the assistance of an independent compensation consulting firm. The system is designed to link our senior management's financial interests with our results of operations and the performance of our shares. Under this system, our senior management's compensation will consist of three components: . basic salaries and other fixed allowances; . short-term incentive compensation (annual performance bonuses); and . long-term incentive compensation in the form of stock appreciation rights, which generally entitle recipients to receive cash payments when the market price of our H shares rises above the exercise price granted in the stock appreciation rights. The variable components in our senior management's compensation, which consist of performance bonuses and stock appreciation rights, account for 30% to 65% of their total potential compensation. Generally, the more direct impact the recipient's responsibilities have on our final operating results, the larger the variable portion of the recipient's compensation package will be. 169 The annual performance bonuses are closely linked with our annual results of operations and the individual performance of our senior management. We have established a complete performance management system, under which key performance indicators are assigned to each position. For example, the key performance indicators assigned to our chief actuary position include the ratio of profitable products to all insurance products, as well as the profit ratio of new insurance products. The key performance indicators assigned to the general manager of our human resources department include the retention rate of specified key positions, the degree of satisfaction of other departments in the general manager's performance and the duration of vacancies of our senior management. The issuance of stock appreciation rights does not involve any issuance of new shares, nor does it have a dilutive effect on our shareholders. Stock appreciation rights will be granted to approximately 100 senior management personnel, including members of the board of directors and the board of supervisors (but excluding independent non-executive directors and independent supervisors), the president, vice presidents, heads of key departments in our headquarters, general managers and some deputy general managers of our principal branches, as well as senior professionals and technicians of key positions, such as the chief actuary we intend to appoint. Our board of directors will determine the recipients of stock appreciation rights according to internal procedures. Stock appreciation rights will be granted in units, with each unit representing one share. Among the senior management to whom stock appreciation rights are granted, the ratio between the highest and the lowest grants will in general not exceed 18:1, with the number of units of the highest grant not exceeding 10% of the total units granted to all participants. The total number of stock appreciation rights that have been granted but not exercised or cancelled and the total number of stock appreciation rights that have been exercised may not exceed 0.5% of our issued share capital, including both domestic shares and H shares. During any fiscal year, the number of stock appreciation rights granted may not exceed 0.2% of our issued share capital. The number of stock appreciation rights initially available for grant may not be more than 0.2% of our issued share capital after the global offering. According to this plan, all stock appreciation rights will have an exercise period of five years and will not be exercisable before the fourth anniversary of the date of grant unless specified performance or other conditions have been met. Under these performance conditions, the exercise right may be accelerated if the share price rises by the percentages and within the time periods indicated below: . a total of one-third of the stock appreciation rights may be exercised provided that within 6 to 18 months from the date of grant, the share price is at least 10% higher than the exercise price for a period of 20 consecutive trading days; . a total of one-third of the stock appreciation rights may be exercised provided that within 18 to 30 months from the date of grant, the share price is 10% to 20% higher than the exercise price for a period of 20 consecutive trading days; and a total of two-thirds of the stock appreciation rights may be exercised if the share price is more than 20% higher; and . a total of one-third of the stock appreciation rights may be exercised provided that after 30 months from the date of grant, the share price is 10% to 20% higher than the exercise price for a period of 20 consecutive trading days; a total of two-thirds of the stock appreciation rights may be exercised if the share price is more than 20% higher; and all of the stock appreciation rights may be exercised if the share price is more than 30% higher. The exercise price of the stock appreciation rights granted at the time of the global offering will be the initial public offering price. The exercise price of stock appreciation rights granted after the global offering will be the average closing price of the shares in the five trading days prior to the date of the grant. Upon exercise of the stock appreciation rights, the exercising participant will receive payment in Renminbi, subject to any withholding tax, equal to the number of stock appreciation rights exercised times the difference between the exercise price and market price of the H shares at the time of exercise. 170 PRINCIPAL AND SELLING SHAREHOLDER The table below sets forth information regarding the ownership of our domestic shares prior to and immediately after the global offering, by each person known to us to own beneficially our shares:
Shares beneficially Shares beneficially owned owned after the prior to the global offering global offering/(1)/ ---------------------------- -------------------- Shareholder Number Percent Number Percent ----------- -------------- ------- ------ ------- China Life Insurance (Group) Company 20,000,000,000 100.00
- -------- (1) Assumes that the underwriters do not exercise the over-allotment option. If the underwriters exercise the over-allotment option in full, China Life Insurance (Group) Company will own % of our outstanding shares. Prior to the global offering, we had 20,000,000,000 domestic shares issued and outstanding, all of which were held by CLIC, our controlling shareholder, which is a wholly state-owned enterprise. See "The Restructuring". In accordance with relevant PRC regulations, CLIC is selling of our shares, which will equal approximately % of the total number of shares offered in the global offering, if the underwriters do not exercise their over-allotment option in full, or of our shares, which will equal approximately % of the total number of shares offered in the global offering, if the underwriters exercise their over-allotment option in full. CLIC will be required to contribute the net proceeds it receives from the global offering to the Chinese national social security fund. CLIC does not have voting rights that differ from the voting rights of other shareholders after the completion of the global offering, except for matters that may be brought to a class vote. See "Description of Share Capital--Voting Rights and Shareholders' Meetings". None of our directors, supervisors or officers is a legal or beneficial owner of any shares of our share capital. We are not aware of any arrangement which may at a subsequent date result in a change of control of our company. 171 THE RESTRUCTURING Our History and Development On October 20, 1949, 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. Initially, the life insurance market focused principally on the group insurance sector, and life insurance products lacked diversity. In the late 1980s, more life insurance companies started to enter the market. Distribution channels for individual life insurance products began to emerge and agency sales forces began to be developed. In 1996, PICC carried out an institutional reform with a view to separating its insurance business into different sectors, and was renamed as China People's Insurance (Group) 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, pursuant to a State Council decision, 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; 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, CLIC was the only wholly state-owned insurance company licensed to operate life insurance business in China. Before the restructuring, CLIC had 30 branch offices at the provincial, autonomous region and municipality levels, as well as five branch offices at the municipal level with independent development plans. 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 on June 30, 2003 as a joint stock company in connection with the restructuring. As part of the restructuring, CLIC transferred to us the transferred policies. All other insurance 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. See "Life Insurance Industry in China--History and Background" and "The Restructuring--Transfer of Insurance Policies and Related Assets" for further information about China's life insurance industry and the 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. 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 June 30, 2003. 172 Purpose The restructuring was carried out in order to meet several objectives: . To establish a modern corporate governance structure and more effective management system. . To enable us to capture the opportunities offered by the rapid growth of China's insurance market and make us more competitive. . To obtain greater access to the capital markets and enhance our growth potential. Principal Actions Taken in the Restructuring The restructuring was effective as of June 30, 2003, which we refer to in this prospectus 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 applicable reinsurance contracts specified in an annex to the restructuring agreement. We refer to these policies in this prospectus 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 "--Transfer of Insurance Policies and Related Assets". . 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 "--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 "Relationship with CLIC--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 "--Transfer of Insurance Policies and Related Assets". . CLIC retained the trademarks used in our business, including the "China Life" name and "ball" logo, and granted us and our branches a royalty-free license to use these trademarks. CLIC, 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 "Relationship with CLIC--Trademark license agreement". 173 . CLIC's contracts with its agents and other intermediaries were transferred to us. See "--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 "Relationship with CLIC". 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. After the restructuring and immediately before the global offering, CLIC owned our entire 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 180 million, will be recognized as an expense to CLIC. 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 and RMB 56 million in 2002. 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. Transfer of Insurance Policies and Related Assets Under PRC law and the restructuring agreement, the restructuring was effective as of June 30, 2003, which we refer to in this prospectus as the effective date. 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. 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 6.50%, 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. 174 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. In connection with the restructuring, the benefit of all assets and the assumption of all liabilities relating to the transferred policies have been attributed to us. We expect to complete the necessary transfers of assets and liabilities, including obtaining any necessary third party consents and governmental approvals, prior to completion of the global offering. The restructuring agreement entered into between CLIC and us provides that where consents and approvals have not yet been obtained, CLIC will provide the benefit of the related assets and contractual obligations to us until the transfer of those assets and contractual obligations is made. Insurance policies Under the plan of restructuring, on the effective date, CLIC transferred to us the transferred policies. The following table sets forth the number of the transferred and non-transferred individual and group life insurance policies as of June 30, 2003.
Number of Number of non-transferred transferred policies policies - --------------- ----------- Life insurance business 68,615,097 44,578,227
In accordance with the plan of restructuring, which sets forth the method by which the transferred policies were transferred from CLIC to us, notice of the transfer was made in the People's Daily and in the Financial News, both daily newspapers with nationwide circulation in the PRC. In the notice, any holder of a policy to be transferred to us that objected to the transfer was given the opportunity to contact CLIC within 30 days of the first date of publication of the notice. Fewer than ten policyholders raised any objections following the publication of the notice and the issues raised by these policyholders have been resolved. 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 "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 175 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 "Business--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 m/2/ were transferred to us. In addition, 3,443 completed buildings and various ancillary structures, with an aggregate total gross floor area of approximately 3,997,000 m/2/, and 65 buildings and structures which were under construction, with an aggregate total gross floor area of approximately 350,000 m/2/ upon completion, were transferred to us. Of the 3,443 buildings, 372 properties with an aggregate gross floor area of approximately 66,800 m/2/ 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. 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. 176 . 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 is in the progress of transferring 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 "Business--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 retained employees by CLIC and of the transferred employees for any period while they were employed by CLIC. These obligations, 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 and "ball" logo. . 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). 178 Insurance policies retained by CLIC In connection with the restructuring, CLIC transferred to us the transferred policies and retained the non-transferred policies. See "--Principal Actions Taken in the Restructuring". CLIC has incurred substantial losses on these non-transferred policies, primarily because the predetermined 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 "Regulation--Insurance Company Regulation--Regulation of insurance and annuity products generally". This outcome, which has been experienced by other major 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. Owners' equity of our predecessor, CLIC, was a deficit of RMB 176,353 million (US$21,305 million) as of June 30, 2003 and a deficit of RMB 175,463 million (US$21,197 million) as of December 31, 2002. The net losses incurred by our predecessor were RMB 714 million (US$86 million) for the six months ended June 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 has offset the profitability of the policies transferred to us. On a pro forma basis after giving effect to the restructuring, our net profit was RMB 3,128 million (US$378 million) for the six months ended June 30, 2003 and RMB 4,524 million (US$547 million) in 2002. 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 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. 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. 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. Under a tax rebate mechanism expected to be approved by the MOF and the State Tax Administration, a hypothetical income tax based on consolidating the operations of CLIC with those of our own, as if the two of us were a single taxpayer, will be calculated and, if the hypothetical tax is less than the sum of the profit taxes actually paid by CLIC and ourselves, the excess of the actual tax payments over the hypothetical tax will be rebated to CLIC. CLIC has a substantial tax loss carry forward. In addition, we expect CLIC to continue to incur losses at least for several years. Under current PRC tax law, the loss in any one year can, for tax purposes, be carried forward for five years, at which time it will expire. Accordingly, it is expected that the actual tax payments will exceed the hypothetical tax for a number of years. We are discussing with the MOF including the asset management company in this arrangement. 178 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. 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 "Regulation--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. See "Risk Factors--Risks Relating to the Restructuring". Status of Implementation of the Restructuring General The separation of assets, liabilities and accounting functions between CLIC and us in connection with the restructuring, including completing the associated legal procedures, implementing internal control and management functions, making required governmental registrations and obtaining third-party consents, has nearly all been completed. All required governmental approvals have been obtained. The restructuring agreement entered into on September 30, 2003 identified detailed arrangements for the separation and transfer of insurance policies, assets and liabilities, business divisions and personnel. Under the restructuring agreement, CLIC transferred the transferred policies to us. The non-transferred policies were retained by CLIC. Information regarding the separation of assets, liabilities and accounting functions between CLIC and us in connection with the restructuring is set forth below. . As of the date of this prospectus, we had obtained the necessary insurance business licenses for our headquarters and all of our branches. In addition, except for certain branches below the provincial level, we had completed the registration of our headquarters and all of our branches with the local administrations for industry and commerce. We anticipate that those branches that have not yet completed their registrations will substantially complete the registration process by the end of November. We are not aware of any impediment to the completion of the registration process. 179 . The transfers of reinsurance contracts have all been completed. The transfers of exclusive agent agreements and bancassurance arrangements with banks and post offices have been substantially completed. . The internal operations and management of CLIC and us have been fully separated as follows: -- We and CLIC have separate business and administrative units and conduct business at separate premises. -- Our financial and business systems have been separated from those of CLIC. The transferred policies and the non-transferred policies are being processed by separate systems. Financial and business data are being separately recorded into a database for transferred policies and a database for non-transferred policies. -- Separate books of accounts have been created and are maintained for our investment assets and those of CLIC. These books of accounts in turn are integrated within our and CLIC's respective financial reporting and management systems. -- Our management and staff have been fully separated from CLIC's. Except for Mr. Wang Xianzhang, who is our president and also the president of CLIC, and Mr. Wu Yan, who is one of our directors and also a vice-president of CLIC, our directors and senior management are separate from CLIC's. Segregation of assets and liabilities The transfer into accounts in our name of all premiums receivable and investment assets, including treasury bonds and government agency bonds in the inter-bank market, open-end funds, negotiated and term deposits and current accounts has been completed. The transfer of liabilities from CLIC to us has been substantially completed. The liabilities transferred as of June 30, 2003 pursuant to the restructuring agreement were included in our audited financial statements. These liabilities consisted primarily of policyholder reserves and deposits, with the rest consisting of account payables and other payables. Liabilities retained by CLIC were also included in our audited financial statements. Claims management Under the policy management agreement between CLIC and us, we have no obligation to and will not at any time settle any claims under the non-transferred policies on behalf of CLIC using our own funds. With regard to payment arrangements for claims under the non-transferred policies, we have implemented the following measures with CLIC: . We have, at our headquarters and all provincial branch offices, opened and are using segregated bank accounts to manage funds and payments in relation to claims under the non-transferred policies. Approximately three-quarters of the branches below the provincial level already have opened segregated bank accounts, and the remaining branches will also open segregated bank accounts as necessary. These account openings are expected to be completed by the end of November 2003. These bank accounts are used solely for the purposes of the non-transferred policies. 180 . We will, based on actuarially determined forecasts and supporting data, issue a monthly funding request to CLIC and the special purpose fund for amounts to be paid to holders of non-transferred policies. Within five business days of the request, CLIC and the special purpose fund established in connection with the restructuring will transfer sufficient funds to the segregated bank accounts to cover insurance benefits and claims payable under the non-transferred policies for that calendar month. We use available funds from the segregated bank accounts for CLIC to settle claims by holders of non-transferred policies. . We are entitled to request emergency funding from CLIC in the event we believe there will be a deficiency in the account balance in the following 10 business days. CLIC is required to make up for the expected deficiency within five business days of receiving our emergency funding request. . Commencing October 2003, we have been issuing separate accounting reports on the non-transferred policies to CLIC on a monthly basis. . In any event, we have no obligation to make any advances on behalf of CLIC in relation to the payment of claims under the non-transferred policies. Our policy management agreement with CLIC states that we manage the non-transferred policies on behalf of CLIC and that all liabilities arising from such polices will be borne by CLIC. See "Relationship with CLIC--Policy Management Agreement". . We have separate IT support systems for processing claims under the transferred policies and the non-transferred policies. As we have separate bank accounts and segregated accounting functions from CLIC, the inter-company balances between CLIC and us will consist primarily of service fees under the agreements as described in "Relationship with CLIC", and do not reflect sums paid in settlement of claims under the non-transferred policies as our own funds will not be used or applied for this purpose. 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 sources of funding for the special purpose fund are set forth in "The Restructuring--Transfer of Insurance Policies and Related Assets--Insurance policies retained by CLIC". The following arrangements have been made in connection with the special purpose fund: . The special purpose fund is managed by a management committee consisting of representatives of CLIC and MOF, which will determine at its annual meeting the annual amount expected to be required for the payment by CLIC of benefits and claims under the non-transferred policies. . If the annual amount as determined above turns out not to be sufficient, the management committee will convene a special meeting to determine the additional amount necessary to make up the shortfall by MOF. . An operating center for the special purpose fund will be established to support the funding activities and to implement the decisions of the management committee. The operating center will prepare reports on expected funding requirements and make recommendations to the management committee. Accounting functions Our financial and business systems have been separated from CLIC's and separate books of accounts have been created and are maintained for our investment assets and those of CLIC. At the headquarters level, we have separate and independent finance departments and personnel from CLIC. Separate books and records (including general ledger, subledgers and vouchers) are maintained by separate finance departments. 181 At branch level, CLIC does not have its own finance personnel, as the accounting function has been subcontracted to us under the policy management agreement. Separate books and records (including general ledger, subledgers and vouchers) are maintained by our finance department with regard to our operations and those of CLIC. The recording of transactions in the respective books and records of us and CLIC are governed by written accounting manuals and instructions issued by us and enabled by the separated financial, business and IT systems. Fixed asset registers and subledgers are maintained separately by us and CLIC, and depreciation is calculated and recorded accordingly. Operating and administrative expenses (including salaries and benefits) are also accounted for and recorded separately. 182 RELATIONSHIP WITH CLIC Immediately following the completion of this offering, CLIC will own approximately 75% of our issued share capital, or % if the underwriters' over-allotment option is exercised in full. In connection with the restructuring, we entered into several agreements with CLIC that document our relationship following the restructuring. In addition, the asset management joint venture established by us and CLIC entered into two asset management agreements, one with us and one with CLIC. The transactions contemplated under these agreements will constitute connected transactions for us under the HKSE Listing Rules following our listing on the HKSE. Set forth below are details of the various connected transaction agreements. Restructuring Agreement We have entered into a restructuring agreement with CLIC under which CLIC agreed to transfer to us a portion of its insurance business and various investment and operating assets, management personnel and employees, and we assumed various obligations and liabilities, as described under "The Restructuring--Transfer of Insurance Policies and Related Assets". The transferred policies consist of (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 received the benefits of all of the rights and interests, and assumed all the liabilities and obligations, associated with the transferred assets and policies, commencing as of June 30, 2003, the effective date of the restructuring. The remaining business of CLIC primarily comprises the non-transferred policies and non-core businesses which are not insurance-related, including investments in property, hotels and other operations through subsidiaries. As a result of the restructuring, CLIC's management and personnel are different from ours and we work independently of CLIC. Under the restructuring agreement, CLIC made various representations and warranties in relation to the business, assets and liabilities transferred to us in the restructuring. In addition, under the restructuring agreement, CLIC indemnified us against all claims, losses, damages, payments or other expenses incurred by us in connection with or arising from, among others: (1) all taxes, fees, surcharges, penalties and interest payable by CLIC as determined under the restructuring agreement; (2) the negligence or fault of CLIC in acting on our behalf while holding any assets, interests or liabilities that were to be transferred to us, but for which third-party consents had not been obtained by the effective date; (3) any dispute regarding our status as the insurer of the insurance policies issued by CLIC on or after June 30, 2003 until the date when we begin to write polices on our own behalf; (4) all claims by policyholders under long-term insurance policies issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999, but which for whatever reason failed to be recorded as long-term insurance policies as of June 30, 2003 in the database attached to the restructuring agreement as an annex; 183 (5) the failure of CLIC to transfer the assets, interests and liabilities to us in accordance with the restructuring agreement and other restructuring documents; (6) the assets, interests and liabilities retained by CLIC after the restructuring; (7) the transfer of the assets, interests and liabilities to us under the restructuring; (8) a breach of any provision of the restructuring agreement on the part of CLIC; and (9) any actual, pending or threatened arbitration or litigation affecting any asset transferred to us. The restructuring agreement provides, among other things, that any profits or losses incurred on the transferred assets and policies from June 30, 2002 to June 30, 2003 are for the benefit of or to be borne by CLIC. We agreed to indemnify CLIC against any claims or losses arising from our breach of the restructuring agreement. Policy Management Agreement General As part of the restructuring, CLIC transferred its entire branch services network to us. In order to capitalize on the large customer base of CLIC, increase the utilization of our customer service network and increase our revenue sources, CLIC engaged us to provide policy administration services relating to the non-transferred policies. We and CLIC entered into a policy management agreement on September 30, 2003 which sets out our responsibilities and duties to CLIC under these policy administration arrangements. In order to better implement this agency arrangement, we, in consultation with CLIC, are in the process of formulating a detailed manual of procedures for our front and back offices which sets out the procedures to be followed when handling claims and benefit payments and collecting premiums in relation to non-transferred policies, as well as rules for the day-to-day monitoring of the policy servicing operations. Terms of the policy management agreement Pursuant to the policy management agreement, we agreed to provide policy administration services to CLIC relating to the non-transferred policies, including day-to-day insurance administration services, customer services, statistics and file management, invoice and receipt management, reinstatement of non-transferred policies, applications for and renewal of riders to the non-transferred policies, reinsurance, and handling of disputes relating to the non-transferred policies. We act as a service provider under the agreement and do not acquire any rights or assume any obligations as an insurer under the non-transferred policies. Under the policy management agreement, we will issue a monthly funding request to CLIC, based on actuarially determined forecasts and supporting data, for amounts to be payable to CLIC policyholders. CLIC will transfer, within five business days prior to each calendar month, to an account under our control, funds sufficient to pay insurance benefits and commissions to be paid under the non-transferred policies, as well as estimated third-party costs and expenses, for that calendar month. We may also request emergency funding from CLIC, if we reasonably believe that the account balance will become insufficient in ten business days to make those payments. We are not required to make any advances on behalf of CLIC to cover any shortfall of funds. In consideration of our services provided under the agreement, CLIC will pay us a service fee based on our estimated cost of providing the services, to which a profit margin is added. The service fee is equal to, for each 184 semi-annual payment period, the sum of (1) the number of non-transferred policies in force that were within their policy term as of the last day of the period, multiplied by RMB 8.0; and (2) 2.50% of the actual premiums and deposits in respect of such policies collected during the period. For these purposes, the number of policies in-force for group insurance policies is equal to the number of individuals covered by the policies (excluding those whose policies have lapsed or matured). The agreement is for an initial term expiring on December 31, 2005, and, subject to the HKSE Listing Rules, will be automatically renewed for successive one year terms, unless terminated by either party by giving to the other party not less than 180 days' prior written notice to terminate the agreement at the expiration of the then current term. We are also permitted to terminate the agreement, upon giving 30 days' prior written notice, if (1) CLIC fails to pay us the service fee in accordance with the agreement in an aggregate amount of at least RMB 100 million; or (2) we are unable to make timely payment of insurance benefits, commissions and/or third-party costs in an aggregate amount of at least RMB 300 million as a result of CLIC failing to transfer sufficient funds to the account controlled by us in accordance with the agreement. Measures taken to prevent the commingling of premiums received from, and payments made to, CLIC's policyholders and our policyholders At each of our branches, the staff who handle the collection of premiums and the payment of claims and benefits for the transferred and the non-transferred policies are located in the same room and share the use of front office operation desks. However, we have designated personnel in our larger branches, as well as in designated divisions at various operating levels, who process these collections and payments relating to the non-transferred policies. Different IT systems are used and separate processes are involved when handling premium collection and making claims and benefit payments for the transferred and non-transferred policies. If a policyholder has premiums or claims and benefits relating to both transferred and non-transferred policies, the processing for these policies goes through the different channels designated for those policies. We have implemented internal control measures which we believe are sufficiently robust to prevent errors in handling premiums and claims and benefit payments, including different IT processing systems, different accounting and bookkeeping systems, separate processing streams and segregated bank accounts at different branch levels which are operated by us on behalf of CLIC. See "The Restructuring--Status of Implementation of the Restructuring--Claims management". In order to identify and prevent potential errors that may occur while handling the transferred and non-transferred policies, we have implemented additional internal controls, including different product types, names, codes, serial numbers and dates of issue for products sold under the transferred policies and the non-transferred policies. As we have separate IT processing systems for claims and benefit payments under the transferred and non-transferred policies, the difference in serial numbers allows our IT system to verify automatically whether policy information has been entered into the correct system. Information and serial numbers relating to an incorrectly attributed policy will be rejected and cannot be processed further by that system. Our systems have the ability to distinguish premium, claims and benefit information by product code. Each product code can be directly linked to either the transferred policies or the non-transferred policies, which enables us to prepare separate premium, claims and benefit information relating to these policies. This segregated financial information has been included in our audited consolidated financial statements beginning on page F-1 of this prospectus. Our systems will continue to allow us to distinguish premiums, claims and benefits arising from the transferred policies and non-transferred policies in the future. Each claim or benefit payment goes through a process which involves double-checking by different categories of personnel. It is first processed by handling personnel, then checked by another set of personnel and finally is approved by a third set of personnel. For claims or benefit payments involving a large amount, the payment is elevated to a higher branch level for approval. In addition, we periodically check the bank accounts relating to the non-transferred policies to ensure that claims and benefit payments are processed correctly. 185 Measures taken to ensure that we have sufficient cash to settle claims relating to non-transferred policies Under the policy management agreement, the operations relating to the transferred policies and the non-transferred policies must be separately managed, settled (including daily and monthly settlement) and checked, and we are not required to make any advances on behalf of CLIC to cover deficiencies in the payment of claims under the non-transferred policies. In order to ensure that there is sufficient cash to pay claims under the non-transferred policies on a day-to-day basis, we and CLIC have implemented the following procedures: . Our headquarters and all provincial offices have opened and are using segregated bank accounts to manage funds and payments in relation to claims and benefits under the non-transferred policies. Approximately three-quarters of our branches below the provincial level have already opened segregated bank accounts, and the remaining branches will also open segregated bank accounts as necessary. . We will, based on actuarially determined forecasts and supporting data relating to the non-transferred policies, maintain a minimum daily balance for each segregated account. The segregated accounts will be brought up to this minimum daily balance should they fall below the required level on any given day. . In the event of an unexpectedly large claim or benefit payment, or a claim or benefit payment which exceeds the minimum daily balance, a request for funds will be made to the branch at the next higher level. If a provincial-level branch does not have sufficient funds to make a payment, it will make a request for funding to our headquarters. If there is a deficiency at the headquarters level, we will make a payment request to CLIC or to the special purpose fund established by the MOF and CLIC. See "The Restructuring--Status of Implementation of the Restructuring--Claims management". Asset Management Agreements The asset management joint venture established by us and CLIC, China Life Asset Management Company Limited, has entered into two asset management agreements, one with us and one with CLIC. The terms of these two asset management agreements are the same. The material terms of the asset management agreement between CLIC and the asset management joint venture are set forth below. Under the asset management agreement between the asset management joint venture and CLIC, the asset management joint venture agreed to invest and manage assets entrusted to it by CLIC on a discretionary basis, subject to the investment guidelines and instructions given by CLIC. In accordance with the agreement, special accounts were established under the name of CLIC to hold the assets managed by the asset management joint venture under the agreement. The asset management joint venture is authorized to operate these accounts for and on behalf of CLIC. CLIC may add to or withdraw from the assets managed by the asset management joint venture pursuant to the agreement. All investment losses relating to the assets managed by the asset management joint venture pursuant to the agreement will be borne by CLIC, except for losses and liabilities arising from the asset management joint venture's misconduct. CLIC has the right to establish, and amend from time to time, the investment guidelines which set forth the general investment principles regarding the assets under the asset management joint venture's management and, for specific periods, requirements relating to liquidity, portfolio, asset-liability matching, risk control and dispositions. CLIC also has the right to give instructions for the liquidation of assets to meet its cash needs. CLIC may not, however, directly conduct any transactions with regard to the entrusted assets or give specific investment instructions. CLIC will agree with the asset management joint venture annually on a benchmark investment rate of return. In addition to acting as CLIC's investment manager, the asset management joint venture is permitted to invest its own assets and provide investment management services to third-party insurance companies. The asset management joint venture agreed to inform CLIC in the event that it, in its professional judgment, believes that there is a conflict of interest in the activities on behalf of itself and others. The asset management joint venture 186 has absolute discretion to take such actions and measures which in its professional judgment are fair, reasonable and necessary to resolve any such conflict. In consideration of its services provided under the agreement, CLIC agreed to pay the asset management joint venture a monthly service fee. The monthly service fee payable is composed of two parts: (1) the aggregate of the monthly service fee for each specified category of assets and (2) the aggregate of the additional service fee for specific transactions made during that month. The monthly service fee is calculated on a monthly basis, by multiplying the net asset value of the assets in each such category under management at the end of the month by the applicable annual rate for that month set forth in the table below (by reference to basis percentage points), divided by twelve. The asset management joint venture and CLIC may, within the first month of each year, agree to change the annual rate for that year, but if there is no new agreement, the existing annual rate for the prior year will remain in force. In relation to any new type of investment product (not included in the categories below) which may be permitted by applicable law or the CIRC in the future, the agreement provides that the asset management joint venture and CLIC will agree on a fair and reasonable annual rate to be applicable to that type of investment product. The following table sets forth the applicable annual rates in relation to the total net asset value of the assets managed by the asset management joint venture.
Total net asset value of managed assets at the end of relevant month -------------------------------------------------------------------- More than More than More than RMB 10 RMB 30 RMB 50 billion billion billion and less and less and less RMB 10 than or than or than or More than billion equal to equal to equal to RMB 100 Item or below 30 billion 50 billion 100 billion billion - ---- -------- ---------- ---------- ----------- --------- (bps) (bps) (bps) (bps) (bps) Bank balances and cash......................... 0 0 0 0 0 Existing term deposits......................... 0.400 0.400 0.400 0.400 0.400 Securities purchased under agreements to resell 1.500 1.425 1.350 1.275 1.200 Fixed maturity securities...................... 11.240 10.390 9.540 8.690 7.840 Equity investments............................. 38.500 35.575 32.650 29.725 26.800
The monthly additional service fee comprises service fees for (1) additional term deposits and (2) additional securities purchased in primary markets made during that month, and is calculated by multiplying the net additional asset value of the assets in such category at the end of that particular transaction month by the applicable rate set forth below.
Applicable rates ---------------------------------------------------- More than More than More than RMB 10 RMB 30 RMB 50 billion billion billion and less and less and less RMB 10 than or than or than or More than billion equal to equal to equal to RMB 100 Item or below 30 billion 50 billion 100 billion billion - ---- -------- ---------- ---------- ----------- --------- (bps) (bps) (bps) (bps) (bps) Additional term deposits.................. 1.100 1.025 0.950 0.875 0.800 Additional securities purchased in primary markets................................. 2.600 2.350 2.100 1.850 1.600
The asset management joint venture will produce an annual report, within 90 days of the conclusion of each fiscal year, setting out the average investment rate of return of the assets managed by it. If the average investment rate of return for the assets managed for a particular year exceeds the investment rate of return, as previously agreed between CLIC and the asset management joint venture for those assets for that year, by at least ten basis 187 points, the asset management joint venture will be entitled to an annual performance bonus fee, the amount of which will be agreed between CLIC and the asset management joint venture but shall not exceed 50% of the annual service fees for that year. If the average investment rate of return is less than the investment rate of return as agreed between CLIC and the asset management joint venture by at least ten basis points, the asset management joint venture will be required to rebate a portion of its fee, the amount of which shall not exceed 25% of the annual service fees for that year. The service fee under the asset management agreement was determined by CLIC and the asset management joint venture based on an analysis of the cost of providing the service, market practice and the size and composition of the asset pool to be managed. The agreement is for an initial term expiring on December 31, 2005, and, subject to the HKSE Listing Rules, will be automatically renewed for successive three years terms, unless terminated by either party by giving to the other party not less than 90 days' prior written notice to terminate the agreement at the expiration of the then current term. Property Leasing Agreement We have entered into a property leasing agreement with CLIC on September 30, 2003, pursuant to which CLIC agreed to lease to us (1) 833 buildings owned by CLIC, its subsidiaries and affiliates, which we refer to as the CLIC owned properties, and (2) 1,764 buildings that CLIC is entitled to sublet, which we refer to as the CLIC leased properties, for an aggregate initial annual rent (payable quarterly) of approximately RMB 335 million. The properties occupied by us are mainly used as our office premises. The annual rent payable by us to CLIC in relation to the CLIC owned properties is determined by reference to market rent or, where there is no available comparison, by reference to the costs incurred by CLIC in holding and maintaining the properties, plus a margin of approximately 5%. The annual rent payable by us to CLIC in relation to the CLIC leased properties will be determined by reference to the rent payable under the head lease plus the actual costs incurred by CLIC arising in connection with the subletting of the properties. Each party may, by giving notice to the other party no later than November 30 of each year, reduce or increase the number of properties under the lease and make adjustments accordingly to the rent payable for the next year. The parties will also revise the annual rent payable at the year end to reflect, in addition to any decrease or increase to the number of properties to be leased, any change of the market rates. Sallmanns (Far East) Limited, our independent property valuer, has reviewed the property leasing agreement and has confirmed that the contemplated rental payments by us to CLIC are currently in line with market rates. CLIC agreed to indemnify us, among other things, against all claims and losses incurred by us arising in connection with (1) the CLIC owned properties which CLIC does not have full legal title; and (2) the subletting of the CLIC leased properties to us. The agreement also contains rights of first refusal allowing us to purchase the underlying property if CLIC wishes to sell the property. In this regard, we will comply with the provisions of Chapter 14 of the HKSE Listing Rules if we exercise the right of first refusal to acquire the properties from CLIC unless we apply for, and obtain, a separate waiver from the HKSE. The agreement is for a fixed term expiring on December 31, 2005, unless otherwise required by the HKSE Listing Rules. In relation to the CLIC leased properties, the term of such properties will expire at the expiration of the respective head leases, and in any event, will expire no later than December 31, 2005. 188 Trademark License Agreement We conduct our business under the "China Life" brand name and "ball" logo. We entered into a trademark license agreement with CLIC on September 30, 2003, pursuant to which CLIC granted to us and our branches a royalty-free license to use these trademarks in the PRC and other countries and territories in which CLIC has registered these trademarks. CLIC has registered the "ball" logo trademark in the PRC and has filed an application to register the trademark in the "China Life" name with the Trademark Office of the SAIC. CLIC undertook in the trademark license agreement to maintain and renew, at its own expense, the registration of the licensed trademarks. If requested by us, CLIC will procure, at its own expense, registration of the trademarks in additional products and service classifications and/or additional countries or territories. CLIC will retain ownership of these trademarks. We may also license a third party to use the trademarks with the written consent of CLIC. CLIC and its subsidiaries and affiliates are entitled to use these trademarks. CLIC may not license or transfer these trademarks to any other third party or allow any other third party to use the trademarks. The trademark license agreement permits us to use the trademarks until such time as either the trademark license agreement is terminated either by agreement between CLIC and ourselves, or pursuant to relevant laws, regulations or consent orders, or at the expiration of the registration of the trademarks, which is currently November 6, 2007 and is renewable at our option. Application for Waiver from the HKSE Following completion of this offering, we will continue to enter into or carry out the transactions described in this section. These transactions would constitute connected transactions for us under the HKSE Listing Rules once our H shares are listed on the HKSE. Our directors (including the independent non-executive directors) and supervisors are of the opinion that the transactions described in this section have been conducted, and will be carried out, in our ordinary and usual course of business and on normal commercial terms which are fair and reasonable so far as our independent shareholders are concerned. Pursuant to the HKSE Listing Rules, each such transaction which is not exempt under the HKSE Listing Rules would normally require full disclosure and/or prior approval by independent shareholders on each occasion it arises, depending on the nature and value of the transaction. We believe that such disclosure and/or approval of each such transaction in full compliance with the HKSE Listing Rules would be impracticable and increase our administrative costs. Accordingly, we have applied to the HKSE for a waiver from strict compliance with the disclosure and shareholders' approval requirements under Rule 14.26 of the HKSE Listing Rules in respect of the transactions contemplated under the policy management agreement, and the disclosure requirement under Rule 14.25(1) of the HKSE Listing Rules in respect of the asset management agreement to be entered into between CLIC and the asset management company, the asset management agreement to be entered into between the asset management company and us, and the property leasing agreement, for a period of three financial years ending December 31, 2005, subject to the following conditions: (a) the transactions shall be: (1) entered into in the ordinary and usual course of our business; and (2) conducted either on normal commercial terms or on terms no less favorable than those available to or from independent third parties; or (3) where there is no available comparison for the purpose of determining whether (2) is satisfied, on terms that are fair and reasonable so far as our independent shareholders are concerned; 189 (b) if applicable, the annual aggregate value in each category of connected transactions shall not exceed the relevant annual caps set out below:
Transaction Proposed annual cap - ----------- --------------------------------------- Policy management agreement.................................. 2003 RMB 1,937 million 2004 RMB 1,817 million 2005 RMB 1,728 million Asset management agreement (between CLIC and asset management not exceeding the higher of either company)................................................... HK$10,000,000 or 3% of the book value of the net tangible assets of the China Life as at the corresponding year-end Asset management agreement (between asset management company not exceeding the higher of either and us).................................................... HK$10,000,000 or 3% of the book value of the net tangible assets of the China Life as at the corresponding year-end Property leasing agreement................................... not exceeding the higher of either HK$10,000,000 or 3% of the book value of the net tangible assets of the China Life as at the corresponding year-end
(c) our independent non-executive directors shall review the transactions annually and confirm in our annual report and accounts for the relevant year that such transactions have been conducted in the manner stated in conditions (a) and (b) above; (d) our auditors shall review the transactions annually and confirm to our directors in writing (with a copy provided to the Listing Division of the HKSE) whether: (1) the transactions have received the approval of our directors; (2) the transactions have been entered into in accordance with the pricing policies as stated in the relevant agreements; (3) the transactions have been entered into in accordance with the relevant agreements governing the transactions; and (4) the values of the transactions have not exceeded the relevant annual caps referred to in condition (b) above; (e) brief details of the transactions in each financial year shall be disclosed as required by Rule 14.25(1)(A) to (D) of the HKSE Listing Rules in our annual report and accounts for the relevant year together with a statement of opinion of our independent non-executive directors and of our auditors; and (f) CLIC shall have undertaken to us to provide our auditors with access to CLIC's accounting records, as well as (where possible) those of its subsidiaries and associates, for the purposes of the above review by our auditors. We have undertaken to the HKSE that if any of the annual caps applicable to the relevant transaction is exceeded or if any of the material terms of the agreements which govern the transactions referred to above are altered (unless such is provided for under the terms of the relevant agreements or arrangements), we will comply with the provisions of Chapter 14 of the HKSE Listing Rules relating to connected transactions unless we apply for, and obtain, a separate waiver from the HKSE. 190 Non-Competition Agreement We entered into a non-competition agreement with CLIC on September 30, 2003 pursuant to which CLIC undertook that during the term of the agreement, unless we otherwise consent in writing in advance, it will not, and it will use its best efforts to procure its subsidiaries and affiliates not to, directly or indirectly, participate, operate or engage in any life, accident or health insurance or other businesses in China which may compete with our insurance businesses. 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. The non-competition agreement allows CLIC to continue its business under the non-transferred policies. In addition, CLIC currently holds 51% interest in China Life-CMG Life Assurance Company Ltd., a Sino-foreign joint venture with CMG, an Australian insurance company. The joint venture is registered in Shanghai, China and engaged in the business of life insurance and related reinsurance in Shanghai. CLIC agreed to dispose of all of its interests in this joint venture to third parties or eliminate any competition between China Life-CMG Life Assurance Company Ltd. and us within three years of our listing on the HKSE. CLIC also agreed with us in the non-competition agreement that we will have a right of first refusal in respect of the transfer of the non-transferred policies retained by CLIC. The non-competition agreement will remain valid and in full force until the earlier of (1) CLIC beneficially holding, directly or indirectly, less than 30% of our issued share capital and ceasing to control the majority of our board of directors; and (2) our H shares or ADSs no longer being listed on the HKSE or any other stock exchange. 191 DESCRIPTION OF SHARE CAPITAL We are organized under the PRC company law as a joint stock company. We are registered with the State Administration of Industry and Commerce in Beijing, China and our business license carries the registration number 1000001002372. Our business scope, set forth in article 10 of our articles of association, is to engage in life, accident and health insurance businesses; reinsurance business relating to the foregoing; fund investment businesses authorized by laws, regulations or the State Council; and agency business, consulting business and provision of services, in each case relating to insurance of the person. The following is a summary of information relating to our share capital, based upon provisions of our articles of association and the PRC company law. You should refer to the text of our articles of association and to the texts of applicable laws and regulations for further information. Certificates representing the shares are and will be issued in registered form. Our share capital consists of domestic shares and H shares, including the H shares represented by ADSs. They are all ordinary shares in our share capital. The par value of both our domestic shares and H shares is RMB 1.00 per share. Domestic shares may only be subscribed for by, and traded among, legal or natural persons of the PRC and certain qualified foreign institutional investors, and must be subscribed for and traded in Renminbi. We must pay all dividends on domestic shares in Renminbi. H shares are "overseas listed foreign-invested shares" that have been admitted for listing on the Hong Kong Stock Exchange, the par value of which is denominated in Renminbi, and that are subscribed for and traded in Hong Kong dollars by and among investors of Hong Kong, Macau, Taiwan and any country other than the PRC. H shares may also be listed on a stock exchange in the United States in the form of American depositary shares evidenced by American depositary receipts. Holders of domestic shares and H shares are deemed to be shareholders of different classes for various matters which affect their respective interests. For instance, if we propose an increase in domestic shares, holders of H shares will be entitled to vote on that proposal as a separate class. See "--Voting Rights and Shareholders' Meetings". Prior to the consummation of the global offering, our registered capital was 20 billion domestic shares. Immediately after the global offering, without giving effect to the exercise of the over-allotment option, our total share capital will consist of H shares and domestic shares. Since the issuance of our domestic shares to CLIC in connection with our restructuring, we have not issued any further shares. The global offering consists solely of an offering of H shares and ADSs representing H shares. Consequently, the following discussion primarily concerns H shares and the rights of holders of H shares. The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the H shares are held in order to exercise rights as holders of H shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of H shares represented by ADSs in accordance with the non-discretionary written instructions of the holders of such ADSs. See "Description of American Depositary Receipts--Voting Rights". Sources of Shareholders' Rights The primary sources of shareholders' rights are the PRC company law, our articles of association, Special Rules applicable to overseas listed joint stock companies promulgated by the State Council, or Special Rules, and the Hong Kong Stock Exchange Listing Rules that, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and CLIC, our controlling shareholder. The PRC company law was enacted in December 1993 and serves as the primary body of law regulating corporate action of companies organized in the PRC and its directors and shareholders. 192 Our articles of association have incorporated the provisions set forth in the Mandatory Provisions for the Articles of Association of Companies Listed Overseas, or the Mandatory Provisions, adopted in 1994, pursuant to the requirements of the China Securities Regulatory Commission. Any amendment to those provisions will only become effective after approval by the relevant governmental department authorized by the State Council and the China Securities Regulatory Commission. The Hong Kong Stock Exchange Listing Rules require a number of provisions in addition to the Mandatory Provisions to be included in our articles of association. The listing agreement between us and the Hong Kong Stock Exchange, or the Listing Agreement, provides that we may not amend certain provisions of our articles of association that have been mandated by the Hong Kong Stock Exchange. These provisions include, among others: . varying the rights of existing classes of shares; . voting rights; . our power to purchase our own shares; . rights of minority shareholders; and . liquidation procedures. In addition, upon the listing of the H shares and for so long as the H shares are listed on the Hong Kong Stock Exchange, we will be subject to the relevant ordinances, rules and regulations applicable to companies listed on the Hong Kong Stock Exchange, including, among other things, the Hong Kong Stock Exchange Listing Rules, the Securities and Futures Ordinance and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases. Unless otherwise specified, all rights, obligations and protections discussed below are derived from our articles of association and the PRC company law. Enforceability of Shareholders' Rights Enforceability of our shareholders' rights may be limited. 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, the 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 venue be changed to Shenzhen, a city in mainland China near Hong Kong. The governing law for the above-mentioned disputes or claims is Chinese law unless otherwise provided by Chinese law. Our articles of association provide that any such arbitration will be final and conclusive. In June 1999, an arrangement was made between the People's Courts of the PRC and the courts of Hong Kong for mutual enforcement of arbitration rewards rendered in the PRC and Hong Kong according to their respective laws. This arrangement was approved by the Supreme Court of the PRC and the Hong Kong Legislative Council and became effective on February 1, 2000. There has not been any published report of judicial enforcement in the PRC by H shareholders of their rights under charter documents of PRC joint stock companies or the PRC company law or in the application or interpretation of the PRC or Hong Kong regulatory provisions applicable to PRC joint stock companies. 193 In most states of the United States, shareholders may sue a corporation in a "derivative" action. A derivative suit involves the commencement by a shareholder of a cause of action, on behalf of the corporation, against persons, including corporate officers, directors or controlling shareholders, who have allegedly wronged the corporation, where the corporation itself has failed to enforce such claim against such persons directly. Derivative actions are not available in China, nor are class action lawsuits based on violations of securities laws generally available. We will be subject to the Hong Kong Exchange Listing Rules, the Hong Kong Securities and Futures Ordinance, or Securities and Futures Ordinance, and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases upon the listing of our H shares on the Hong Kong Stock Exchange. However, holders of H shares will not be able to bring actions on the basis of violations of the Hong Kong Stock Exchange Listing Rules and must instead rely on the Hong Kong Stock Exchange to enforce its rules. The Hong Kong Codes on Takeovers and Mergers and Share Repurchases do not have the force of law and are only standards of commercial conduct considered acceptable for takeover and merger transactions and share repurchases in Hong Kong as established by the Securities and Futures Commission of Hong Kong and the securities and futures industry in Hong Kong. The Securities and Futures Ordinance establishes various obligations in relation to disclosure of shareholders' interests in Hong Kong listed companies, the violation of which is subject to prosecution by the Securities and Futures Commission of Hong Kong. See "Risk Factors--Risks Relating to the People's Republic of China--The laws in China differ from the laws in the United States and may afford less protection to our minority shareholders", "Risk Factors--Risks Relating to the People's Republic of China--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 law against us, our management and some of the underwriters and experts named on this prospectus", and "Enforceability of Civil Liabilities". Dividends Our board of directors may propose dividend distributions at any time. A distribution of dividends for any fiscal year is subject to shareholders' approval. Dividends may be distributed in the form of cash or shares. The H shares will rank equally with domestic shares with regard to dividend rights. A distribution of shares must be approved by special resolution of the shareholders. We may only distribute dividends after allowance has been made for: . recovery of accumulated losses, if any; . allocations to the statutory common reserve fund equivalent to 10% of our after-tax income, as determined under PRC GAAP; . allocations to the statutory common welfare fund (the minimum and maximum aggregate allocations to the statutory common welfare fund being equivalent to 5% and 10%, respectively, of our after-tax income, as determined under PRC GAAP); and . allocations to a discretionary common reserve fund as approved by the shareholders in a shareholders' meeting. 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 Hong Kong 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, we will ordinarily not pay any dividends in a year when we do not have any distributable profits. 194 Payment of dividends by us is also regulated by the PRC insurance law. If we do not meet the minimum solvency level required by the CIRC, we will be prohibited from paying dividends. See "Regulation--Insurance Company Regulation--Solvency requirements". Our articles of association require us to appoint, on behalf of the holders of H shares, a receiving agent that is registered as a trust corporation under the Trustee Ordinance of Hong Kong to receive dividends declared by us in respect of the H shares on behalf of such shareholders. Our articles of association require that cash dividends in respect of H shares be declared in Renminbi and paid by us in Hong Kong dollars. The depositary will convert these proceeds into U.S. dollars and will remit the converted proceeds to holders of our ADSs. See "Description of American Depositary Receipts--Share Dividends and Other Distributions". We anticipate that our controlling shareholder, CLIC, may incur future operating losses arising in part from the runoff of policies retained by it in connection with the restructuring. Dividends received from us may become one of CLIC's principal means of funding these losses. Although we believe that the reserves held by CLIC and other financial resources available to it will fund substantially all of any future operating shortfalls arising out of these policies, which should reduce CLIC's reliance on dividends from us, subject to the relevant provisions of the PRC company law and our articles of association as described above and in "Dividend Policy", CLIC may seek to increase the amount of dividends we pay in order to satisfy its cash flow requirements. See "Risk Factors--Risks Relating to the Restructuring". Dividend payments may be subject to Chinese withholding tax. See "Taxation--People's Republic of China--Taxation of Dividends". Voting Rights and Shareholders' Meetings Our board of directors will convene a shareholders' annual general meeting once every year within six months from the end of the preceding fiscal year. Our board of directors must convene an extraordinary general meeting within two months of the occurrence of any of the following events: . where the number of directors is less than the number stipulated in the PRC company law or two-thirds of the number specified in our articles of association; . where our unrecovered losses reach one-third of the total amount of our share capital; . where shareholders holding 10% or more of our issued and outstanding voting shares so request in writing; or . whenever our board of directors deems necessary or our board of supervisors so requests. All shareholders' meetings must be convened by our board of directors by written notice given to shareholders not less than 45 days before the meeting. Shareholders holding at least one-half of our total voting shares will constitute a quorum for a shareholders' meeting. If a quorum is not reached, we are required to notify our shareholders within five days by public announcement of the agenda, the date and venue of the adjourned meeting. After the notice, the board of directors may conduct the shareholders' meeting. The accidental omission by us to give notice of a meeting to, or the non-receipt of notice of a meeting by, a shareholder will not invalidate the proceedings at that shareholders' meeting. Shareholders at meetings have the power, among other matters, to approve or reject our profit distribution plans, annual budget, financial statements, increases or decreases in share capital, issuances of debentures, mergers, liquidation and any amendment to our articles of association. In addition, the rights of a class of shareholders may not be modified or abrogated, unless approved by a special resolution of shareholders at a general shareholders' meeting and by a special resolution of shareholders of that class of shares at a separate 195 meeting. Our articles of association enumerate various amendments which would be deemed to be a modification or abrogation of the rights of a class of shareholders, including, among others, increasing or decreasing the number of shares of a class disproportionate to increases or decreases of other classes of shares, removing or reducing rights to receive dividends in a particular currency or creating shares with voting or equity rights superior to those of shares of that class. There are no restrictions under PRC law or our articles of association on the ability of investors that are not Chinese residents to hold H shares and exercise voting rights, except that the prior approval of the CIRC is required in respect of any acquisition which results in the acquirer holding more than 10% of the outstanding share capital of our company. Each of our ordinary shares, whether it be a domestic share or an H share, is entitled to one vote on all matters submitted for vote at all shareholders' meetings, except for meetings of a special class of shareholders where only holders of shares of the affected class are entitled to vote on the basis of one vote per share of the affected class. Shareholders are entitled to attend and vote at meetings either in person or by proxy. Proxies must be in writing and deposited at our legal address or such other place as is specified in the meeting notice, not less than 24 hours before the time for holding the meeting at which the proxy proposes to vote or the time appointed for the passing of the relevant resolution. Resolutions on any of the following matters must be approved by more than two-thirds of the voting rights held by shareholders who are present in person or by proxy: . an increase or decrease in our share capital or the issuance of shares, warrants, debentures and other similar securities; . our division, merger, dissolution or liquidation (shareholders who object to a proposed merger are entitled to demand that either we or the shareholders who approved the merger purchase their shares at a fair price); . amendments to our articles of association; . amendment of shareholders' rights of any class of shares; and . any other matters determined by a majority of shareholders at a general meeting to have a material impact on us and should be approved by two-thirds of the voting rights. All other actions taken by the shareholders will be approved by a majority of the voting rights held by shareholders who are present in person or by proxy at the shareholders' meeting. Any shareholder resolution that is in violation of any laws or regulations of China or the articles of association will be null and void. Liquidation Rights We are organized as a joint stock company with limited liability of indefinite duration, but must renew our business license annually with the SAIC. In the event of our liquidation, the H shares will rank equally with the domestic shares, and payment of debts out of our remaining assets shall be made in the order of priority prescribed by applicable laws and regulations or, if no such standards exist, in accordance with such procedures as the liquidation committee that has been appointed either by us or the People's Courts of China may consider to be fair and reasonable. After payment of debts, we shall distribute the remaining property to shareholders in proportion to the number of shares they hold. 196 Information Rights Our shareholders may, without charge, inspect copies of the minutes of the shareholders' general meetings during our business hours. Shareholders may also request copies of such minutes from us, and we must deliver those copies to the relevant shareholders within seven days of receipt of such reasonable fees as we may require. Our fiscal year is the calendar year ending December 31. We must send to holders of H shares, not less than 21 days before the date of the shareholders' annual general meeting, our audited financial statements for each fiscal year, together with the auditor's report as required by the Hong Kong Stock Exchange Listing Rules relating to that fiscal year. These and any interim financial statements must be prepared in accordance with PRC accounting standards and, for so long as our H shares are listed on the Hong Kong Stock Exchange, in accordance with either Hong Kong accounting standards or H.K. GAAP. The financial statements must be approved by a majority of our shareholders who are present in person or by proxy at the annual general meeting. The Hong Kong Stock Exchange Listing Rules also require us to prepare for the first six months of each fiscal year an interim report no later than sixty days after the end of such period. Further, a preliminary announcement of such interim report is required to be published in the newspapers on the next business day after such report is approved by our board of directors. A copy of such interim report is also required to be sent to every shareholder as soon as reasonably practicable after such publication. Under the Listing Agreement, we are required to keep the Hong Kong Stock Exchange, our shareholders and other holders of our listed securities informed as soon as reasonably practicable of any information relating to us and our subsidiaries, including information on any major new developments that is not public information, which: . is necessary to enable them and the public to appraise the position of us and our subsidiaries; . is necessary to avoid the establishment of a false market in our securities; and . might reasonably be expected to affect materially market activity in, and the price of, our securities. We are also required under the Hong Kong Stock Exchange Listing Rules to disclose to our shareholders details of various acquisitions or disposals of assets and other transactions (including transactions with controlling shareholders). Restrictions on Transferability and the Share Register H shares may be traded only among investors who are legal or natural persons resident outside of China, and may not be sold to investors resident within the PRC. Under our articles of association, any proposed sale by a PRC shareholder of its domestic shares to persons resident outside China who will receive H shares upon the sale must be approved by two-thirds of our domestic shareholders and H shareholders at duly convened meetings of domestic shareholders and H shareholders held separately and at a duly convened joint meeting of domestic shareholders and H shareholders. Any sale is also subject to approval by the Ministry of Finance, the China Securities Regulatory Commission and other relevant governmental authorities. There are no restrictions under PRC law or our articles of association on the ability of investors who are not PRC residents to hold H shares. In general, under PRC company law, our domestic shares held by CLIC may not be transferred within three years from our establishment on June 30, 2003. However, a special waiver was granted by the State Council, pursuant to the PRC company law to exempt from this sales prohibition the sale of our H shares by CLIC in connection with this offering. See "Principal and Selling Shareholders". We are required to keep a register of our shareholders, which shall be comprised of various parts, including one part which is to be maintained in Hong Kong in relation to holders of H shares. Shareholders have the right 197 to inspect and, for a reasonable charge, to copy the share register. No transfers of ordinary shares will be recorded in our share register within thirty days prior to the date of a shareholders' general meeting or within five days prior to the record date established for the purpose of distributing a dividend. We have appointed Computershare Hong Kong Investor Services Limited to act as the registrar of our H shares. This registrar maintains our register of holders of H shares at our offices in Hong Kong and enters transfers of H shares in such register upon the presentation of the documents described above. Increases in Share Capital Under our articles of association, issuance of new securities, including ordinary shares, securities convertible into ordinary shares, options, warrants or similar rights to subscribe for any ordinary shares or convertible securities, must be approved by two-thirds of all shareholders. In addition, the issuance of domestic shares or H shares must be approved by two-thirds of the class of domestic shares or H shares, as the case may be, unless: . the number of shares to be issued shall not exceed 20% of the number of shares of the same class then outstanding in any 12-month period; or . our plans for issuing H shares in the offering are implemented within 15 months of November 3, 2003, the date of approval by the China Securities Regulatory Commission. Shareholders are not liable to make any further contribution to the share capital other than according to the terms that were agreed upon by the subscriber of the relevant shares at the time of subscription. New issues of shares must also be approved by relevant Chinese authorities. Decreases in Share Capital and Repurchases We may reduce our registered share capital only upon obtaining the approval of at least two-thirds of our shareholders and, in certain circumstances, of relevant Chinese authorities. The number of H shares that may be repurchased is subject to the Hong Kong Codes on Takeovers and Mergers and Share Repurchases. Restrictions on Ownership You may not individually or with your nominees or other persons acting in concert own more than 10% of our share capital without the prior approval of the CIRC. Other restrictions on ownership of our shares apply. See "Regulation--Insurance Company Regulation--Restriction of ownership in joint stock insurance companies". Restrictions on Large or Controlling Shareholders Our articles of association define a controlling shareholder as any person who acting alone or in concert with others: . is in a position to elect more than one-half of the board of directors; . has the power to exercise, or to control the exercise of, 30% or more of our voting rights; . holds 30% or more of our issued and outstanding shares; or . has de facto control of us in any other way. 198 As of the date of this prospectus and immediately following the global offering (including the exercise of the underwriters' over-allotment option), CLIC, a wholly state-owned enterprise, is and will be our only controlling shareholder. Our articles of association provide that, in addition to any obligation imposed by laws and administrative regulations or required by the Hong Kong Stock Exchange Listing Rules, a controlling shareholder shall not exercise its voting rights in a manner prejudicial to the interests of other shareholders: . to relieve a director or supervisor from his or her duty to act honestly in our best interests; . to approve the appropriation by a director or supervisor, for his or her own benefit or for the benefit of any other person, of our assets in any way, including without limitation opportunities which may be advantageous to us; or . to approve the appropriation by a director or supervisor, for his or her own benefit or for the benefit of another person, of the individual rights of other shareholders, including without limitation rights to distributions and voting rights (except in accordance with a restructuring of our company which has been submitted for approval by the shareholders at a general meeting in accordance with our articles of association). Board of Directors Our directors are elected by our shareholders at shareholders' general meetings. Because the domestic shares and H shares do not have cumulative voting rights, a holder of a majority of our ordinary shares is able to elect all of the directors. Directors are elected for a term of three years and may serve consecutive terms if re-elected. Article 23 of Special Regulations on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies provides that directors, supervisors, and senior officers of a company owe duties of honesty, care and diligence to their company. Our articles of association provide that, in exercising their duties and powers, our directors, supervisors and senior officers will act with the care, diligence and skills that are expected of a reasonable person under similar circumstances, observe fiduciary principles and not place themselves in a situation where their interests conflict with the duties they are charged with performing. In addition to these fiduciary duties to our company, each director, supervisor and officer is obligated to each shareholder: . to act honestly in our company's best interests; . not to exploit corporate assets for personal gains; and . not to expropriate the rights of our shareholders. If directors, supervisors or officers are found to have misappropriated our company's assets or misused their position for personal gain, the PRC company law provides that any misappropriated or misused property be returned and any illegal proceeds received by the supervisor be confiscated, and allows us to impose punishment on them. Criminal liability may also be imposed. Our shareholders cannot bring a derivative suit against any director, supervisor or officer who has breached his fiduciary duties, and most disputes between H shareholders and directors, supervisors and officers are required to be resolved by final and binding arbitration. See "Enforceability of Shareholders' Rights" and "--Certain Differences between PRC Company Law and Delaware Corporate Law--Shareholders' Lawsuits". 199 Moreover, our articles of association provide that our directors, supervisors and senior officers must not enter into transactions or contracts with us or agree to make corporate loans to any persons or provide guarantees for loans of any shareholder or any other person with corporate assets. In particular, our directors, supervisors and senior officers have obligations to disclose to the board of directors any direct or indirect material interest they may have in any contracts or transactions with us. They may not vote on any contracts, transactions or arrangements in which they have any material interest. Further, we may not make loans or provide guarantees to directors, supervisors or senior officers, unless such loans or guarantees are approved at a shareholders' meeting or made in the ordinary course of business. All decisions relating to the compensation of directors are made at shareholders' meetings. There are no provisions under our articles of association or PRC law which relate to: . the retirement or non-retirement of directors under any age limit requirement; . directors' borrowing power; or . number of shares required for directors' qualification. Subject to all relevant laws and administrative regulations, the shareholders may remove any director before the expiration of his or her term of office by a majority vote of the shareholders present in person or by proxy at shareholders' general meetings. A director, supervisor, chief executive officer, chief financial officer, president, vice president or other senior officer may be relieved of liability for a specific breach of his or her duties by the consent of shareholders so long as specified conditions are met. Board of Supervisors Our board of supervisors consists of three supervisors. One member of our board of supervisors must be an employee representative elected by our employees. The remaining members must be elected by our shareholders in a general meeting. One member of our board of supervisors is designated as the chairman. Members of the board of supervisors may not serve as director, president, vice president or financial controller of our company. The term of office for our supervisors is three years, which is renewable upon re-election. The primary duty of the board of supervisors is to monitor our financial matters and management. The board of supervisors' powers are generally limited to carrying out investigations and reporting to shareholders, the China Securities Regulatory Commission and other relevant governmental authorities having jurisdiction over our affairs and to convening shareholders' extraordinary general meetings. Reasonable expenses incurred by the board of supervisors in carrying out its duties will be paid by us. Our supervisors owe fiduciary duties to our company and our shareholders. Please see the discussion of the duties and the nature of recourse our shareholders may have against supervisors in breach of these duties in the subsection entitled "--Board of Directors". The board of supervisors is accountable, and will report, to the shareholders at the shareholders' general meetings. Certain Differences Between PRC Company Law and Delaware Corporate Law The PRC company law and other laws applicable to us differ in a number of respects from laws generally applicable to United States corporations and their shareholders. The description set forth below includes a summary of certain provisions of the PRC company law, Special Rules and Mandatory Provisions applicable to overseas listed companies, such as us, which differ from provisions of the corporate law of the State of Delaware. 200 General We are a PRC joint stock company, which is a corporate entity organized under the PRC company law. Under the PRC company law, the registered capital of a joint stock company is divided into shares of equal par value. These shares are commonly called domestic ordinary shares. Each share of a joint stock company ranks equally with all other shares in its class as to voting rights and rights to dividends and other distributions. Upon receiving approval from the relevant authorities, a joint stock company may offer its shares for sale to the public and seek to be listed on a stock exchange. The State Council may formulate separate regulations for the issuance of other classes of shares, including H shares. All of our issued shares will be fully paid and nonassessable, and thus the liability of our shareholders will be limited to the amount they have paid for their shares. Shareholders of a joint stock company may transfer their shares without the approval of other shareholders. Among other things, a joint stock company must have (1) not fewer than five shareholders, (2) minimum paid-in capital of not less than RMB 10 million, (3) a board of directors of not fewer than five and not more than 19 members and (4) a board of supervisors of not fewer than three members. The shareholders' meeting of a joint stock company is the highest authority of the company and exercises the powers of the company with respect to significant matters, subject to applicable law and the articles of association of the company. The business of a joint stock company is under the overall management of a board of directors, subject to the PRC company law, other applicable laws and regulations (which in our case include the PRC insurance law and regulations), the company's articles of association and duly adopted resolutions of its shareholders. The day-to-day operations of a joint stock company are under the direction of its general manager or president, subject to the applicable laws and regulations, the company's articles of association and duly adopted resolutions of the directors and shareholders. In addition, the PRC company law provides for the establishment of a board of supervisors for each joint stock company. The supervisors perform and exercise the functions and powers described below, including examination of the joint stock company's affairs and monitoring the actions of the directors and officers of the company. The directors, supervisors and officers are not required to hold any qualifying shares in the joint stock company. A joint stock company may be liquidated involuntarily due to insolvency or voluntarily in accordance with the terms of its articles of association or duly adopted shareholders' resolutions. The property of a joint stock company remaining after full payment of its liquidation expenses, wages and labor insurance premiums of its employees, outstanding taxes and debts, is distributed in proportion to the holdings of its shareholders. Meetings of shareholders Under PRC law, shareholders are given the power to approve specified matters. See "Voting Rights and Shareholders' Meetings". In addition, the Mandatory Articles provide that at shareholders' meetings shareholders are entitled consider any proposals made by shareholders holding in the aggregate at least 5% of voting power over the company's shares. Under Delaware law, the business and affairs of a Delaware corporation are, in general, managed by or under the direction of its board of directors. Only certain fundamental matters regarding the corporation are reserved by statute to be exercised by the shareholders. These matters include, in general, the election and removal of directors, the retention and dismissal of the corporation's independent auditors, mergers and other business combinations involving the corporation, the amendment of the corporation's certificate of incorporation and a liquidation and dissolution of the corporation. Shareholders' approval by written consent PRC law does not provide shareholders of overseas joint stock listed companies with rights to approve corporate matters by written consent. Under Delaware law, unless otherwise provided in the certificate of incorporation, any action which is required or permitted to be taken at any shareholders' meeting may be taken without a meeting, subject to various conditions. 201 Amendments of articles of association Under PRC law, an amendment of the articles of association must be approved by an affirmative vote of two-thirds of shareholders attending a shareholders' meeting. Under the Mandatory Articles, the proposal to amend the articles is required to be approved by the board of directors, as well as the shareholders. Amendments only become effective after approval by the relevant governmental department authorized by the State Council and the China Securities Regulatory Commission. Under Delaware law, board as well as shareholder approval are required for any amendment to the certificate of incorporation, but no governmental approval is generally required. Powers and responsibilities of directors Under PRC law, the board of directors is responsible for specified actions, including the following functions and powers of a joint stock company: . convening shareholders' meetings and reporting its work to shareholders at these meetings; . implementing shareholders' resolutions; . determining the company's business plans and investment proposals; . formulating the company's annual financial budgets and final accounts; . formulating the company's profit distribution plans and loss recovery plans; . formulating proposals for the increase or decrease in the company's registered capital and the issue of debentures; . formulating major acquisition and disposal plans and plans for the merger, division or dissolution of the company; . deciding on the company's internal management structure and formulating its basic management system; and . appointing or removing the company's principal executive officers; appointing and removing other senior officers based on the recommendation of the principal executive officer and deciding on the remuneration of the senior officers. In addition, the Mandatory Articles provide that the board has the authority to formulate any proposal to amend the articles of association and to exercise any other power conferred by a decision of the shareholders' meeting. Under Delaware law, the business and affairs of a Delaware corporation are managed by or under the direction of its board of directors. Their powers include fixing the remuneration of directors, except as otherwise provided by statute or in the certificate of incorporation or by-laws of the corporation. Powers and responsibilities of supervisors Under PRC law, a PRC joint stock company must have a board of supervisors consisting of shareholder representatives and one or more employee representatives. Supervisors attend board meetings as non-voting 202 observers. Directors, officers and company personnel in charge of financial matters may not serve as supervisors. The supervisors perform and exercise the following functions and powers: . examining the company's financial affairs; . monitoring compliance with laws, regulations and the articles of association of the company by the directors and officers of the company; . requiring corrective action from directors and officers whose actions are contrary to the interests of the company; . proposing the holding of a shareholders' meetings; and . exercising and performing other powers and functions provided for in the company's articles of association. In addition, the Mandatory Articles provide that supervisors of overseas listed joint stock companies are entitled to retain auditors in the name of the company to examine any the financial or business reports or profit distribution proposals to be submitted by the directors to a meeting of the shareholders which the supervisors consider questionable, and negotiate or take legal action against any director or the directors in the name of the company. The fees and expenses of attorneys and other professionals incurred by the supervisors in connection with the discharge of their duties are to be paid by the company. Delaware law makes no provision for a comparable corporate institution. Duties of directors, supervisors and officers Under PRC law, directors, supervisors and officers of a joint stock company are required to comply with relevant laws and regulations and the company's articles of association. A director, supervisor or officer who contravenes any law, regulation or the company's articles of association in the performance of his duties shall be personally liable to the company for any loss incurred by the company. Directors, supervisors and officers are required to carry out their duties honestly and protect the interests of the company. They are also under a duty of confidentiality to the company and prohibited from divulging confidential information concerning the company, except as permitted by relevant laws and regulations or by a decision of a shareholders' meeting. They may not use their position and authority in the company to seek personal gain. Directors and officers may not directly or indirectly engage in the same business as the company or in any other business detrimental to the interests of the company, and they are required to forfeit any profits from these activities to the company. Under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. Limitations on transactions with interested directors, supervisors and officers Under PRC law, directors and officers of a joint stock company may not enter into any contracts or transactions with the company unless permitted by the articles of association or approved by the shareholders. Under the Mandatory Articles, a director, supervisor or officer is required to disclose to the board any transaction with the company in which he has a direct or indirect interest or in which there is a material conflict of interest between the company and himself. A director is not entitled to vote or be counted for quorum purposes in any board decision on any such transaction. The company may set aside any interested transaction which did not comply with these requirements, unless the offending director, supervisor or officer was honestly unaware of his 203 obligations. The company may not loan or provide any guarantees to directors, supervisors or officers (including persons related to them), except for the loans made in accordance with employment contracts approved by the shareholders, or unless the company's business scope allows for the provision of loans and guarantees and such loans or guarantees are made under regular commercial terms. Under Delaware law, an interested transaction is not voidable if (1) the material facts as to such interested director's relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors, (2) such material facts are disclosed or are known to the shareholders entitled to vote on such transaction and the transaction is specifically approved in good faith by vote of the majority of shares entitled to vote thereon or (3) the transaction is fair as to the corporation as of the time it is authorized, approved or ratified. Under Delaware law, the interested director could be held liable for a transaction in which such a director derived an improper personal benefit. Election and removal of directors Under PRC law, the term of office of directors of a joint stock company must be specified in the articles of association, but may not exceed three years. Directors may be re-elected. No director may be removed from office without cause by shareholders prior to the expiration of the director's term. PRC law does not contemplate a classified board of directors or cumulative voting in the election of directors for PRC joint stock companies. Under Delaware law, directors of a Delaware corporation can be removed from office with or without cause by the holders of a majority of shares then entitled to vote at an election of directors, provided that except where the certificate of incorporation of the Delaware corporation otherwise provides, a member of a classified board may be removed by shareholders only for cause, and in a corporation with cumulative voting, if less than all of the directors are removed, no director may be removed if the votes cast against the director's removal is sufficient to elect the director if cumulatively voted at an election of directors. Dividend payments Under PRC law, proposals for distribution of profits are formulated by the board of directors and submitted for shareholder approval at a shareholders' meeting. Dividends may be distributed in the form of cash or shares. Under Delaware law, the board of directors of a Delaware corporation may declare dividends out of distributable earnings and profits without the approval of the shareholders. Amalgamations and business combinations; appraisal rights Under PRC law, amalgamations and divisions involving joint stock companies are required to be approved by shareholders voting at a shareholders' meeting. The Mandatory Articles require an amalgamation or division involving the company to be approved by an affirmative vote of two-thirds of the votes present at the shareholders' meeting called to consider the transaction. Any shareholder opposing such an amalgamation or business combination may request the company or the consenting shareholders to purchase its shares at a fair price. In addition, a sale of fixed assets having a value exceeding one-third of the total fixed assets of the company requires the approval of the directors and shareholders. Under Delaware law, with certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a corporation must be approved by the board of directors and holders of a majority of the outstanding shares entitled to vote. A shareholder objecting to the merger is entitled to appraisal rights pursuant to which the shareholder may receive cash in the amount of the fair value of the shares held by such shareholder (as determined by a court) in lieu of the consideration the shareholder would otherwise receive in the transaction. 204 Transactions with significant shareholders Under Delaware law, a business combination between a Delaware corporation and an interested shareholder which takes place at any time during a period of three years commencing with the date the interested shareholder became an interested shareholder would need prior approval from the board of directors or a supermajority of the shareholders of the corporation, unless the corporation opted out of the relevant Delaware business combination statute. Under Delaware law, an interested shareholder of a corporation is someone who, together with its affiliates and associates, owns more than 15% of the outstanding common shares of the corporation. No such business combination statute or regulation applies to PRC joint stock companies. Shareholders' lawsuits The PRC law provides that most disputes involving an H shareholder are to be resolved by final and binding arbitration. See "Enforceability of Shareholders' Rights". Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. Limitations on liability and indemnification of directors and officers PRC law does not provide for any specific limitations on liability or indemnification of directors and officers. Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if (1) the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (2) with respect to any criminal action or proceeding, the director or officer had no reasonable cause to believe his conduct was unlawful. Shareholders' rights of inspection of corporate records Under PRC law, shareholders are entitled to inspect the articles of association, minutes of shareholders' meetings and reports of the financial accounts of the company. In addition, the Mandatory Articles provide that, after paying reasonable fees, shareholders are entitled to inspect the company's shareholder list, certain personal information on the directors, supervisors and officers, the company's capital position and certain information regarding share repurchases conducted by the company during the most recent fiscal year. Delaware law permits any shareholder of a Delaware corporation to inspect or obtain copies of or extracts from the corporation's shareholder list and its other books and records for any purpose reasonably related to such person's interest as a shareholder. 205 DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS JPMorgan Chase Bank, as depositary, will issue the ADSs which you may receive in this offering. Each ADS will represent an ownership interest in H shares, which we will deposit with the custodian, as agent of the depositary under the deposit agreement among ourselves, the depositary, yourself as an ADR holder and the other holders of ADRs. In the future, each ADS will also represent any securities, cash or other property deposited with the depositary but which it has not distributed directly to you. Unless specifically requested by you, all ADSs will be issued on the books of our depositary in book-entry form and a statement will be mailed to you which reflects your ownership interest in such ADSs. In our description, references to American Depositary Receipts, or ADRs, include the statements you will receive which reflect your ownership of ADSs. The depositary's office is located at 4 New York Plaza, New York, New York 10004. You may hold ADSs either directly or indirectly through your broker or other financial institution. If you hold ADSs directly, by having an ADS registered in your name on the books of the depositary, you are an ADR holder. This description assumes you hold your ADSs directly. If you hold the ADSs through your broker or financial institution nominee, you must rely on the procedures of the broker or financial institution to assert the rights of an ADR holder described in this section. You should consult with your broker or financial institution to find out what those procedures are. Because the depositary's nominee will actually be the registered owner of the shares, you must rely on it to exercise the rights as a shareholder on your behalf. Your rights as a ADR holder as well as the rights and obligations of the depositary and its agents are set out in the deposit agreement. By holding an ADR, you become party to the deposit agreement. The deposit agreement and the ADSs are governed by New York law. However, our obligations to the holders of our H shares will continue to be governed by the laws of the PRC, which may be different from laws in the United States. The following is a summary of the material terms of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of ADR which contains the terms of your ADSs. You can read a copy of the deposit agreement which is filed as an exhibit to the registration statement of which this prospectus forms a part. See "Where You Can Find More Information". Share Dividends and Other Distributions How will you receive dividends and other distributions on the H shares underlying your ADSs? We may make various types of distributions with respect to our securities. The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on H shares or other deposited securities, after deducting its expenses. You will receive these distributions in proportion to the number of underlying H shares that your ADSs represent. Except as stated below, to the extent the depositary is legally permitted it will deliver distributions to ADR holders in proportion to their interests in the following manner: Cash. The depositary will distribute any U.S. dollars available to it resulting from a cash dividend or other cash distribution or the net proceeds of sales of any other distribution or portion thereof (to the extent applicable), on an averaged or other practicable basis, subject to (i) appropriate adjustments for taxes withheld, (ii) the distribution being impermissible or impracticable with respect to certain registered holders, and (iii) deduction of the depositary's expenses in (1) converting any foreign currency to U.S. dollars to the extent that it determines that the conversion may be made on a reasonable basis, (2) transferring foreign currency or U.S. dollars to the United State by such means as the depositary may determine to the extent that it determines that the transfer may be made on a reasonable basis, (3) obtaining any approval or license of any governmental authority required for the conversion or transfer, which is obtainable at a reasonable cost and within a reasonable time, and (4) making any sale by public or private means in any commercially reasonable manner. 206 H shares. In the case of a distribution in H shares, the depositary will issue additional ADRs to evidence the number of ADSs representing these H shares. Only whole ADSs will be issued. Any H shares which would result in fractional ADSs will be sold, and the net proceeds will be distributed to the ADR holders entitled thereto. Rights to receive additional H shares. In the case of a distribution of rights to subscribe for additional H shares or other rights, if we provide satisfactory evidence that the depositary may lawfully distribute these rights, the depositary may arrange for ADR holders to instruct the depositary as to the exercise of these rights. However, if we do not furnish this evidence or if the depositary determines it is not practical to distribute these rights, the depositary may: . sell these rights if practicable and distribute the net proceeds as cash; or . allow these rights to lapse, in which case ADR holders will receive nothing. We have no obligation to file a registration statement under the Securities Act in order to make any rights available to ADR holders. Other distributions. In the case of a distribution of securities or property other than those described above, the depositary may either: . distribute the securities or property in any manner it deems equitable and practicable; . to the extent the depositary deems distribution of the securities or property not to be equitable and practicable, sell the securities or property and distribute any net proceeds in the same way it distributes cash; or . hold the distributed property in which case the ADSs will also represent the distributed property. Any U.S. dollars will be distributed by checks drawn on a bank in the United States for whole dollars and cents. Fractional cents will be withheld without liability and dealt with by the depositary in accordance with its then current practices. The depositary may choose any practical method of distribution for any specific ADR holder, including the distribution of foreign currency, securities or property, or it may retain these items, without paying interest on or investing them, on behalf of the ADR holder as deposited securities. The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders. There can be no assurance that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, H shares or other securities at a specified price, or that any of these transactions can be completed within a specified time period. Deposit, Withdrawal and Cancellation How does the depositary issue ADSs? The depositary will issue ADSs if you or your broker deposits H shares or evidence of rights to receive H shares with the custodian. In the case of the ADSs to be issued under this prospectus, we will arrange with the underwriters named in this prospectus to deposit those H shares. 207 H shares deposited in the future with the custodian must be accompanied by specified documents, including instruments showing that the H shares have been properly transferred or endorsed to the person on whose behalf the deposit is being made. The custodian will hold all deposited H shares, including those being deposited by or on our behalf in connection with the offering to which this prospectus relates, for the account of the depositary. ADR holders thus have no direct ownership interest in the H shares and only have such rights as are contained in the deposit agreement. The custodian will also hold any additional securities, property and cash received on or in substitution for the deposited H shares. We refer to the deposited H shares and any such additional items as "deposited securities." Upon each deposit of H shares, receipt of related delivery documentation and compliance with the other provisions of the deposit agreement, including the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue an ADR or ADRs in the name of the person entitled to the ADR evidencing the number of ADSs to which the person is entitled. All of the ADSs issued will, unless specifically requested to the contrary, be part of the depositary's direct registration system, and a registered holder will receive periodic statements from the depositary which will show the number of ADSs registered in the holder's name. An ADR holder can request that the ADSs not be held through the depositary's direct registration system and that certificated ADRs be issued. How do ADR holders cancel an ADS and obtain deposited securities? When you turn in your ADS at the depositary's office, the depositary will, upon payment of certain applicable fees, charges and taxes and upon receipt of proper instructions, deliver the underlying H shares to an account designated by you maintained by us. At your risk, expense and request, the depositary may deliver deposited securities at such other place as you may request. The depositary may only restrict the withdrawal of deposited securities in connection with: . temporary delays caused by closing our transfer books or those of the depositary, or the deposit of H shares in connection with voting at a shareholders' meeting, or the payment of dividends; . the payment of fees, taxes and similar charges; or . compliance with any U.S. or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of deposited securities. This right of withdrawal may not be limited by any other provision of the deposit agreement. Voting Rights How do you vote? If you are an ADR holder and the depositary asks you to provide it with voting instructions, you may instruct the depositary how to exercise the voting rights for the H shares that underlie your ADSs. After receiving voting materials from us, the depositary will notify the ADR holders of any shareholders' meeting or solicitation of consents or proxies. This notice will describe how you may instruct the depositary to exercise the voting rights for the H shares which underlie your ADSs. For instructions to be valid, the depositary must receive them on or before the date specified. The depositary will try, as far as is practical, subject to the provisions of the underlying H shares or other deposited securities, to vote or to have its agents vote the H shares or other deposited securities 208 as you instruct. The depositary will only vote or attempt to vote as you instruct. The depositary itself will not exercise any voting discretion. Furthermore, neither the depositary nor its agents are responsible for any failure to carry out any voting instructions, for the manner in which any vote is cast or for the effect of any vote. There is no guarantee that you will receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Record Dates The depositary may fix record dates for the determination of the ADR holders who will be entitled: . to receive a dividend, distribution or rights; or . to give instructions for the exercise of voting rights at a meeting of holders of H shares or other deposited securities, all subject to the provisions of the deposit agreement. Reports and Other Communications Will you be able to view our reports? The depositary will make available for inspection by holders of the ADSs at the depositary's office any written communications received from us, which are both (1) received by the custodian or its nominee as a holder of the deposited securities and (2) made generally available to the holders of the deposited securities. We will furnish these communications in English when so required by any rules or regulations of the U.S. Securities and Exchange Commission, or the SEC. Additionally, if we make any written communications generally available to holders of our shares, including the depositary or the custodian, and we request the depositary to provide them to ADR holders, the depositary will mail copies of them, or, at its option, summaries of them, to ADR holders. Fees and Expenses What fees and expenses will you be responsible for paying? ADR holders will be charged a fee for each issuance of ADSs, including issuances resulting from distributions of shares, rights and other property, and for each surrender of ADSs in exchange for deposited securities. The fee in each case is US$5.00 for each 100 ADSs, or any portion thereof, issued or surrendered. The following additional charges will be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a share dividend or share split declared by us or an exchange of shares regarding the ADRs or the deposited securities or a distribution of ADRs), whichever is applicable: . to the extent not prohibited by the rules of any stock exchange or interdealer quotation system upon which the ADSs are traded, a fee of $1.50 per ADR or ADRs for transfers of certificated ADRs made; . to the extent not prohibited by the rules of any stock exchange or interdealer quotation shares system upon which the ADSs are traded, a fee of $.02 or less per ADS (or portion thereof) for any cash distribution made pursuant to the deposit agreement; 209 . a fee for the distribution of securities, such fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of those securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those entitled thereto; . stock transfer or other taxes and other governmental charges; . cable, telex and facsimile transmission and delivery charges; . transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; . expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars; and . such fees and expenses as are incurred by the depositary, including without limitation expenses incurred in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment, in delivery of deposited securities or otherwise in connection with the depositary's or its custodian's compliance with applicable law, rule or regulation. We will pay all other charges and expenses of the depositary and any agent of the depositary, except the custodian, under agreements from time to time between us and the depositary. The fees described above may be amended from time to time. Payment of Taxes ADR holders must pay any tax or other governmental charge payable by the custodian or the depositary on any ADS or ADR, deposited security or distribution. If an ADR holder owes any tax or other governmental charge, the depositary may (1) deduct the amount of the tax or charge from any cash distributions, or (2) sell deposited securities and deduct the amount owing from the net proceeds of the sale. In either case the ADR holder remains liable for any shortfall. Additionally, if any tax or governmental charge is unpaid, the depositary may also refuse to effect any registration, registration of transfer, split-up or combination of deposited securities or withdrawal of deposited securities, except under limited circumstances mandated by securities regulations. If any tax or governmental charge is required to be withheld on any non-cash distribution, the depositary may sell the distributed property or securities to pay those taxes and distribute any remaining net proceeds to the ADR holders who are entitled to them. Reclassifications, Recapitalizations and Mergers If we take specified actions that affect the deposited securities, including (1) any change in par value, split-up, consolidation, cancellation or other reclassification of deposited securities, or (2) any recapitalization, reorganization, merger, consolidation, liquidation, receivership, bankruptcy or sale of all or substantially all of our assets, then the depositary may choose to: . amend the form of ADR; . distribute additional or amended ADRs; . distribute cash, securities or other property it has received in connection with these actions; . sell any securities or property received and distribute the proceeds as cash; or . none of the above. 210 If the depositary does not choose any of the above options, any of the cash, securities or other property it receives will constitute part of the deposited securities, and each ADS will then represent a proportionate interest in that property. Amendment and Termination How may the deposit agreement be amended? We may agree with the depositary to amend the deposit agreement and the terms of the ADSs without your consent for any reason. ADR holders must be given notice at least 30 days in advance of any amendment that imposes or increases any fees or charges (other than share transfer or other taxes and other governmental charges, transfer or registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or affects any substantial existing right of ADR holders. If an ADR holder continues to hold ADRs being so notified, the ADR holder is deemed to agree to the amendment. Notwithstanding the foregoing, an amendment can become effective before notice is given if this is necessary to ensure compliance with a new law, rule or regulation. No amendment will impair your right to surrender your ADSs and receive the underlying securities. If a governmental body adopts new laws or rules which require the deposit agreement or the ADSs to be amended, we and the depositary may make the necessary amendments, which could take effect before you receive notice of the amendment. How may the deposit agreement be terminated? The depositary may terminate the deposit agreement by giving the ADR holders at least 30 days' prior notice, and it must do so at our request. The deposit agreement will be terminated on the removal of the depositary for any reason. After termination, the depositary's only responsibility will be (1) to deliver deposited securities to ADR holders who surrender their ADRs, and (2) to hold or sell distributions received on deposited securities. As soon as practicable after the expiration of six months from the termination date, the depositary will sell the deposited securities which remain and hold the net proceeds of such sales, without liability for interest, in trust for the ADR holders who have not yet surrendered their ADRs. After making the sale, the depositary will have no obligations except to account for the proceeds and other cash. The depositary will not be required to invest the proceeds or pay interest on them. Limitations on Obligations and Liability to ADR Holders Limits on our obligations and the obligations of the depositary; limits on liability to ADR holders and holders of ADSs Prior to the issue, registration, registration of transfer, split-up, combination, or cancellation of any ADRs or the delivery of any distribution in respect of the ADRs, the depositary and its custodian may require you to pay, provide or deliver: . payment of (i) any stock transfer or other tax or other governmental charge, (ii) any stock transfer or registration fees in effect for the registration of transfers of shares or other deposited securities upon any applicable register and (iii) any applicable fees and expenses described in the ADR; . the production of proof satisfactory to it of (i) the identity and genuineness of any signature and (ii) such other information, including without limitation, information as to citizenship, residence, exchange control approval, beneficial ownership of any securities, payment of applicable taxes or governmental charges, or legal or beneficial ownership and the nature of such interest, information relating to the registration of the shares on the books maintained by or on our behalf for the transfer and registration of shares, and compliance with applicable law, regulations, provisions of or governing deposited securities and terms of the deposit agreement and the ADR, as it may deem necessary or proper; and 211 . compliance with such regulations as the depositary may establish consistent with the deposit agreement. The deposit agreement expressly limits the obligations and liabilities of the depositary, ourselves and our respective agents. Neither we nor the depositary nor any such agent will be liable if: . any present or future law, regulation of the United States, Hong Kong, the People's Republic of China or any other country, or of any governmental or regulatory authority or stock exchange, the provisions of or governing any deposited securities, act of God, war or other circumstance beyond its control shall prevent, delay or subject to any civil or criminal penalty any act which the deposit agreement or any ADR provides shall be done or performed by it; . it exercises or fails to exercise discretion authorized under the deposit agreement; . it performs its obligations without gross negligence or bad faith; . it takes any action or fails to take any action in reliance upon the advice of or information from legal counsel, accountants, any person presenting shares for deposit, any registered holder of ADRs or any other person believed by it to be competent to give such advice or information; or . it relies upon on any documents we believe in good faith to be genuine and to have been properly executed. Neither the depositary nor its agents have any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs. We and our agents shall only be obligated to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs, which in our opinion may involve us in expense or liability, if indemnity satisfactory to us against all expense, including fees and disbursements of counsel, and liability is furnished as often as we require. The depositary and its agents may fully respond to any and all demands or requests for information maintained by or on its behalf in connection with the deposit agreement, any registered holder or holders of ADRs, any ADSs or otherwise to the extent such information is requested or required by or pursuant to any lawful authority, including without limitation laws, rules, regulations, administrative or judicial process of, banking, securities or other regulators. The depositary will not be responsible for failing to carry out instructions to vote the deposited securities or for the manner in which the deposited securities are voted or the effect of the vote. In no event shall the depositary or any of its agents be liable for any indirect, special, punitive or consequential damages. The depositary may own and deal in deposited securities and in ADSs. Disclosure of interests in ADSs We may from time to time request you and other holders and beneficial owners of ADSs to provide information as to: . the capacity in which you and other holders and beneficial owners own or owned ADSs; . the identity of any other persons then or previously interested in those ADSs; and . the nature of that interest and various other matters. You may not individually or with your nominees or other persons acting in concert own more than 10% of our share capital without the prior approval of the CIRC. You and other holders and beneficial owners will be 212 subject to the provisions of the Securities and Futures Ordinance and any other legislation or regulations of Hong Kong from time to time in effect regarding the disclosure of interests in shares. For this purpose, "interest" has the meaning provided in the Securities and Futures Ordinance. Under the Securities and Futures Ordinance, you may have a duty to notify us and the Hong Kong Stock Exchange if you become aware that your interest in H shares, including your interest in H shares represented by ADSs, equals or exceeds 5% of long positions in our issued H share capital or 5% of long positions and 1% of short positions in our issued H share capital. You are also further required to notify us and the Hong Kong Stock Exchange of certain changes in your interest in the shares, or if you cease to have such interest or acquired more of our issued share capital. Under the Securities and Futures Ordinance, we have certain rights and duties to make inquiries of persons whom we know or have reasonable cause to believe to be interested in our H shares, including those represented by ADSs, concerning such persons' interests in our H shares. In the event that any person to whom we have made such inquiries fails to respond, or provides false information in response, such person may be subject to sanctions and criminal penalties. The depositary has agreed that it will use reasonable efforts to comply with our written instructions requesting that it forward any such requests for information relating to your interests to you. By holding an ADS or an interest in an ADS, you will be agreeing to comply with these requests. Requirements for Depositary Actions We, the depositary or the custodian may refuse to: . issue, register or transfer an ADR or ADRs; . effect a split-up or combination of ADRs; . deliver distributions on any such ADRs; or . permit the withdrawal of deposited securities, unless the deposit agreement provides otherwise, until the following conditions have been met: . the holder has paid all taxes, governmental charges and fees and expenses as required in the deposit agreement; . the holder has provided the depositary with any information it may deem necessary or proper, including, without limitation, proof of identity and the genuineness of any signature; and . the holder has complied with such regulations as the depositary may establish under the deposit agreement. The depositary may also suspend the issuance of ADSs, the deposit of H shares, the registration, transfer, split-up or combination of ADRs, or the withdrawal of deposited securities (unless the deposit agreement provides otherwise), if the register for ADRs or any deposited securities is closed or if we or the depositary decides it is advisable to do so. Books of Depositary The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADSs. You may inspect these records at our office during regular business hours, but solely for the purpose of communicating with other holders in the interest of business matters relating to the deposit agreement. 213 The depositary will maintain facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. These facilities may be closed from time to time, to the extent not prohibited by law. Pre-release of ADSs The depositary may issue ADSs prior to the deposit with the custodian of H shares or rights to receive H shares. This is called a pre-release of the ADS. A pre-release is closed out as soon as the underlying H shares or other ADSs are delivered to the depositary. The depositary may pre-release ADSs only if: . the depositary has received collateral for the full market value of the pre-released ADSs; and . each recipient of pre-released ADSs agrees in writing that he or she: . owns the underlying H shares; . assigns all rights in those H shares to the depositary; . holds those H shares for the account of the depositary; and . will deliver those H shares to the custodian as soon as practicable, and promptly if the depositary so demands. In general, the number of pre-released ADSs will not evidence more than 30% of all ADSs outstanding at any given time, excluding those evidenced by pre-released ADSs. However, the depositary may change or disregard this limit from time to time as it deems appropriate. The depositary may retain for its own account any earnings on collateral for pre-released ADSs and its charges for their issuance. 214 SHARES ELIGIBLE FOR FUTURE SALE Before this offering, there has been no market for our H shares, and we cannot assure you that a significant public market for our H shares will develop or be substantial after this offering. Future sales of substantial amounts of our H shares, including shares issued upon the exercise of outstanding options, in the public market following this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. Sales of our H shares in the public market after applicable restrictions lapse, or the perception that such sales may occur, could adversely affect the prevailing market price. Upon completion of this offering, we will have outstanding H shares, or H shares if the underwriters exercise in full their over-allotment option. The H shares being sold in this offering will be freely tradable, without restriction or registration under the Securities Act of 1933, unless held by an "affiliate" of our company as that term is defined in Rule 144 under the Securities Act. The shares held by CLIC, which will be H shares if sold outside China, may be sold only after required Chinese governmental approvals have been obtained. See "Description of Share Capital--Restrictions on Transferability and the Share Register". These shares may be sold in the United States or to U.S. persons only if registered or sold under an exemption from registration under the Securities Act, including the exemption provided by Rule 144. CLIC may seek to sell shares in the future in order to meet its cash requirements, which may adversely affect the market prices of our H shares and ADSs. See "Risk Factors--Risks Relating to the Restructuring". 215 TAXATION The taxation of income and capital gains of holders of H shares or ADSs is subject to the laws and practices of China and of jurisdictions in which holders of H shares or ADSs are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions is based on current law and practice, is subject to change and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the H shares or ADSs. In particular, the discussion does not address the tax consequences under state, local and other laws, such as non-U.S. federal laws. Accordingly, you should consult your own tax adviser regarding the tax consequences of an investment in the H shares and ADSs. The discussion is based upon laws and relevant interpretations in effect as of the date of this prospectus, all of which are subject to change. The People's Republic of China The following is a discussion of the material Chinese tax provisions relating to the ownership and disposition of H shares or ADSs purchased in connection with the global offering and held by the investors as capital assets. This summary does not purport to address all material tax consequences of the ownership of H shares, and does not take into account the specific circumstances of any particular investors. This summary is based on the tax laws of China as in effect on the date of this prospectus, as well as on the Agreement between the United States of America and the People's Republic of China for the Avoidance of Double Taxation, or the Treaty, all of which are subject to change (or changes in interpretation), possibly with retroactive effect. This discussion does not address any aspects of Chinese taxation other than income taxation, capital taxation, stamp taxation and estate taxation. Prospective investors are urged to consult their tax advisers regarding Chinese, Hong Kong and other tax consequences of owning and disposing of H shares. Taxation of dividends Individual investors. According to the Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System, or the Provisional Regulations, and the Individual Income Tax Law of China, as amended on October 31, 1993 and effective January 1, 1994, and further amended and effective on August 30, 1999, dividends paid by Chinese companies are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. For a foreign individual who is not a resident of China, the receipt of dividends from a company in China is normally subject to a withholding tax of 20% unless reduced by an applicable tax treaty. However, the Chinese State Administration of Taxation, or the SAT, the Chinese central government tax authority which succeeded the State Tax Bureau, issued, on July 21, 1993, a Notice of the Chinese State Administration of Taxation Concerning the Taxation of Gains on Transfer and Dividends from Share (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals, or the Tax Notice, which states that dividends paid by a Chinese company to individuals with respect to shares listed on an overseas stock exchange, or overseas shares, such as H shares, are not subject to Chinese withholding tax. The relevant tax authority has not collected withholding tax on dividend payments on overseas shares, including H shares and ADSs. The Amendments to the Individual Income Tax Law of China, or the Amendments, were promulgated on October 31, 1993 and became effective on January 1, 1994. The Amendments state that they shall supersede the provisions of any contradictory prior administrative regulations concerning individual income tax. Under the requirements of the Amendments and the amended Individual Income Tax Law, foreign individuals are subject to withholding tax on dividends paid by a Chinese company at a rate of 20% unless specifically exempted by the tax authority of the State Council. However, in a letter dated July 26, 1994 to the former State Commission for Restructuring the Economic System, the former State Council Securities Commission and the China Securities Regulatory Commission, the SAT reiterated the temporary tax exemption stated in the Tax Notice for dividends received from a Chinese company listed overseas. In the event that this letter is withdrawn, a 20% tax may be withheld on dividends in accordance with the Provisional Regulations, the Amendments and the Individual 216 Income Tax Law. The withholding tax may be reduced under an applicable double taxation treaty. To date, the relevant tax authorities have not collected withholding tax from dividend payments on the shares exempted under the Tax Notice. Enterprises. According to the Income Tax Law of China Concerning Foreign Investment Enterprises and Foreign Enterprises, dividends paid by Chinese companies to enterprises are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. However, according to the Tax Notice, a foreign enterprise with no permanent establishment in China receiving dividends paid with respect to a Chinese company's Overseas Shares will temporarily not be subject to the 20% withholding tax. If the withholding tax becomes applicable in the future, the rate could be reduced under an applicable double-taxation treaty. Tax treaties. Investors who do not reside in China and reside in countries that have entered into treaties for the avoidance of double-taxation with China may be entitled to a reduction of the withholding tax imposed on the payment of dividends to investors of the Company who do not reside in China. China currently has treaties for the avoidance of double-taxation with a number of other countries, which include Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States. Under the treaty between China and the United States, the China-US Treaty, China may tax a dividend paid by us to an Eligible U.S. Holder up to a maximum of 10% of the gross amount of the dividend. It is arguable that under the China-US Treaty, China may only tax gains from the sale or disposition by an Eligible U.S. Holder of H shares representing an interest in the Company of 25% or more, but this position is uncertain and the Chinese authorities may take a different position. For the purposes of this discussion, an "Eligible U.S. Holder" is a U.S. holder that (i) is a resident of the United States for the purposes of the China-US Treaty, (ii) does not maintain a permanent establishment or fixed base in China to which H shares are attributable and through which the beneficial owner carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services) and (iii) is not otherwise ineligible for benefits under the China-US Treaty with respect to income and gains derived in connection with the H shares. Taxation of capital gains The Tax Notice provides that gains realized by enterprises that are holders of Overseas Shares would, temporarily, not be subject to capital gains taxes. With respect to individual holders of H shares, the Provisions for Implementation of Individual Income Tax Law of China, or the Provisions, issued on January 28, 1994, stipulated that gains realized on the sale of equity shares would be subject to income tax at a rate of 20% on the gains, and empowered the Ministry of Finance to draft detailed tax rules on the mechanism for collecting such tax, as per the official publication "China Securities News" of April 13, 1994. However, no income tax on gains realized on the sale of equity shares has been collected. Gains on the sale of shares by individuals were temporarily exempted from individual income tax pursuant to notices issued by the SAT dated February 9, 1996 and March 30, 1998. In the event this temporary exemption is withdrawn or ceases to be effective, individual holders of H shares may be subject to capital gains tax at the rate of 20% unless such tax is reduced or eliminated by an applicable double taxation treaty. If tax on capital gains from the sale of H shares become applicable, it is arguable that under the China-US Treaty, China may only tax gains from the sale or disposition by an Eligible U.S. Holder of H shares representing an interest in the Company of 25% or more, but this position is uncertain and the Chinese authorities may take a different position. On November 18, 2000, the State Council issued a notice entitled "State Council Notice on the Income Tax Reduction for Interest and Other Income that Foreign Enterprises Derive in China", or the Tax Reduction Notice. Under the Tax Reduction Notice, beginning January 1, 2001, enterprise income tax at a reduced 10% rate will apply to interest, rental, license fees and other income obtained in China by foreign enterprises without agencies or establishment in China, or by foreign enterprises without any substantive relationship with their agency or establishment in China. Therefore, if the exemption as described in the preceding paragraph does not apply or is 217 not renewed, and the Tax Reduction Notice is found not to apply, a foreign enterprise shareholder may be subject to a 20% tax on capital gains, unless reduced by an applicable double-taxation treaty. Additional Chinese tax considerations Chinese stamp duty. Chinese stamp duty imposed on the transfer of shares of Chinese publicly traded companies under the Provisional Regulations should not apply to the acquisition and disposal by non-Chinese investors of H shares or ADSs outside of China by virtue of the Provisional Regulations of China Concerning Stamp Duty, which became effective on October 1, 1988 and which provide that Chinese stamp duty is imposed only on documents executed or received within China that are legally binding in China and are protected under Chinese law. Estate tax. No liability for estate tax under Chinese law will arise from non-Chinese nationals holding H shares. Hong Kong Tax treaties There is no relevant tax treaty in effect between Hong Kong and the United States. Tax on dividends Under current practice, no tax is payable in Hong Kong in respect of dividends paid by us. Tax on gains from sale No tax is imposed in Hong Kong in respect of capital gains. However, trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong where the gains are derived from or arise in Hong Kong from the trade, profession or business will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 15.5% on individuals (to be increased to 16% effective April 1, 2004). Certain categories of taxpayers are likely to be regarded as deriving trading gains rather than capital gains (for example, financial institutions, insurance companies and securities dealers) unless these taxpayers could prove that the investment securities are held for long-term investment purpose. Trading gains from sales of H shares effected on the Hong Kong Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of H shares effected on the Hong Kong Stock Exchange realized by persons carrying on a business of trading or dealing in securities in Hong Kong. There will be no liability for Hong Kong profits tax in respect of profits from the sale of ADSs, where purchases and sales of ADSs are effected outside Hong Kong, for example, on the New York Stock Exchange. Stamp duty Hong Kong stamp duty, currently charged at the ad valorem rate of 0.1% on the higher of the consideration for or the market value of the H shares, will be payable by the purchaser on every purchase and by the seller on every sale of H shares (in other words, a total of 0.2% is currently payable on a typical sale and purchase transaction involving H shares). In addition, a fixed duty of HK$5.00 is currently payable on any instrument of transfer of H shares. Where one of the parties is resident outside Hong Kong and does not pay the ad valorem 218 duty due by it, the duty not paid will be assessed on the instrument of transfer (if any) and will be payable by the transferee. If stamp duty is not paid on or before the due date, a penalty of up to ten times the duty payable may be imposed. The withdrawal of H shares upon the surrender of ADRs, and the issuance of ADRs upon the deposit of H shares, will also attract stamp duty at the rate described above for sale and purchase transactions unless such withdrawal or deposit does not result in a passing of the beneficial interest in the H shares under Hong Kong law, in which case only a fixed duty of HK$5.00 is payable on the transfer. The issuance of the ADRs upon the deposit of H shares issued directly to the depositary of the ADSs, or for the account of the depositary, will not be subject to any stamp duty. No Hong Kong stamp duty is payable upon the transfer of ADSs outside Hong Kong. Estate duty Estate duty is imposed upon the principal value of property situated in Hong Kong which passes upon the death of a person. H shares are regarded as property situated in Hong Kong for estate duty purposes by virtue of being entered in a register in Hong Kong. We cannot assure you that the Hong Kong Inland Revenue Department will not treat the ADSs as Hong Kong property that may be subject to estate duty on the death of the beneficial owner of the ADSs even if the ADRs evidencing such ADSs are located outside Hong Kong at the date of such death. Hong Kong estate duty is imposed on a progressive scale from 5% to 15%. The rate of and the threshold for estate duty have, in the past, been adjusted on a fairly regular basis. No estate duty is payable when the aggregate value of the dutiable estate does not exceed HK$7.5 million, and the maximum rate of duty of 15% applies when the aggregate value of the dutiable estate exceeds HK$10.5 million. United States of America In the opinion of Debevoise & Plimpton, special United States tax counsel to China Life, the following is a discussion of the material United States federal income tax consequences relating to the purchase, ownership and disposition of H shares or ADSs by U.S. Holders (as defined below) that purchase H shares or ADSs in the international offering and hold the shares or ADSs as capital assets. This discussion is based on the Internal Revenue Code of 1986, as amended or, the Code, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion does not address all of the tax considerations that may be relevant to specific U.S. Holders in light of their particular circumstances or to U.S. Holders subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, tax-exempt entities, retirement plans, regulated investment companies, partnerships, dealers in securities, brokers, U.S. expatriates, persons who have acquired our H shares or ADSs as part of a straddle, hedge, conversion, or other integrated investment, persons who own, directly or by attribution, 10% or more of the combined voting power of all classes of stock of China Life or persons that have a "functional currency" other than the U.S. dollar). This discussion does not address any U.S. state or local or any U.S. federal estate, gift or alternative minimum tax considerations. As used in this discussion, the term "U.S. Holder" means a beneficial owner of H shares or ADSs that is, for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States or of any state or political subdivision thereof or therein, including the District of Columbia or (iii) an estate or trust the income of which is subject to U.S. federal income tax regardless of the source thereof. Prospective investors are urged to consult their own tax advisers as to the particular tax considerations applicable to them relating to the purchase, ownership and disposition of H shares or ADSs in their individual circumstances, including the applicability of U.S. federal, state and local tax laws, any changes in applicable tax laws and any pending or proposed legislation or regulations. 219 Taxation of dividends Subject to the discussion below under "--Special Rules", cash distributions with respect to the H shares or ADSs will, upon receipt, be includible in the gross income of a U.S. Holder as ordinary dividend income to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent that the amount of any such cash distribution exceeds our current and accumulated earnings and profits as so computed, it will be treated first as a non-taxable return of capital to the extent of the U.S. Holder's adjusted tax basis in such H shares or ADSs and, to the extent the amount of such cash distribution exceeds adjusted tax basis, will be treated as gain from the sale of such H shares or ADSs. Dividends paid by us generally will constitute income from sources outside the United States for foreign tax credit limitation purposes and will not be eligible for the "dividends received" deduction. Recently enacted legislation (the "2003 Tax Act") reduces to 15% the maximum tax rate applicable to certain dividends received by individuals during taxable years beginning on or before December 31, 2008, so long as certain holding period requirements are met. Dividends received from "qualified foreign corporations" generally qualify for the reduced rate. A non-U.S. corporation (other than a foreign personal holding company, foreign investment company, or passive foreign investment company) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive income tax treaty with the United States which the Secretary of the Treasury determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. The Treasury Department has determined that the U.S.-China income tax treaty as currently in effect meets the requirements described in clause (i) above. In addition, the ADSs are expected to be readily tradable on the New York Stock Exchange, an established securities market in the United States. Each U.S. Holder that is an individual is urged to consult his tax adviser regarding the possible applicability of the reduced rate under the 2003 Tax Act and the related restrictions and special rules. The U.S. dollar value of any distribution made by us in Renminbi (or other currency that is not the U.S. dollar, or a foreign currency), should be calculated by reference to the exchange rate in effect on the date of receipt of such distribution by JPMorgan Chase Bank, as depositary, in the case of ADSs, or by the U.S. Holder, in the case of H shares held directly by such U.S. Holder regardless of whether the Hong Kong dollars (or such other foreign currency) so received are converted into U.S. dollars on the date of receipt. If the Hong Kong dollars (or such other foreign currency) so received are converted into U.S. dollars on the date of receipt, such U.S. Holder generally should not recognize foreign currency gain or loss on such conversion. If the Hong Kong dollars (or such other foreign currency) are not converted into U.S. dollars on the date of receipt, such U.S. Holder will have a basis in the Hong Kong dollars (or such other foreign currency) equal to their U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the Hong Kong dollars (or such other foreign currency) generally will be treated as ordinary income or loss from sources within the United States for foreign tax credit limitation purposes. As described above under "--The People's Republic of China--Taxation of Dividends", under current practice, Chinese withholding tax will not be collected from dividends paid with respect to overseas shares such as H shares and ADSs. If, in the future, Chinese withholding tax were to be collected from dividends paid on H shares or ADSs, a U.S. Holder should be entitled, at its option, to either a deduction or a tax credit for the amount paid or withheld. There are significant and complex limitations that apply to foreign tax credits. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and U.S. Holders are urged to consult their own U.S. tax advisers with respect to foreign tax credit considerations in their individual circumstances. Sale or other disposition of H shares or ADSs Subject to the discussion below under "--Special Rules", a U.S. Holder generally will recognize gain or loss for U.S. federal income tax purposes upon a sale or other disposition of our H shares or ADSs in an amount equal 220 to the difference between the amount realized from the sale or disposition and the U.S. Holder's adjusted tax basis in the shares or ADSs. The gain or loss generally will be a capital gain or loss and will be long-term capital gain (taxable at a reduced rate for individuals) or loss if, on the date of sale or disposition, the H shares or ADSs were held by the U.S. Holder for more than one year and will generally be U.S. source gain or loss. The claim of a deduction in respect of a capital loss may be subject to limitations. A U.S. Holder that receives Hong Kong dollars (or other foreign currency) from the sale or disposition generally will realize an amount equal to the U.S. dollar value of the Hong Kong dollars (or the other foreign currency) on the settlement date of the sale or disposition if (i) the U.S. Holder is a cash basis or electing accrual basis taxpayer and our H shares or ADSs, as the case may be, are treated as being "traded on an established securities market" for this purpose or (ii) the settlement date is the date of the sale or disposition. If the Hong Kong dollars (or the other foreign currency) so received are converted into U.S. dollars on the settlement date, the U.S. Holder should not recognize foreign currency gain or loss on the conversion. If the Hong Kong dollars (or the other foreign currency) so received are not converted into U.S. dollars on the settlement date, the U.S. Holder will have a basis in the Hong Kong dollars (or the other foreign currency) equal to the U.S. dollar value on the settlement date. Any gain or loss on a subsequent conversion or other disposition of the Hong Kong dollars (or the other foreign currency) generally will be treated as ordinary income or loss to the U.S. Holder and generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. A U.S. Holder should consult its own tax adviser regarding the U.S. federal income tax consequences of receiving Hong Kong dollars (or other currency) from a sale or disposition of the H shares or ADSs in cases not described in this paragraph. Special rules Related Person Insurance Income. Certain adverse U.S. income and tax reporting rules may apply to U.S. holders who, directly or indirectly, own stock of a non-U.S. corporation that earns "related person insurance income" ("RPII"), if 25% or more of the non-U.S. corporation's direct or indirect shareholders are U.S. persons. If applicable, these rules would require U.S. Holders to include in taxable income each year their pro rata share of any RPII for the year, regardless of whether such income is distributed, and also to file I.R.S. Form 5471, disclosing certain information regarding their direct or indirect ownership of the non-U.S. corporation. For organizations that are otherwise exempt from U.S. federal income tax under section 501(a) of the Code, any such income would constitute "unrelated business taxable income." These rules could also apply to convert some or all of the gain recognized from the sale or disposition of H shares or ADSs from capital gain to ordinary income and to report such gain on I.R.S. Form 5471. Under a statutory exception, these rules do not apply if less than 20% of the non-U.S. corporation's insurance income is derived from the insurance (or reinsurance) of insureds who are also U.S. Holders (or related to a U.S. Holder). Because, upon completion of the global offering, CLIC will hold an aggregate of no less than 75% of our share capital (or approximately % if the over-allotment is exercised in full), and we do not offer or intend to offer our products and services in the United States, it is highly unlikely that the Related Person Insurance Income rules will apply at the time of the global offering. If more of our shares are sold to the public in the future, it is possible that such rules could apply at a later date. Passive Foreign Investment Company. In general, a non-U.S. corporation will be a passive foreign investment company, or a PFIC, if 75% or more of its gross income constitutes "passive income" or 50% or more of its assets produce "passive income" or are held for the production of "passive income". For the purpose of determining whether a non-U.S. corporation is a PFIC, "passive income" is defined to include income of the kind which would be foreign personal holding company income under section 954(c) of the Code, and generally includes interest, dividends, annuities and other investment income. Passive income does not include interest income or dividends received from controlled subsidiaries or certain other related persons, to the extent properly allocable to income of such related person that is not passive income. In addition, the PFIC 221 provisions specifically exclude from the definition of "passive income" any income "derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business and which would be subject to tax under subchapter L if it were a domestic corporation". This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income. Thus, to the extent that income is attributable to financial reserves in excess of the reasonable needs of the insurance business, it may be treated as passive income. We believe that we are, and we anticipate that we will continue to be, predominantly engaged in an insurance business and that we do not, and will not, have financial reserves in excess of the reasonable needs of our insurance business. Accordingly, our income and assets should not be passive income and passive assets. As a result, we do not expect to be classified as a PFIC for any tax year. However, an actual determination of PFIC status is inherently factual in nature and cannot be made until the close of each applicable tax year and, accordingly, no assurances can be given that we will not become a PFIC at some point in the future. In general, a U.S. Holder of a PFIC is subject to a special tax and an interest charge at the time of the sale of (or receipt of an "excess distribution" with respect to) its shares in the PFIC. We do not intend to comply with the requirements necessary to permit a holder to make a "qualified electing fund" election under section 1295 of the Code. In general, a shareholder is treated as having received an "excess distribution" if the amount of the distribution was more than 125% of the average distribution with respect to its shares during the three preceding taxable years (or shorter period during which the taxpayer held the shares). The special tax is computed by assuming that the excess distribution or, in the case of a sale, the gain with respect to the shares was earned in equal portions throughout the holder's period of ownership. The portion allocable to each year prior to the year of sale is taxed at the maximum marginal tax rate applicable for each such period. The interest charge is determined based on the applicable rate imposed on underpayments of U.S. federal income tax for the period. The above results may be eliminated if a "mark-to-market" election is available and a U.S. Holder validly makes such an election. If the election is made, such U.S. Holder generally will be required to take into account the difference, if any, between the fair market value and its adjusted tax basis in H shares or ADSs at the end of each taxable year as ordinary income or ordinary loss (to the extent of any net mark-to-market gain previously included in income). In addition, any gain from a sale or other disposition of H shares or ADSs will be treated as ordinary income, and any loss will be treated as ordinary loss (to the extent of any net mark-to-market gain previously included in income). A mark-to-market election is available to a U.S. Holder only if our H shares or ADSs are considered "marketable stock" for these purposes. Generally, stock will be considered marketable stock if it is "regularly traded" on a "qualified exchange" within the meaning of applicable U.S. Treasury regulations. A class of stock is regularly traded during any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. A non-U.S. securities exchange will constitute a qualified exchange if it is regulated or supervised by a governmental authority of the country in which the market is located and meets certain trading, listing, financial disclosure and other requirements set forth in the Treasury Regulations. We do not know whether our H shares or ADSs will be treated as marketable stock for these purposes. 222 ENFORCEABILITY OF CIVIL LIABILITIES We are a joint stock company with limited liability incorporated under the laws of China, and substantially all of our assets are located outside the United States. We have appointed CT Corporation System, located at 111 Eighth Avenue, New York, New York 10019, as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any State of the United States or under the deposit agreement or the ADRs referred to under "Description of American Depositary Receipts", or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York. However, it may be difficult for investors to enforce outside the United States judgments against us obtained in the United States in any such actions, including actions predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any State of the United States. In addition, our directors, supervisors and executive officers and certain of the underwriters and experts named in this prospectus are resident outside the United States, and all or a substantial portion of the assets of these persons are or may be located outside the United States. Therefore, it may not be possible for investors to effect service of process within the United States upon them, or to enforce against them or us judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any State of the United States. The difficulty of enforcing a judgment of a U.S. court in China stems from the lack of any official arrangement providing for judicial assistance to the enforcement of judgments of courts of the United States in the PRC. China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts within the United States, the United Kingdom, Japan or many other members of the Organization for Economic Cooperation and Development. In the absence of such a treaty, judgments of U.S. courts will not be enforced in the PRC without review of the merits of the claims and the claims brought in the original action in the United States court will have to be relitigated on their merits. Likewise, administrative actions brought by regulatory authorities, such as the SEC, and other actions, which result in foreign court judgments, could (assuming such actions are not required by Chinese law or our articles of association to be arbitrated) only be enforced in China if such judgments or rulings do not violate the basic principles of the law of China or the sovereignty, security and public interest of the society of China, as determined by a People's Court of China that has jurisdiction for recognition and enforcement of judgments. We have been advised by our Chinese counsel, King & Wood, that there is doubt: . as to the enforceability in China of any actions to enforce judgments of United States courts arising out of or based on the ownership of the H shares or ADSs, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws; and . whether Chinese courts would enforce, in original actions, judgments against our directors and officers predicated solely upon the federal securities laws of the United States. Furthermore, an original action may be brought in the PRC against us, our directors, supervisors or executive officers or the underwriters and experts named in this prospectus 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 such an original action, a PRC court may award civil liability, including monetary damages. Our Hong Kong legal adviser, Allen & Overy, has advised us that Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. However, under Hong Kong common law, a foreign judgment (including one from a court in the United States predicated on federal or state securities laws of the United States) may be enforced in Hong Kong by bringing an action in a Hong Kong court, and then seeking summary or default judgment on the strength of the foreign judgment, provided that the foreign judgment is for a debt or definite sum of money and is final and conclusive on the merits. 223 In addition, the Hong Kong courts may refuse to recognize or enforce a foreign judgment if: . the judgment was obtained by fraud; . the foreign court lacked the appropriate jurisdiction at the time; . it is contrary to public policy or natural justice; . the judgment is for multiple damages; or . it was based on foreign penal, revenue, or other public law. 224 UNDERWRITERS General The global offering consists of a U.S. offering, an international offering and a public offering in Hong Kong. China International Capital Corporation Limited, Citigroup Global Markets Asia Limited, Credit Suisse First Boston (Hong Kong) Limited and Deutsche Bank AG, Hong Kong Branch (in alphabetical order) are acting as joint global coordinators and joint global bookrunners for the global offering. On the terms and subject to the conditions contained in a U.S. and international underwriting agreement, dated the date of this prospectus, among us, CLIC, who is the selling shareholder, the U.S. underwriters named below, for whom China International Capital Corporation Limited, Citigroup Global Markets Inc., Credit Suisse First Boston LLC and Deutsche Bank Securities Inc. (in alphabetical order) are acting as U.S. representatives, and the international underwriters named below, for whom China International Capital Corporation Limited, Citigroup Global Markets Limited, Credit Suisse First Boston LLC and Deutsche Bank AG, Hong Kong Branch (in alphabetical order) are acting as international representatives, the U.S. and international underwriters have severally agreed to purchase, and we and the selling shareholder have agreed to sell to them, severally, the number of ADSs indicated below:
Number of Name ADSs ---- --------- U.S. underwriters: China International Capital Corporation Limited Citigroup Global Markets Inc................... Credit Suisse First Boston LLC................. Deutsche Bank Securities Inc................... Subtotal....................................... -------- International underwriters: China International Capital Corporation Limited Citigroup Global Markets Limited............... Credit Suisse First Boston LLC................. Deutsche Bank AG, Hong Kong Branch............. Subtotal....................................... -------- Total........................................... ========
We and the selling shareholder also entered into a Hong Kong underwriting agreement with the underwriters participating in the Hong Kong public offering, including China International Capital Corporation (Hong Kong) Limited, Citigroup Global Markets Asia Limited, Credit Suisse First Boston (Hong Kong) Limited and Deutsche Bank AG, Hong Kong Branch (in alphabetical order), for the public offer of H shares for subscription in Hong Kong. The Hong Kong public offering is conditional upon, among other things, the Listing Committee of the Hong Kong Stock Exchange granting the listing of, and permission to deal in, our H shares offered in the global offering on the Hong Kong Stock Exchange. The closing of the sale of ADSs or H shares under each underwriting agreement described above is conditional on the closings of the sales of ADSs or H shares under the other two underwriting agreements described above. The U.S. underwriters and the international underwriters are referred to collectively as the underwriters, and the U.S. representatives and the international representatives are referred to collectively as the representatives in this section, in each case where the context requires. 225 To provide for coordination among the different underwriting syndicates, the U.S. underwriters, the international underwriters and the Hong Kong underwriters have entered into an intersyndicate agreement. It is contemplated in the intersyndicate agreement that sales may be made among the U.S. underwriters, international underwriters and Hong Kong underwriters of any number of ADSs or H shares as may be agreed mutually. The price of any ADSs sold by the underwriters shall be the public offering price listed on the cover page of this prospectus, in U.S. dollars, less an amount not greater than the amount of the concession to dealers described below. The initial public offering price per ADS and price per H share in the U.S. and international offerings include a Securities and Futures Commission transaction levy, an investor compensation levy and a Hong Kong Stock Exchange trading fee, which will be paid to the relevant authorities by us and the selling shareholder. The underwriters propose to offer ADSs at the initial public offering price set forth on the cover page of this prospectus. They may sell ADSs to certain dealers at the initial public offering price less a concession not in excess of US$ per ADS. The underwriters may allow, and such dealers may reallow, a discount not in excess of US$ per ADS on sales to certain other dealers. After the initial public offering, the public offering prices and the concessions and discounts may be changed. H shares may be delivered instead of ADSs at the option of purchasers in the U.S. offering and the international offering and such initial purchases of H shares will be settled in Hong Kong dollars based on an exchange rate of HK$ to US$1.00, the noon buying rate on , 2003, and adjusted for the ratio of H shares per ADS. The following table summarizes the compensation we and the selling shareholders each will pay, assuming no exercise of the underwriters' over-allotment option and assuming full exercise of the underwriters' over-allotment option:
Per ADS Total ------------------- ------------------- Without With Without With over- over- over- over- allotment allotment allotment allotment --------- --------- --------- --------- Underwriting discounts and commissions payable by us......... US$ US$ US$ US$ Underwriting discounts and commissions payable by the selling shareholder................................................ US$ US$ US$ US$
The information in the above table excludes H shares offered in the Hong Kong public offering. The underwriting discount consists of the difference between the amount paid by the underwriters to purchase the ADSs from us and the selling shareholder and the offering price of the ADSs to the public. The underwriting discounts and commissions are % of the total amount of the U.S. offering and the international offering. The initial public offering prices and underwriting discounts and commissions per ADS are the same for each of the U.S. offering and the international offering. The U.S. underwriters, international underwriters and Hong Kong underwriters have agreed that, if the number of H shares validly applied for in the Hong Kong public offering represents a multiple of: (1) 15 times or more but less than 50 times, (2) 50 times or more but less than 100 times, or (3) 100 times or more than 100 times the number of H shares initially available in such offering, then an additional H shares, H shares or H shares, respectively, will be reallocated to the Hong Kong public offering, such that the additional H shares, when aggregated with the H shares initially available in the Hong Kong public offering, will represent approximately 7.5% in the case of (1) above, 10% in the case of (2) above and 20% in the case of (3) above, 226 of the total number of H shares initially available under the global offering, without giving effect to the underwriters' over-allotment option. In such case, the number of ADSs allocated to the U.S. offering and the international offering will be reduced correspondingly, in such manner as the joint global coordinators deem appropriate. Any unsold H shares in the Hong Kong public offering may be reallocated to the U.S. offering and the international offering. The joint global coordinators also have discretion to reallocate additional H shares to the Hong Kong public offering from the U.S. offering and international offering. H shares offered in the Hong Kong public offering will be offered initially at a maximum price to be determined immediately prior to commencement of the Hong Kong public offering. If the initial public offering price per ADS in the U.S. offering and the international offering is less than the equivalent maximum public offering price per H share in the Hong Kong public offering, the purchasers of H shares in the Hong Kong public offering will receive a refund such that their effective price per H share (including a 1.0% brokerage fee, a 0.005% Hong Kong Securities and Futures Commission transaction levy, a 0.002% investor compensation levy and a 0.005% Hong Kong Stock Exchange trading fee payable in respect of offerings of securities listed on the Hong Kong Stock Exchange and adjusted for the ratio of H shares per ADS) will be equivalent to the initial public offering price per ADS in the U.S. offering and the international offering based on an exchange rate of HK$ to US$1.00, the noon buying rate on , 2003. The offer and sale as part of the initial distribution in the global offering of the ADSs and H shares subject to the international offering and the Hong Kong public offering have not been registered under the U.S. Securities Act of 1933. These ADSs and H shares have, however, been registered under the Securities Act solely for purposes of their resale in the United States in transactions that require registration under the Securities Act. These ADSs and H shares initially will be offered outside the United States in compliance with Regulation S under the Securities Act. This prospectus may be used in connection with resales of such ADSs and H shares in the United States to the extent such transactions would not be exempt from registration under the Securities Act. We and the selling shareholder have granted an option to the underwriters, exercisable in whole or in part at the discretion of the joint global coordinators, at any time or from time to time, during the 30-day period from the day on which dealings commence on the New York Stock Exchange or the Hong Kong Stock Exchange, whichever is earlier, to purchase up to an additional ADSs and ADSs from us and the selling shareholder, respectively, at the initial public offering price per ADS less the underwriting discount. The joint global coordinators may exercise the option on behalf of the underwriters solely for the purpose of covering over-allotments, if any, in connection with the global offering. To the extent that the joint global coordinators exercise the option on behalf of the underwriters, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional ADSs approximately proportionate to such underwriter's initial purchase commitment. The ADSs have been approved for listing on the New York Stock Exchange under the symbol "LFC". To meet the distribution standards of the New York Stock Exchange for the U.S. offering, the U.S. underwriters have undertaken to distribute the ADSs in a manner so as to: . Create a minimum of 2,000 round lots of ADSs; and . offer a minimum public float of 1.1 million ADSs in the United States with an offering value in excess of US$60.0 million. The Hong Kong Stock Exchange has granted approval in principle for the listing of the H shares on the Hong Kong Stock Exchange under the stock code "2628". 228 Each of us and the selling shareholder has agreed that, without the prior written consent of the joint global coordinators on behalf of the underwriters, it will not, during the period ending 180 days after the date of this prospectus: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant or agree to grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any ADSs, H shares directly or in the form of depositary receipts, our shares or any securities convertible into or exercisable or exchangeable for, or that represent the right to receive, ADSs, H shares or our shares; . enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the ADSs, H shares or our shares; or . publicly disclose that it will or may enter into any transaction described above, whether any transaction described above is to be settled by delivery of ADSs, H shares or such other securities, in cash or otherwise. We have undertaken to the Hong Kong Stock Exchange that, except to the extent permitted under the global offering or the over-allotment option: (i) in the first six months after the date on which dealings in the H shares commence on the Hong Kong Stock Exchange, or the First Six-month Period, we will not allot or issue or agree to allot or issue any H shares or other securities (including warrants or other convertible securities) or grant or agree to grant options or rights over any H shares or other securities or enter into swap or other arrangements that transfer, in whole or in part, any part of the economic consequence of ownership of any H shares or offer or agree to do any of the foregoing or announce any intention to do so, without the prior consent of the Hong Kong Stock Exchange and unless in compliance with the requirements of the Hong Kong Stock Exchange Listing Rules; and (ii) in the period of six months commencing from the expiry of the First Six-month Period, or the Second Six-month Period, we will not allot or issue or agree to allot or issue any H shares or other securities (including warrants or other convertible securities) or grant or agree to grant options or rights over any H shares or other securities or enter into swap or other arrangements that transfer, in whole or in part, any part of the economic consequence of ownership of any H shares or offer or agree to do any of the foregoing or announce any intention to do so, if such action would result in CLIC ceasing to be our controlling shareholder (as defined in the Hong Kong Stock Exchange Listing Rules). The selling shareholder has undertaken to the Hong Kong Stock Exchange that, except to the extent permitted under the global offering or the over-allotment option: (i) in the First Six-month Period, it will not, and will procure that the registered holder does not, without our prior written consent and that of the Hong Kong Stock Exchange and unless in compliance with the requirements of the Hong Kong Stock Exchange Listing Rules, dispose of any of our shares in respect of which it is shown by this prospectus to be the beneficial owner, or the CLIC shares; (ii) in the Second Six-month Period, it will not, without our prior written consent and that of the Hong Kong Stock Exchange, dispose of or permit the registered holder to dispose of any of the CLIC shares if, immediately following such disposal, it would cease to be our controlling shareholder (as defined in the Hong Kong Stock Exchange Listing Rules); and (iii) it will on any disposal of any of the CLIC shares during the Second Six-month Period, take all reasonable steps to ensure that any such disposal will not create a disorderly or false market. 228 The selling shareholder has undertaken to us and the Hong Kong Stock Exchange that it will, at any time after the date of this prospectus up to and including the date falling 12 months after the date on which dealings in the H shares on the Hong Kong Stock Exchange commence immediately inform us, the joint global coordinators and the Hong Kong Stock Exchange of: (i) any pledges or charges of any of our shares or our other share capital beneficially owned by it and the number of such shares or other securities so pledged or charged; and (ii) any indication received by it, either verbal or written, from any pledgee or chargee of any of our shares or our other share capital pledged or charged that such shares or our other share capital will be disposed of. We will inform the Hong Kong Stock Exchange as soon as we have been informed of the above matter (if any) by the selling shareholder and disclose such matters by way of a press notice which is published in the newspapers as soon as possible after being so informed by the selling shareholder. Purchasers of the ADSs or H shares offered by this prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the initial public offering price set forth on the front cover page of this prospectus. The underwriters do not expect any account to subscribe for more than 5% of the global offering. China International Capital Corporation Limited is not a U.S. registered broker-dealer and, therefore, intends to effect any offers and sales of ADSs in the United States only through one or more U.S. registered broker-dealers as permitted by U.S. securities laws and by NASD regulations. China International Capital Corporation Limited and Lehman Brothers Inc. have acted as financial advisers to us in connection with the global offering and will receive US$ million from us in compensation for such services. China International Capital Corporation Limited is a joint global coordinator, a U.S. underwriter and an international underwriter, and is an affiliate of China International Capital Corporation (Hong Kong) Limited, a Hong Kong underwriter. Some of the underwriters may have in the past provided, and may in the future provide, investment banking, underwriting or financial services to us or our affiliates for which they would have received customary compensation. In connection with the offering of the ADSs and the H shares, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the ADSs and the H shares. Specifically, the underwriters may sell more ADSs or H shares than they are obligated to purchase under the underwriting agreement, creating a covered short position. A short sale is covered if the short position is no greater than the number of ADSs or H shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing ADSs or H shares in the open market. In determining the source of ADSs or H shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of ADSs or H shares compared to the price available under the over-allotment option. As an additional means of facilitating the offering, China Life will appoint one of the joint global coordinators (the "stabilization manager") who, acting directly or through one or more agents, may bid for, and purchase, ADSs or H shares in the open market to stabilize the price of the ADSs or H shares. The underwriters also may impose a penalty bid, which occurs when a particular underwriter repays to the other underwriters a portion of the underwriting discount received by it because the stabilization manager or its agent has repurchased ADSs or H shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities may raise or maintain the market price of the ADSs or H shares 229 above independent market levels or prevent or retard a decline in the market price of the ADSs or H shares. The underwriters are not under any obligation to engage in these activities. Any such activities may be discontinued at any time, and must be brought to an end after a limited period. We and the selling shareholder have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in respect of any of these liabilities. A prospectus in electronic format may be made available on the websites maintained by one or more underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the lead managers to underwriters that may make Internet distributions on the same basis as other allocations. It is expected that delivery of our ADSs and H shares will be made against payment for such ADSs and H shares on or about the date specified on the cover page of this prospectus, which will be the business day following the date of pricing of the ADSs (this settlement cycle being referred to as T + ). In compliance with Rule 15c6-1 under the Exchange Act, trades in the secondary market are generally required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the ADSs or H shares on the date of this prospectus should specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement and should consult their own advisers. Selling Restrictions No action has been taken in any jurisdiction (except in the United States, Hong Kong and Japan) that would permit a public offering of the ADSs or H shares, or the possession, circulation or distribution of this prospectus or any other material relating to us, the selling shareholders or the ADSs or H shares in any jurisdiction where action for that purpose is required. Accordingly, neither the ADSs nor the H shares may be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in connection with the ADSs or H shares may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. To provide for the coordination of the global offering, the U.S. underwriters, the international underwriters and the Hong Kong underwriters have entered into the intersyndicate agreement. Under the intersyndicate agreement, (i) each U.S. underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any ADSs or H shares for the account of anyone other than a United States or Canadian Person (as defined below); and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any ADSs or H shares or distribute any prospectus relating to the ADSs or H shares outside the United States or Canada or to anyone other than a United States or Canadian Person; (ii) each international underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any ADSs or H shares for the account of any United States or Canadian Person; and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any such ADSs or H shares or distribute any prospectus relating to the ADSs or H shares in the United States or Canada or to any United States Person or Canadian Person. With respect to any underwriter that is simultaneously a U.S. underwriter and an international underwriter, the foregoing representations and agreements (i) made by it in its capacity as a U.S. underwriter apply only to it in its capacity as a U.S. underwriter, and (ii) made by it in its capacity as an international underwriter apply only to it in its capacity as an international underwriter. The foregoing restrictions do not apply to stabilization transactions or to certain other transactions specified in the intersyndicate agreement. 230 Under the intersyndicate agreement, each Hong Kong underwriter has represented and agreed that, with certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any H shares or distribute any prospectus relating to any of the H shares in the United States or Canada or to any United States Person or Canadian Person or to any person who it believes intends to reoffer, resell or deliver any of the H shares in the United States or Canada or to any United States Person or Canadian Person. "United States Person or Canadian Person" means any national or resident of the United States or Canada, or any corporation, person, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States and Canada of any United States Person or Canadian Person), and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. Canada. Under the intersyndicate agreement, each U.S. underwriter has represented and agreed that (i) it has not offered or sold, and will not offer or sell, any ADSs or H shares, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and has represented that any offer or sale of ADSs or H shares in Canada will be made only (a) in accordance with an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and (b) by a dealer duly registered under the applicable securities laws of that province or territory or in circumstances where an exemption from the applicable registered dealer requirements is available; and (ii) it will send to any dealer who purchases from it any of the ADSs or H shares a notice stating in substance that, by purchasing such ADSs or H shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such ADSs or H shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer or sale of ADSs or H shares in Canada will be made only (a) in accordance with an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and (b) by a dealer duly registered under the applicable securities laws of that province or territory or in circumstances where an exemption from the applicable registered dealer requirements is available, and that such dealer will deliver to any other dealer to whom it sells any of such ADSs or H shares a notice containing substantially the same statement as is contained in this sentence. United Kingdom. Under the intersyndicate agreement, each international underwriter has represented and agreed that (i) it has not offered or sold and, prior to the expiry of a period of six months from the completion of the global offering, will not offer or sell any ADSs or H shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses, or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 (the "FSMA") with respect to anything done by it in relation to any ADSs or H shares in, from or otherwise involving the United Kingdom; and (iii) it only has communicated or caused to be communicated and only will communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any ADSs or H shares in circumstances in which section 21(1) of the FSMA does not apply to us. France. Under the intersyndicate agreement, each international underwriter has represented and agreed that (i) neither this prospectus nor any offering material relating to ADSs or H shares has been or will be submitted to the "Commission des Operations de Bourse" for approval ("Visa") in France; and (ii) it has not offered or sold and will not offer or sell any ADSs or H shares or distribute or cause to be distributed any copies of this prospectus or any offering material relating to the ADSs or H shares, directly or indirectly, in France, except to qualified investors ("investisseurs qualifies") and/or a restricted group of investors ("cercle restreint d'investisseurs"), in each case acting for their account, all as defined in, and in accordance with, Article L. 411-1 and L. 411-2 of the Monetary and Financial Code and "Decret" no. 98-880 dated October 1, 1998. 231 Germany. Under the intersyndicate agreement, each international underwriter has represented and agreed that (i) this prospectus is not a Securities Selling Prospectus (Verkaufsprospekt) within the meaning of the German Securities Prospectus Act (Verkaufsprospektgesetz) of September 9, 1998, as amended, and has not been filed with and approved by the German Federal Supervisory Authority (Bundesanstalt fur Finanzdienstleistungsaufsicht) or any other German governmental authority; and (ii) it has not offered or sold and will not offer or sell any ADSs or H shares or distribute copies of this prospectus or any document relating to the ADSs, directly or indirectly, in Germany except to persons falling within the scope of paragraph 2 numbers 1, 2 and 3 of the German Securities Prospectus Act and by doing so has not taken, and will not take, any steps which would constitute a public offering of the ADSs or H shares in Germany. Italy. The offering of the ADSs or H shares has not been registered with the Commissione Nazionale per le Societa e la Borsa or "CONSOB", in accordance with Italian securities legislation. Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that the ADSs or H shares may not be offered, sold or delivered, and copies of this prospectus or any other document relating to the ADSs or H shares may not be distributed in Italy except to Professional Investors, as defined in Art. 31.2 of CONSOB Regulation no. 11522 of 1st July, 1998, as amended, pursuant to Art. 30.2 and Art. 100 of Legislative Decree no. 58 of 24th February, 1998 (or the Finance Law) or in any other circumstance where an express exemption to comply with the solicitation restrictions provided by the Finance Law or CONSOB Regulation no. 11971 of 14th May, 1999, as amended (or the Issuers Regulation) applies, including those provided for under Art. 100 of the Finance Law and Art. 33 of the Issuers Regulation, and provided, however, that any such offer, sale, or delivery of the ADSs or H shares or distribution of copies of this prospectus or any other document relating to the ADSs or H shares in Italy must (i) be made in accordance with all applicable Italian laws and regulations, (ii) be made in compliance with Article 129 of Legislative Decree no. 385 of 1 September 1993, as amended (the "Banking Law Consolidated Act") and the implementing guidelines of the Bank of Italy (Istruzioni di Vigilanza per le banche) pursuant to which the issue, trading or placement of securities in the Republic of Italy is subject to prior notification to the Bank of Italy, unless an exemption applies depending, inter alia, on the amount of the issue and the characteristics of the securities, (iii) be conducted in accordance with any relevant limitations or procedural requirements the Bank of Italy or CONSOB may impose upon the offer or sale of the securities, and (iv) be made only by (a) banks, investment firms or financial companies enrolled in the special register provided for in Article 107 of the Banking Law Consolidated Act, to the extent duly authorised to engage in the placement and/or underwriting of financial instruments in Italy in accordance with the Financial Laws Consolidated Act and the relevant implementing regulations; or by (b) foreign banks or financial institutions (the controlling shareholding of which is owned by one or more banks located in the same EU Member State) authorised to place and distribute securities in the Republic of Italy pursuant to Articles 15, 16 and 18 of the Banking Law Consolidated Act, in each case acting in compliance with every applicable law and regulation. The Netherlands. Under the intersyndicate agreement, each international underwriter has represented and agreed that it has not offered, distributed, sold, transferred or delivered, and will not offer, distribute, sell, transfer or deliver, any ADSs or H shares, directly or indirectly, in the Netherlands, as part of their initial distribution or at any time thereafter, to any person other than our employees or employees of our subsidiaries, individuals who or legal entities which trade or invest in securities in the conduct of their profession or business within the meaning of article 2 of the Exemption Regulation issued under the Securities Transactions Supervision Act 1995 ("Vrijstellingsregeling Wet toezicht effectenverkeer 1995"), which includes banks, brokers, pension funds, insurance companies, securities institutions, investment institutions and other institutional investors, including, among others, treasuries of large enterprises, who or which regularly trade or invest in securities in a professional capacity. Denmark. This prospectus has not been filed with or approved by the Danish Securities Council or any other regulatory authority in the Kingdom of Denmark. Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that the securities have not been offered or sold and may not be offered, sold or delivered directly or indirectly in Denmark, unless in compliance with Chapter 12 of the Danish Act on Trading in Securities and the Danish 232 Executive Order No. 166 of 13 March 2003 on the First Public Offer of Certain Securities issued pursuant hereto as amended from time to time. Norway. This prospectus has not been approved by or registered with the Oslo Stock Exchange under Chapter 5 of the Norwegian Securities Trading Act 1997. Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, any ADSs or H shares to any persons in Norway in any way that would constitute an offer to the public other than to persons who invest in securities as part of their professional activity and who are registered with the Oslo Stock Exchange in this capacity, or otherwise only in circumstances where an exemption from the duty to publish a prospectus under the Norwegian Securities Trading Act 1997 shall be applicable. Sweden. This prospectus has not been approved by or registered with the Swedish Financial Supervisory Authority (Finansinspektionen). Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, any ADSs or H shares to persons in Sweden, except to a "closed circle" of not more than 200 pre-selected, non-substitutable investors, under the Swedish Financial Instruments Trading Act ("Lag (1991:980) om handel med finansiella instrument") Belgium. Neither this prospectus nor any offering material relating to the ADSs or H shares has been or will be submitted to the "Commission Bancaire et Financiere/Commissie voor het Bank- en Financiewezen" for approval. Therefore, this prospectus will not constitute a prospectus under Belgium law. Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that neither this prospectus nor any offering material relating to the ADSs or H shares may be distributed or caused to be distributed, directly or indirectly, to the public in Belgium, except to: . "qualified investors", as defined in article 3, 2(degrees) of the Royal Decree of 7 July 1999 on the public character of financial transactions and acting for their own account, and . a restricted group of potential investors (without the intervention of any intermediaries other than those permitted under Belgian law), defined as a group of less than 51 persons, or, without restrictions, if the consideration to be paid by each investor amounts to at least Euro 250,000. Ireland. Under the intersyndicate agreement, each international underwriter has represented and agreed that (i) otherwise than in circumstances which are not deemed to be an offer to the public or any section of the public by virtue of the provisions of the Irish Companies Acts, 1963 to 2001, it has not offered or sold, and will not offer or sell, in Ireland, by means of any document, any ADSs or H shares, unless such offer or sale has been or is made to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, and it has not issued, and will not issue, in Ireland any form of application for ADSs or H shares; and (ii) it has not made and will not make any offer of ADSs or H shares to the public in Ireland to which the European Communities (Transferable Securities and Stock Exchange) Regulations, 1992 of Ireland would apply, except in accordance with the provisions of those regulations; and (iii) it has complied, and will comply, with all applicable provisions of the Investment Intermediaries Act 1995 of Ireland, with respect to anything done by it in relation to the offer, sale or delivery of the ADSs or H shares in or involving Ireland. Switzerland. Under the intersyndicate agreement, each international underwriter has represented and agreed that (i) it has not offered or sold, and will not offer or sell, the ADSs and H shares to any investors in Switzerland other than on a non-public basis; (ii) this prospectus does not constitute a prospectus within the meaning of Article 652a and Art. 1156 of the Swiss Code of Obligations (Schweizerisches Obligationenrecht); and (iii) none of this offering, the ADSs and H shares has been or will be approved by any Swiss regulatory authority. Luxembourg. Under the intersyndicate agreement, each international underwriter has represented and agreed that the ADS or H shares are not being offered to the public in the Grand Duchy of Luxembourg and each of the international underwriters represents, warrants and agrees that it will not offer the ADS or H shares or 233 cause the offering of the ADS or H shares or contribute to the offering of the ADS or H shares to the public in Luxembourg, unless all the relevant legal and regulatory requirements have been complied with. In particular, this offer has not been and may not be announced to the public and offering material may not be made available to the public. Australia. This prospectus is not a disclosure document under Chapter 6D of the Corporations Act 2001 (Cth) (the "Australian Corporations Act"), has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that (i) the offer of ADSs and H shares under this prospectus is only made to persons to whom it is lawful to offer ADSs and H shares without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia to only those persons as set forth in clause (i) above and (iii) such international underwriter must send the offeree a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above and unless permitted under the Australian Corporations Act agrees not to sell or offer for sale within Australia any ADS or H share sold to the offeree within 12 months after their transfer to the offeree under this prospectus. New Zealand. This prospectus has not been prepared or registered in accordance with the Securities Act 1978 of New Zealand. Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that it (i) has not offered or sold, and will not offer or sell, directly or indirectly, any ADSs or H shares and (ii) has not distributed and will not distribute, directly or indirectly, any offer materials or advertisements in relation to any offer of ADSs or H shares, in each case in New Zealand other than (a) to persons whose principal business is the investment of money or who, in the course of and for the purpose of their business, habitually invest money or (b) in other circumstances where there is no contravention of the Securities Act 1978 of New Zealand (or any statutory modification or re-enactment, or statutory substitution for, the securities legislation of New Zealand)." Hong Kong. Under the intersyndicate agreement, each international underwriter has represented and agreed that (i) it has not offered or sold, and will not offer or sell, in Hong Kong, by means of any document, any ADSs or H shares other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (CAP32) of Hong Kong; and (ii) except as permitted under the securities laws of Hong Kong, it has not issued, and will not issue, in Hong Kong any document, invitation or advertisement relating to the ADSs or H shares other than with respect to ADSs or H shares which are intended to be disposed of to persons outside Hong Kong or only to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. Japan. It is expected that a public offering without a listing of the H shares will be made in Japan. Under the intersyndicate agreement, each international underwriter has represented and agreed that (i) it has not offered or sold, and will not offer or sell, directly or indirectly, in Japan or to or for the account of any resident of Japan, any of the H shares acquired in connection with the distribution contemplated in the intersyndicate agreement, except in accordance with the terms and conditions of the public offering without a listing of the H shares in Japan, as stated in the securities registration statement filed on , 2003, with the Japanese authority under, or pursuant to any exemption from the registration requirements of, the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law; and (ii) it will send any dealer who purchases from it any H shares a notice stating in substance that, by purchasing such H shares, the dealer represents and agrees that it has not offered or sold, and will not offer or sell, any of the H shares, directly or indirectly, in Japan or to or for the account of any resident thereof, except in accordance with the terms and conditions of the public offering without a listing of the H shares in Japan, as stated in the securities registration statement filed on , 2003, with the Japanese authority under, or pursuant to any exemption from the 234 registration requirements of, the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law, and that such dealer will send to any other dealer to whom it sells any of such H shares a notice containing substantially the same statement as is contained in this sentence. As used in this paragraph, "resident of Japan" means any person residing in Japan, including any corporations or other entities organized under the laws of Japan. Singapore. This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, under the intersyndicate agreement, each international underwriter has represented and agreed that it will not offer or sell ADSs or H shares, nor will it make ADSs or H shares the subject of an invitation for subscription or purchase, nor will it circulate or distribute this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of ADSs or H shares, whether directly or indirectly, to the public or any member of the public in Singapore other than: . to an institutional investor or other person specified in Section 274 of the Securities and Futures Act 2001, Chapter 289, of Singapore (the Securities and Futures Act), . to a sophisticated investor, and in accordance with the conditions, specified in Section 275 of the Securities and Futures Act, or . otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act. Korea. The ADSs or H shares of common stock offered in this Offering have not been registered under the Korean Securities and Exchange Law, and, under the intersyndicate agreement, each international underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, in Korea or to or for the account of any resident of Korea, any of the ADSs or H shares acquired in connection with the distribution contemplated by the intersyndicate agreement, except otherwise permitted by applicable provisions of Korean laws and regulations, including, without limitation, the Korean Securities and Exchange Law and Foreign Exchange Transaction Law. United Arab Emirates. Under the intersyndicate agreement, each international underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any ADSs or H shares in the United Arab Emirates, except: . in compliance with all applicable laws and regulations of the United Arab Emirates, and . through persons or corporate entities authorized and licensed to provide investment advice and/or engage in brokerage activity and/or trade in respect of foreign securities in the United Arab Emirates. People's Republic of China. Under the intersyndicate agreement, each international underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any ADSs or H shares in the People's Republic of China (excluding Hong Kong for the purposes of this paragraph). Pricing of the Offering Prior to the global offering, there has been no public market for the ADSs and the H shares. The initial public offering price of the ADSs will be determined by negotiations between the joint global coordinators, us and the selling shareholder. Among the factors considered in such negotiations will be prevailing market conditions, current market valuations of publicly traded companies that we and the underwriters believe to be reasonably comparable to us, an assessment of our results of operations in recent periods, estimates of our business potential and earnings prospects, the current state of our development and the current state of our 235 industry and the economy as a whole. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. The address of China International Capital Corporation Limited is 28th Floor, China World Tower 2, No.1, Jian Guo Men Wai Avenue, Beijing 100004, China. The address of Citigroup Global Markets Inc. is 388 Greenwich Street, New York, NY 10013. The address of Citigroup Global Markets Limited is Citigroup Centre, 33 Canada Square, Canary Wharf, London, England E14 5LB. The address of Citigroup Global Markets Asia Limited is 20th Floor, Three Exchange Square, Central, Hong Kong. The address of Credit Suisse First Boston LLC is Eleven Madison Avenue, New York, NY 10010-3629. The address of Credit Suisse First Boston (Hong Kong) Limited is 45/F, Two Exchange Square, 8 Connaught Place, Central, Hong Kong. The address of Deutsche Bank Securities Inc. is 60 Wall Street, New York, NY 10005. The address of Deutsche Bank AG, Hong Kong Branch is 55th Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong. LEGAL MATTERS The validity of H shares under Chinese law will be passed upon for us and CLIC by King & Wood, Beijing, PRC, and for the underwriters by Haiwen & Partners, Beijing, PRC. Certain legal matters of United States and New York law will be passed upon for us and CLIC by Debevoise & Plimpton, New York, New York, and for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal matters of Hong Kong law will be passed upon for us and CLIC by Allen & Overy, Hong Kong, SAR, and for the underwriters by Baker & McKenzie, Hong Kong, SAR. EXPERTS The consolidated financial statements of China Life as of December 31, 2000, 2001 and 2002 and as of June 30, 2002 and 2003 and for each of the three years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this prospectus have been so included in reliance upon the report of PricewaterhouseCoopers, independent accountants, given upon the authority said firm as experts in auditing and accounting. PricewaterhouseCoopers was retained to audit our consolidated financial statements in September 2002. The address of the auditors is 22/F, Prince's Building, Central, Hong Kong. Tillinghast-Towers Perrin, consulting actuaries, located at Suite 3001 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, has rendered an opinion, dated November 20, 2003, to us with respect to our embedded value and value of one year's sales as of June 30, 2003. See "Embedded Value". A copy of Tillinghast-Towers Perrin's summary report containing their opinion is included as Annex A to this prospectus, and has been so included with the consent and in reliance upon the authority of that firm as experts in the actuarial matters set out in their summary report. 236 The valuation report included in this prospectus in Annex B has been prepared by Sallmanns (Far East) Ltd., located at 15/F, Lucky Centre, 165-171 Wanchai Road, Hong Kong, and has been included with the consent and in reliance of the valuations given upon the authority of that firm as experts in valuing property interests in buildings and real property. EXPENSES RELATING TO THIS OFFERING The following table sets forth the main estimated expenses in connection with this offering, other than the underwriting discounts and commissions, which we and the selling shareholder will be required to pay: U.S. Securities and Exchange Commission registration fee US$203,000 National Association of Securities Dealers filing fee... US$ 30,500 New York Stock Exchange listing fee..................... US$ Hong Kong Stock Exchange listing fee.................... US$ Legal fees and expenses................................. US$ Accounting fees and expenses............................ US$ Printing fees........................................... US$ Financial advisory fees and expenses.................... US$ Other fees and expenses................................. US$ ---------- Total................................................... US$ ==========
All amounts are estimated, except the U.S. Securities and Exchange Commission registration fee, the New York Exchange listing fee and the NASD filing fee. Expenses will be borne in proportion to the number of shares sold in the offering by us and the selling shareholders respectively. 237 WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form F-1 (No. 333- ) under the Securities Act of 1993, with respect to the H shares, and a registration statement on Form F-6 (No. 333- ) under the Securities Act of 1993 with respect to the ADSs. This prospectus does not contain all of the information in the registration statements and their exhibits. We have omitted certain portions of these registration statements from this prospectus in accordance with the rules and regulations of the SEC. You may read and copy this information at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can also request copies of the documents we file with the SEC, upon payment of a duplicating fee, by writing to the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. You may also inspect these reports and other information at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005. Upon completion of the global offering, we will become subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, or the Exchange Act, applicable to a foreign private issuer. In accordance with these requirements, we will file annual reports on Form 20-F within six months of our fiscal year end and we will submit other reports and information under cover of Form 6-K with the SEC. These reports and other information can be inspected at the public reference room at the SEC. You can also obtain copies, upon payment of a prescribed fee, of such material from the public reference room and the regional offices, or by calling or writing to the SEC. That material may also be accessed electronically by means of the SEC's home page on the Internet (http://www.sec.gov). As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements and annual reports to shareholders and requiring reporting of insider purchases and sales. We will furnish the depositary with our annual reports in English. Our annual reports will include a review of operations and annual audited financial statements prepared in conformity with H.K. GAAP, together with a reconciliation to U.S. GAAP of certain financial information. We will also furnish the depositary with our semi-annual reports in English, which will include unaudited interim financial information prepared in conformity with H.K. GAAP. Once the depositary receives these information and reports, it will promptly, upon our written request, mail such reports to all holders of record of ADSs. We also will furnish to the depositary in English all notices of shareholders' meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our written request, will mail to all record holders of ADSs the information contained in any notice of a shareholders' meeting received by the depositary from us. 238 GLOSSARY The following glossary includes definitions of certain insurance terms. Each term defined in this glossary is printed in boldface type the first time it appears in this prospectus. Annuity..................... A contract that provides for periodic payments to an annuitant for a specified period of time, often until the annuitant's death. Bancassurance............... The distribution of insurance products through bank branches and joint ventures with banks. Cash value.................. The amount of cash available to a policyholder on the surrender of or withdrawal from a life insurance policy or annuity contract. Cede, ceded or ceding....... The reinsurance of all or a portion of an insurer's risk with another insurer. Deposits.................... Gross additions to policyholder contract deposits for a specified period collected from investment-type insurance contracts. Deposits are not accounted for as revenue under H.K. GAAP or U.S. GAAP. Endowment insurance......... Insurance policies which 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. First-year premiums......... The amount of premiums recognized in a specified year in respect of insurance policies sold during that year, excluding premiums in respect of policies that lapse in their first year. Investment-linked products.. Insurance policies which insure the policyholder against one or more separate risks and at the same time give the policyholder an interest in one or more separate investment accounts. In force.................... A policy or contract reflected on our records that has not expired or been terminated as of a given date. Lapse....................... An insurance policy for which the policyholder has not paid the premiums as required under the policy. Morbidity................... Incidence rates and duration of disability used in pricing and computing liabilities for disability insurance. Morbidity varies by such parameters as age, gender and duration since disability. Mortality................... Rates of death, varying by such parameters as age, gender and health, used in pricing and computing liabilities for future policyholder benefits for life and annuity products which contain significant mortality risk. G-1 Participating policy or Policies or annuity contracts under which the annuity................... owner is eligible to share in a portion of the distributable earnings from participating products of the insurer through policyholder dividends, whether or not such dividends are currently payable. Persistency................. The percentage of insurance policies remaining in force from year to year, as measured by premiums. Policy fee.................. A small annual charge (sometimes a one-time charge) to the policyholder, in addition to the premium, to cover the costs of policy administration (premium collection and tax payment). Premiums.................... Payments and consideration received in respect of insurance policies issued or reinsured by an insurer. Under H.K. GAAP and U.S. GAAP, premiums on investment-type contracts are not accounted for as revenues. Reinstate................... The reinstatement of a life insurance policy that has lapsed, through the payment by the policyholder of unpaid premiums and interests. Reinsurance................. The acceptance by one or more insurers of a portion of risk underwritten by another insurer that has directly written the coverage in return for a portion of the premium related to a policy or annuity contract. The legal rights of the insured generally are not affected by the reinsurance transaction, and the insurer issuing the insurance contract remains liable to the insured for payment of policy benefits. Rider....................... An insurance policy supplementary to an existing main insurance contract entered into between the policyholder and the insurer. A rider is not an independent insurance contract. Separate accounts........... Investment accounts maintained by an insurer to which funds have been allocated for certain policies under provisions of the PRC insurance laws. The investments in each separate account are maintained separately from those in other separate accounts and an insurer's general account and generally are not subject to the general liabilities of the insurer. The investment results of the separate account assets generally pass through to the separate account policyholders and contractholders, less management fees, so that an insurer bears limited or no investment risk on such assets. Solvency.................... The ability of an insurance company to satisfy its policyholder benefits and claims obligations. As required by the PRC insurance law, insurance companies must meet minimum solvency requirements. Statutory reserves.......... Monetary amounts established by the PRC insurance law that an insurer must have available to provide for future policyholder benefits and obligations. Supplementary products...... Insurance products that are additional to the insurance products originally offered and which constitute separate, independent insurance products. G-2 Surrender................... The act by a policyholder to terminate the policy prior to the expiration of the policy. Term life product........... Life insurance products which provide a guaranteed benefit upon the death of the insured within a specified time period. Underwriting................ The process of examining, accepting or rejecting insurance risks, and classifying those accepted, in order to charge an appropriate premium for each accepted risk. Universal life products..... Life insurance products in which premiums, less expense charges, are credited to a policy account from which periodic charges for life insurance are deducted and to which interest and investment income are credited. Typically, the policyholder can vary the amount and timing of premium payments and change the amount of insurance coverage. Variable life products...... Life insurance products for which the reserves and/or benefits may vary in amount with the market value of a specified group of assets held in a segregated fund. Whole life products......... Life insurance products which provide a guaranteed benefit, predetermined by the contract, upon the death of the insured, in return for the periodic payment of a fixed premium over a predetermined period. G-3 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Historical Consolidated Financial Statements Report of Independent Auditors...................................................................... F-2 Consolidated Profit and Loss Accounts for the years ended December 31, 2000, 2001 and 2002 and the six-month periods ended June 30, 2002 and 2003.................................................... F-3 Consolidated Balance Sheets as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003....... F-4 Consolidated Cash Flow Statements for the years ended December 31, 2000, 2001, and 2002 and the six- month periods ended June 30, 2002 and 2003........................................................ F-6 Consolidated Statements of Changes in Owners' Equity for the years ended December 31, 2000, 2001 and 2002 and the six-month periods ended June 30, 2002 and 2003....................................... F-8 Notes to the Consolidated Financial Statements...................................................... F-10
F-1 Report of Independent Auditors To the Board of Directors and Owner of China Life Insurance Company Limited and Subsidiaries: In our opinion, the accompanying consolidated balance sheets and the related consolidated profit and loss accounts, cash flow statements, and statements of changes in owners' equity present fairly, in all material respects, the financial position of China Life Insurance Company Limited and its subsidiaries (collectively referred to as the "Group") at December 31, 2002, 2001, 2000, June 30, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three year periods ended December 31, 2002, 2001, 2000 and the six months ended June 30, 2003 and 2002 in conformity with generally accepted accounting principles in Hong Kong. These financial statements are the responsibility of the Group's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America and Hong Kong, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Generally accepted accounting principles in Hong Kong vary in certain significant respects from accounting principles generally accepted in the United States of America ("U.S. GAAP"). The application of the latter would have affected the determination of consolidated net income for each of the years in the three year periods ended December 31, 2002, 2001, 2000 and six-month periods ended June 30, 2003 and 2002 and the determination of consolidated owners' equity at December 31, 2002 and 2001 and June 30, 2003, to the extent summarized in Note 26 to the consolidated financial statements, except that property, plant and equipment on hand as of January 1, 1997 has been valued on the basis of a valuation performed as of January 1, 2000 rather than at historical cost less depreciation, which is required by U.S. GAAP. As explained in Note 3(m) to the consolidated financial statements, the Group acquired these assets from a predecessor company in 1997 and is unable to obtain historical cost information in respect of such assets from this predecessor. PricewaterhouseCoopers, Hong Kong October 8, 2003 F-2 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 AND SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2003 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED PROFIT AND LOSS ACCOUNTS
For the year ended For the six months ended December 31, June 30, ------------------------- ----------------------- Note 2000 2001 2002 2002 2003 ---- ------- ------- ------- ------- ------- (RMB in millions) REVENUES Gross written premiums and policy fees............. 44,714 56,869 68,769 34,164 36,091 Less: premiums ceded to reinsurers................. (1,501) (1,655) (1,869) (765) (690) ------- ------- ------- ------- ------- Net written premiums and policy fees............... 43,213 55,214 66,900 33,399 35,401 Net change in unearned premium reserves............ (314) (248) (476) 306 17 ------- ------- ------- ------- ------- Net premiums earned and policy fees................ 42,899 54,966 66,424 33,705 35,418 ------- ------- ------- ------- ------- Net investment income.............................. 5.1 4,374 6,276 8,347 3,991 5,070 Net realized gains/(losses) on investments......... 5.1 (23) (6) 266 684 691 Net unrealized gains/(losses) on investments....... 5.1 298 (322) (1,067) (75) 280 Other income....................................... 827 293 338 121 122 ------- ------- ------- ------- ------- Total revenues..................................... 48,375 61,207 74,308 38,426 41,581 ------- ------- ------- ------- ------- BENEFITS, CLAIMS AND EXPENSES Insurance benefits and claims Life insurance death and other benefits.......... 13 (8,467) (10,099) (7,010) (3,869) (4,580) Accident and health claims and claim adjustment expenses........................................ 13 (2,767) (3,829) (4,053) (1,959) (2,455) Increase in future life policyholder benefits.... 13 (27,738) (33,121) (45,374) (22,793) (23,192) Policyholder dividends and participation in profits........................................... (7) (177) (641) (310) (862) Amortization of deferred policy acquisition costs.. 7 (1,745) (3,024) (3,832) (2,102) (2,648) Underwriting and policy acquisition costs.......... (3,073) (2,176) (1,661) (822) (708) Administrative expenses............................ (4,318) (5,100) (6,162) (2,916) (3,005) Other operating expenses........................... (2,602) (1,110) (634) (316) (704) Interest expense on bank borrowings................ (29) (5) (7) (4) (5) Interest credited to policyholder contract deposits (4,505) (5,799) (7,095) (3,209) (4,109) Statutory insurance levy........................... (59) (64) (73) (30) (38) ------- ------- ------- ------- ------- Total benefits, claims and expense................. (55,310) (64,504) (76,542) (38,330) (42,306) ------- ------- ------- ------- ------- Profit/(loss) before income tax expense and minority interests................................ 20 (6,935) (3,297) (2,234) 96 (725) Income tax expense................................. 21 (14) (4) (14) (3) (8) ------- ------- ------- ------- ------- Profit/(loss) before minority interest............. (6,949) (3,301) (2,248) 93 (733) Minority interests................................. (41) 6 (2) (2) 19 ------- ------- ------- ------- ------- Net profit/(loss).................................. (6,990) (3,295) (2,250) 91 (714) ======= ======= ======= ======= ======= Basic and diluted earnings/(loss) per share........ 22 (0.35) (0.16) (0.11) 0.00 (0.04) ------- ------- ------- ------- -------
The accompanying notes form an integral part of these consolidated financial statements. F-3 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, As of June 30, ----------------------- --------------- Note 2000 2001 2002 2002 2003 ---- ------- ------- ------- ------- ------- (RMB in millions) ASSETS Investments Fixed maturity securities 37,684 53,284 76,337 61,449 82,017 Held-to-maturity securities, at amortized cost... 5.4 1,598 1,388 1,220 1,243 827 Non-trading securities, at estimated fair value.. 5.2 36,086 51,896 75,117 60,206 81,190 Equity securities 5.3 6,794 7,698 12,171 7,084 14,797 Non-trading securities, at estimated fair value.. 5.2 1,119 2,002 8,101 3,017 9,025 Trading securities, at estimated fair value...... 5,675 5,696 4,070 4,067 5,772 Term deposits.................................... 5.6 39,653 76,083 123,675 97,798 142,043 Statutory deposits--restricted................... 5.7 40 990 991 991 992 Investments in associated companies.............. 5.5 2,031 2,036 2,035 2,027 1,993 Policy loans..................................... 109 107 106 105 136 Securities purchased under agreements to resell.. 5.8 19,840 30,480 36,388 46,247 70,061 Other............................................ 572 336 231 299 209 Cash and cash equivalents........................ 23,275 17,855 14,529 17,575 23,592 ------- ------- ------- ------- ------- 129,998 188,869 266,463 233,575 335,840 ------- ------- ------- ------- ------- Other assets Accrued investment income........................ 10 3,033 3,527 4,198 4,003 4,277 Premiums receivable.............................. 11 1,388 1,844 1,757 2,878 3,282 Reinsurance assets............................... 8 970 1,100 1,224 1,091 971 Deferred policy acquisition costs.............. 7 5,996 10,893 18,084 14,185 21,282 Property, plant and equipment, net of accumulated depreciation................................... 9 15,617 18,347 18,457 18,237 18,610 Other............................................ 12 5,375 3,528 3,587 4,176 3,676 ------- ------- ------- ------- ------- 32,379 39,239 47,307 44,570 52,098 ------- ------- ------- ------- ------- Total assets...................................... 162,377 228,108 313,770 278,145 387,938 ======= ======= ======= ======= =======
The accompanying notes form an integral part of these consolidated financial statements. F-4 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--(Continued)
As of December 31, As of June 30, ---------------------------- ------------------ Notes 2000 2001 2002 2002 2003 ----- -------- -------- -------- -------- -------- (RMB in millions) LIABILITIES AND EQUITY Liabilities Future life policyholder benefits....... 226,868 259,989 305,363 282,782 328,555 Policyholder contract deposits and other funds................................. 89,373 105,609 156,273 139,575 210,975 Unearned premium reserves............... 4,131 4,441 5,036 4,058 4,719 Reserves for claims and claim adjustment expenses.............................. 14 716 867 879 1,010 910 Annuity and other insurance balances payable............................... 4,029 6,362 8,057 8,257 7,987 Premiums received in advance............ 735 1,481 1,767 1,231 1,860 Policyholder deposits................... 694 629 592 609 570 Policyholder dividends payable.......... 2 177 688 390 1,599 Securities sold under agreements to repurchase............................ 15 90 14,608 3,602 4,501 -- Bank borrowings......................... 16 921 379 313 325 311 Provision............................... 17 73 330 445 388 460 Other liabilities....................... 19 3,489 4,206 4,716 4,967 4,800 Statutory insurance fund................ 18 1,132 1,215 1,337 1,269 1,399 -------- -------- -------- -------- -------- Total liabilities........................ 332,253 400,293 489,068 449,362 564,145 -------- -------- -------- -------- -------- Contingencies and commitments............ 24,25 Minority interests....................... 169 163 165 164 146 Owners' equity........................... (170,045) (172,348) (175,463) (171,381) (176,353) -------- -------- -------- -------- -------- Total liabilities and equity............. 162,377 228,108 313,770 278,145 387,938 ======== ======== ======== ======== ========
The accompanying notes form an integral part of these consolidated financial statements. F-5 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS
For the year ended For the six months December 31, ended June 30, ------------------------- ---------------- 2000 2001 2002 2002 2003 ------- ------- ------- ------- ------- (RMB in millions) CASH FLOWS FROM OPERATING ACTIVITIES Net profit/(loss)................................................... (6,990) (3,295) (2,250) 91 (714) Adjustments for non-cash items: Changes in minority interests..................................... 41 (6) 2 1 (19) Net unrealized gains/(losses) on investments...................... (298) 322 1,067 75 (280) Amortization of deferred acquisition costs........................ 1,745 3,024 3,832 2,102 2,648 Other impairments................................................. 24 13 7 3 86 Profit/(loss) from investments in associated companies............ 45 32 6 14 (16) Interest credited to policyholder contract deposits............... 4,505 5,799 7,095 3,209 4,109 Investment contract policy fees................................... (2,623) (2,816) (5,010) (3,139) (3,961) Depreciation and amortization..................................... 1,092 1,115 1,359 650 746 Revaluation of investment properties.............................. -- -- -- -- 181 Amortization of fixed maturity securities' premiums and discounts. 223 128 129 64 88 Gains on disposals of fixed assets................................ 1,475 557 91 32 36 Changes in operational assets and liabilities: Deferred policy acquisition costs................................. (5,574) (7,497) (10,649) (5,499) (5,846) Reinsurance assets................................................ 21 (69) (5) (66) 253 Accrued investment income......................................... 94 (494) (671) (476) (79) Receivables and payables.......................................... (1,988) 3,416 3,072 969 (628) Reserves for claims and claim adjustment expenses................. 122 151 12 143 31 Unearned premium reserves......................................... 314 249 476 (308) (317) Future life policyholder benefits................................. 27,738 33,121 45,374 22,793 23,192 Statutory insurance fund.......................................... 85 83 122 54 62 ------- ------- ------- ------- ------- Net cash inflow from operating activities........................... 20,051 33,833 44,059 20,712 19,572 ------- ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Sales and maturities: Fixed maturity securities......................................... 16,444 17,714 9,711 8,831 17,264 Equity securities................................................. 4,047 7,434 5,371 4,969 3,805 Fixed assets...................................................... 25 94 283 196 206 Purchases: Fixed maturity securities......................................... (18,910) (32,899) (34,161) (16,080) (23,150) Equity securities................................................. (6,327) (8,660) (10,911) (4,430) (6,151) Fixed assets...................................................... (2,429) (2,327) (1,796) (765) (1,382) Term deposits, net.................................................. (8,839) (37,380) (47,593) (21,716) (18,369) Securities purchased under agreements to resell..................... (15,043) (10,640) (5,908) (15,767) (33,673) Proceeds from investments in securities sold under agreements to repurchase, net.................................................... 90 14,518 (11,006) (10,107) (3,602) Other (mainly policy loans), net.................................... 1,501 182 112 35 (8) ------- ------- ------- ------- ------- Net cash outflow from investing activities.......................... (29,441) (51,964) (95,898) (54,834) (65,060) ------- ------- ------- ------- -------
The accompanying notes form an integral part of these consolidated financial statements. F-6 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS--(Continued)
For the year ended For the six months December 31, ended June 30, ------------------------- ----------------- 2000 2001 2002 2002 2003 ------- ------- ------- ------ ------ (RMB in millions) CASH FLOWS FROM FINANCING ACTIVITIES Deposits accepted on investment contracts........... 23,075 27,332 64,574 43,287 61,223 Withdrawals from investment contracts............... (10,173) (14,079) (15,995) (9,391) (6,670) Repayments of bank borrowings....................... (225) (542) (66) (54) (2) ------- ------- ------- ------ ------ Net cash inflow from financing activities........... 12,677 12,711 48,513 33,842 54,551 ======= ======= ======= ====== ====== Net increase/(decrease) in cash and cash equivalents 3,287 (5,420) (3,326) (280) 9,063 ------- ------- ------- ------ ------ Cash and cash equivalents Beginning of year/period............................ 19,988 23,275 17,855 17,855 14,529 End of year/period.................................. 23,275 17,855 14,529 17,575 23,592 ======= ======= ======= ====== ====== Supplemental cash flow information: Income tax paid.................................... 14 4 14 3 8 Interest paid...................................... 29 5 7 4 5
The accompanying notes form an integral part of these consolidated financial statements. F-7 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY
Additional Unrealized Paid-in paid-in Accumulated gains/ capital capital loss (losses) Total ------- ---------- ----------- ---------- -------- (RMB in millions) As of January 1, 2000............................ 4,600 (876) (167,795) 2,046 (162,025) Net loss......................................... -- -- (6,990) -- (6,990) Unrealized losses, net of tax.................... -- -- -- (906) (906) Profit capitalization............................ -- 802 (802) -- -- Investments transferred to parties under common control........................................ -- (124) -- -- (124) ----- ---- -------- ----- -------- As of December 31, 2000.......................... 4,600 (198) (175,587) 1,140 (170,045) ----- ---- -------- ----- -------- Net loss......................................... -- -- (3,295) -- (3,295) Unrealized gains, net of tax..................... -- -- -- 1,048 1,048 Profit capitalization............................ -- 117 (117) -- -- Investments transferred to parties under common control........................................ -- (56) -- -- (56) ----- ---- -------- ----- -------- As of December 31, 2001.......................... 4,600 (137) (178,999) 2,188 (172,348) ----- ---- -------- ----- -------- Net loss......................................... -- -- (2,250) -- (2,250) Unrealized losses, net of tax.................... -- -- -- (871) (871) Profit capitalization............................ -- 244 (244) -- -- Investments transferred from parties under common control........................................ -- 6 -- -- 6 ----- ---- -------- ----- -------- As of December 31, 2002.......................... 4,600 113 (181,493) 1,317 (175,463) ===== ==== ======== ===== ========
The accompanying notes form an integral part of these consolidated financial statements. F-8 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS' EQUITY--(Continued)
Additional Unrealized Paid-in paid-in Accumulated gains/ capital capital loss (losses) Total ------- ---------- ----------- ---------- -------- (RMB in millions) As of January 1, 2002.......................... 4,600 (137) (178,999) 2,188 (172,348) Net gain....................................... -- -- 91 -- 91 Unrealized gains, net of tax................... -- -- -- 880 880 Investments transferred to parties under common control...................................... -- (4) -- -- (4) ----- ---- -------- ----- -------- As of June 30, 2002............................ 4,600 (141) (178,908) 3,068 (171,381) ===== ==== ======== ===== ======== As of January 1, 2003.......................... 4,600 113 (181,493) 1,317 (175,463) Net loss....................................... -- -- (714) -- (714) Unrealized losses, net of tax.................. -- -- -- (176) (176) ----- ---- -------- ----- -------- As of June 30, 2003............................ 4,600 113 (182,207) 1,141 (176,353) ===== ==== ======== ===== ========
The accompanying notes form an integral part of these consolidated financial statements. F-9 CHINA LIFE INSURANCE COMPANY LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL ACTIVITIES China Life Insurance Company Limited (the "Company") was established in the People's Republic of China ("China" or "PRC") on June 30, 2003 as a joint stock company with limited liability in anticipation of a group restructuring of China Life Insurance (Group) Company (formerly China Life Insurance Company (the "Holding Company" or "CLIC")) and its subsidiaries (the "Restructuring") in preparation for a listing of the Company's shares on the New York Stock Exchange and the Main Board of the Stock Exchange of Hong Kong Limited. The initial registered capital of the Company is RMB 20,000 million, consisting of 20,000 million ordinary shares of par value of RMB 1.00 per share ("Domestic Shares"). The Company and its subsidiaries are hereafter collectively referred to as the "Group". CLIC was established in Beijing, China as a state-owned enterprise under the State Council through the Ministry of Finance of the PRC (the "MOF"). CLIC is engaged in life insurance business, providing life, annuities, accident and health insurance products in China. Pursuant to the Restructuring, CLIC transferred to the Company (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 China Insurance Regulatory Commission (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. These policies are referred to as the "transferred policies". All other insurance policies were retained by CLIC. These policies are referred to as the "non-transferred policies". The Company issued 20,000 million Domestic Shares in exchange for various liabilities related to the life insurance business of the transferred policies and certain assets (collectively the "Transferred Business"). CLIC retained (i) various liabilities related to the life insurance business of non-transferred policies and certain assets, (ii) equity interests in all subsidiaries and associated companies, (iii) all non-core businesses, and (iv) the ownership of certain assets and liabilities including certain office buildings, bank balances, investments in fixed maturity and equity securities, borrowings, claims, contingent and tax liabilities (collectively, the "Non-transferred Business"). Further pursuant to the Restructuring, on September 30, 2003, CLIC and the Company signed a binding restructuring agreement that identified all specific assets and liabilities to be transferred to the Company from CLIC. 2. BASIS OF PREPARATION The consummation of the Restructuring occurred for accounting purposes on September 30, 2003, which is the date on which the Company and CLIC signed the legally binding restructuring agreement that identified all specific assets and liabilities to be transferred to the Company from CLIC. The Company's accompanying financial statements are the consolidated financial statements of CLIC, after giving retroactive effect to the Company's issued and outstanding shares on loss per share amounts. Prior to the consummation of the Restructuring, the Transferred Business and Non-transferred Business have been historically under common management from a number of significant aspects, such as policy design, distribution, plan servicing, asset management, accounting and financing. Therefore, the Company's historical financial statements for each of the years ended December 31, 2000, 2001 and 2002 and as of and for the six months ended June 30, 2002 and 2003 (the "Relevant Periods") could not reflect the carve-out of F-10 CHINA LIFE INSURANCE COMPANY LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the Company's business for such periods due to the described common management and are required to present the consolidated financial results of the business of CLIC and its subsidiaries (including both the Transferred Business and Non-Transferred Business). Upon the consummation date of the Restructuring, the Non-transferred business, consisting of an excess of liabilities over assets, retained by CLIC was derecognized and reflected in the Company's financial statements as a capital contribution on such date. This presentation is considered appropriate as CLIC wholly owns the Transferred Business transferred to the Company before and after the Restructuring. In 2003, CLIC committed to pay certain of our former 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 180 million, will be recognized as an expense, and a corresponding capital contribution to the Company in the 2003 financial statements. Payments made to certain former employees during the Relevant Periods were expensed as paid. For purpose of the earnings/loss per share computations, the Company's issuance of 20,000 million ordinary shares to CLIC is given retroactive treatment and considered outstanding for all periods presented. The names of some of the companies referred to in the financial statements represent management's best efforts at translating the Chinese names of these companies as no English names have been registered. 3. PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements, which conform to Statements of Standard Accounting Practices ("SSAP") issued by the Hong Kong Society of Accountants and accounting principles generally accepted in Hong Kong (collectively, "H.K. GAAP"), are as follows: (a) Consolidation principles i) Consolidation The consolidated financial statements include the accounts of CLIC and its subsidiaries made up to December 31, June 30. Subsidiaries are those entities in which CLIC, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors. The results of subsidiaries acquired or disposed of during the year/period are included in the consolidated profit and loss accounts from the date of acquisition or up to the date of disposal, as appropriate. All significant intercompany transactions and balances within the Group are eliminated on consolidation. The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the sale and the Group's share of its net assets together with any unamortized goodwill or negative F-11 CHINA LIFE INSURANCE COMPANY LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) goodwill or goodwill/negative goodwill taken to reserves and which was not previously charged or recognized in the consolidated profit and loss accounts and any related accumulated foreign currency translation reserve. Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries. ii) Associated companies An associated company is a company, not being a subsidiary or a joint venture, in which an equity interest is held for the long-term and significant influence is exercised in its management. The consolidated profit and loss accounts include the Group's share of the results of associated companies for the year/period, and the consolidated balance sheet includes the Group's share of the net assets of the associated companies and goodwill/negative goodwill (net of accumulated amortization) on acquisition. Equity accounting is discontinued when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated company. (b) Revenue recognition Premiums: Premiums from traditional life insurance contracts, including participating contracts and annuity policies with life contingencies, are recognized as revenue when due from the policyholders. Benefits and expenses are provided against such revenue to recognize profits over the estimated life of the policies. Moreover, for single premium and limited pay contracts, premiums are recorded as income when due with any excess profit deferred and recognized in income in a constant relationship to the insurance in force or, for annuities, the amount of expected benefit payments. Premiums from the sale of accident and health insurance products are recorded when written and are accreted to earnings on a pro-rata basis over the term of the related policy coverage. However, for those contracts for which the period of risk differs significantly from the contract period, premiums are recognized over the period of risk in proportion to the amount of insurance protection provided. The unearned premium reserve represents the portion of the premiums written relating to the unexpired terms of coverage. Amounts collected as premiums from investment type contracts are reported as deposits. Revenue from these contracts consists of policy fees charged against the deposit amount for the cost of insurance, administration fees and gains on surrenders during the year/period. Policy benefits and claims that are charged to expenses include benefit claims incurred in the year/period in excess of related policyholder contract deposits and interest credited to policyholder deposits. Net investment income: Net investment income is accrued for interest from term deposits, cash and cash equivalents, fixed maturity securities, securities purchased under agreements to resell, policy loan and other loans, dividends from equity securities, rental income from investment property and share of profits/losses from investment in associates less investment expenses. Net investment income is recorded on accrual basis. F-12 CHINA LIFE INSURANCE COMPANY LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (c) Deferred policy acquisition costs The costs of acquiring new business including commissions, underwriting and policy issue expenses, which vary with and are directly related to the production of new business, are deferred. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and at the end of each accounting period. Future investment income is taken into account in assessing recoverability. Deferred policy acquisition costs for traditional life insurance and annuity policies are amortized over the expected life of the contracts as a constant percentage of expected premiums. Expected premiums are estimated at the date of policy issue and are consistently applied throughout the life of the contract unless premium deficiency occurs. Deferred policy acquisition costs for investment type contracts are amortized over the expected life of the contracts based on a constant rate of the present value of estimated gross profits expected to be realized over the life of the contract. Estimated gross profits include expected amounts to be assessed for mortality, administration, investment and surrender less benefit claims in excess of policyholder balances, administrative expenses and interest credited. Estimated gross profits are revised regularly and the interest rate used to compute the present value of revised estimates of expected gross profits is the latest revised rate applied to the remaining benefit period. Deviations of actual results from estimated experience are reflected in the profit and loss accounts. (d) Insurance losses and reserves Reserve for claims and claim adjustment expenses: These represent liabilities for claims arising under short duration accident and health insurance contracts. Claims and claim adjustment expenses are charged to the profit and loss accounts as incurred. Unpaid claims and claim adjustment expense reserves represent the accumulation of estimates for ultimate losses and include provisions for claims incurred but not yet reported. The reserves represent estimates of future payments of reported and unreported claims for losses and related expenses with respect to insured events that have occurred. Reserving is a complex process dealing with uncertainty, requiring the use of informed estimates and judgments. The Group does not discount its claims reserves, other than for settled claims with fixed payment terms. Any changes in estimates are reflected in results of operations in the period in which estimates are changed. Future life policyholder benefits, policyholder contract deposits and other funds: These represent liabilities for estimated future policyholder benefit liability for traditional life insurance policies and non-investment-linked investment contracts. Future life policyholder benefits for traditional life insurance policies are calculated using a net level premium valuation method based on actuarial assumptions as to mortality, persistency, expenses, withdrawal and investment return, including a margin for adverse deviation. The assumptions are established at policy issue and remain unchanged except where premium deficiency occurs. Future life policyholder benefits include the value of accumulated declared bonuses or dividends that have been vested to policyholders. F-13 CHINA LIFE INSURANCE COMPANY LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Policyholder contract deposits represent the accumulation of premium received less charges plus declared dividends. The policyholders' share of unrealized gains or losses in respect of assets held by the Group, which may be paid to profit participating policyholders in the future under the policy terms in respect of assets, is included in liabilities for future life policyholder benefits offsetting the policyholders' share of the change in unrealized gains and losses during the year/period. (e) Reinsurance The Group cedes 20% (15% since January 1, 2003) of its insurance premiums and risk from short duration accident and health contracts to China Reinsurance Company under relevant statutory reinsurance regulations of the PRC and cedes insurance and premiums risk from other contracts in the normal course of business in order to limit the potential for losses arising from longer exposures. Reinsurance does not relieve the originating insurer of its liability. The Group may assume reinsurance business incidental to their normal business. Such business is not significant to the Group's operations. Reinsurance assets include the balances due under reinsurance contracts from both insurance and reinsurance companies for paid and unpaid claims and claim adjustment expenses, ceded unearned premiums, ceded future life policy benefits and funds held under reinsurance treaties. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross in the consolidated balance sheet unless a right of offset exists. The Group evaluates the financial strength of potential reinsurers and continually monitors the financial conditions of reinsurers. Reinsurance contracts are contracts under which the Group has assessed to ensure that underwriting risk, defined as the reasonable possibility of significant loss, and timing risk, defined as the reasonable possibility of a significant variation in the timing of cash flows, are transferred by the ceding company to the reinsurer. (f) Investments Held-to-maturity securities Fixed maturity securities classified as held-to-maturity are those which the Group has the ability and positive intent to hold to maturity. Held-to-maturity securities are stated in the consolidated balance sheet at cost plus/less any discount/premium amortized to date. The discount or premium is amortized over the period to maturity and included as interest income/expense in the consolidated profit and loss accounts. Provision is made when there is a diminution in value other than temporary. The carrying amounts of individual held-to-maturity securities or holdings of the same securities are reviewed at the balance sheet date in order to assess the credit risk and whether the carrying amounts are expected to be recovered. Provisions are made when carrying amounts are not expected to be recovered and are recognized in the consolidated profit and loss accounts as an expense immediately. F-14 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Non-trading securities Investments other than trading or held-to-maturity are defined as non-trading and are stated at fair value at the balance sheet date. Changes in the fair value of individual securities are credited or debited to the investment revaluation reserve until the security is sold, or is determined to be impaired. Upon disposal, the cumulative gain or loss representing the difference between the net sales proceeds and the carrying amount of the relevant securities, together with any surplus/deficit transferred from the investment revaluation reserve, is recognized in the consolidated profit and loss accounts. Where there is objective evidence that individual investments are impaired, the cumulative loss recorded in the revaluation reserve is transferred to the consolidated profit and loss accounts. Trading securities Fixed maturity securities and liquidity securities which the Group buys with the intention to resell in the near term are classified as trading and are carried at fair value. At each balance sheet date, the net unrealized gains or losses arising from the changes in fair value of trading securities are recognized in the consolidated profit and loss accounts. Profits or losses on disposal of trading securities, representing the difference between the net sales proceeds and the carrying amounts, are recognized in the consolidated profit and loss accounts as they arise. (g) Investment properties Investment properties are interests in land and buildings in respect of which construction work and development have been completed and which are held for their investment potential, any rental income being negotiated at arm's length. Investment properties are valued at intervals of not more than three years by independent valuers; in each of the intervening years valuations are undertaken by professionally qualified executives of the Group. The valuations are on an open market value basis related to individual properties and separate values are not attributed to land and buildings. The valuations are incorporated in the annual accounts. Increases in valuation are credited to the investment properties revaluation reserve. Decreases in valuation are first set off against increases on earlier valuations on a portfolio basis and thereafter are debited to the consolidated profit and loss accounts. Any subsequent increases are credited to the consolidated profit and loss accounts up to the amount previously debited. Upon the disposal of an investment property, the relevant portion of the revaluation reserve realized in respect of previous valuations is released from the investment properties revaluation reserve to the consolidated profit and loss accounts. (h) Policy loans Policy loans and other investments originated by the Group are carried at amortized cost, net of provision for impairment in value. Impairment loss on policy loans is generally measured based on the present value of expected future cash flows discounted at the instrument's effective interest rate, except where the value of the asset is collateral dependent, in which case the fair value of the underlying collateral is used. Interest income on impaired assets is recognized based on the original effective rate of interest. F-15 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (i) Securities purchased under agreements to resell The Group enters into purchases of securities under agreements to resell substantially identical securities. These agreements are classified as secured loans. Securities purchased under agreements to resell are recorded at their cost plus accrued interest at the balance sheet date, which approximates fair value. The amounts advanced under these agreements are reflected as assets in the consolidated balance sheet. The Group does not take physical possession of securities purchased under agreements to resell. Sales or transfers of the securities are not permitted by the respective stock exchanges on which they are listed while the loan is outstanding. In the event of default by the counterparty to repay the loan, the Group has the right to the underlying securities held by the stock exchanges which are the custodians. (j) Term deposits Term deposits are bank deposits with fixed maturity dates. They are stated at amortized cost. (k) Cash and cash equivalents Cash amounts represent cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments with original maturities of 90 days or less, which approximates fair value. (l) Securities sold under agreements to repurchase Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within 180 days from the transaction date. The Group may be required to provide additional collateral based on the fair value of the underlying securities. Securities sold under agreements to repurchase are recorded at their cost plus accrued interest at the balance sheet date. It is the Group's policy to maintain effective control over securities sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated balance sheets. (m) Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment loss, except for certain assets acquired prior to January 1, 1997. These assets were acquired as a result of the prior restructuring in 1996 of People's Insurance Company of China ("PICC"), a state-owned enterprise. The restructuring created CLIC's predecessor as a specialized life insurance subsidiary of PICC. CLIC is unable to obtain historical cost information for assets which were transferred to CLIC in that restructuring. Accordingly, these assets are stated at deemed costs less accumulated depreciation. Deemed cost is determined on the basis of a valuation performed as of January 1, 2000. The initial cost of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, interest costs on borrowings to finance the acquisition, and any directly attributable costs of bringing the asset to its working condition and location for its intended use. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. F-16 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Depreciation is computed on a straight-line basis to write down the cost of each asset to their residual value over their estimated useful lives as follows:
Estimated useful lives ---------------------- Buildings............................... 30 to 35 years Leasehold improvements.................. Over the remaining term of the lease Office equipment, furniture and fixtures 3 to 11 years Motor vehicles.......................... 4 to 6 years
Property, plant and equipment are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset's net selling price and value in use. The useful life and depreciation methods are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of property, plant and equipment. Asset under construction represents buildings under construction and are stated at cost. Costs include construction and acquisition costs. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for use. (n) Deferred taxation Deferred income tax is provided in full, using liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Currently enacted tax rates are used in the determination of deferred income tax. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associated companies and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. (o) Employee benefits Pension obligations The full-time employees of the Group are covered by various government-sponsored pension plans under which the employees are entitled to a monthly pension based on certain formulas. These government agencies are responsible for the pension liability to these retired employees. The Group contributes on a monthly basis to these pension plans. Under these plans, the Group has no legal or constructive obligation for retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred. Voluntary payments made to certain former employees and which were not made pursuant to a formal or informal plan are expensed as paid. F-17 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Termination and early retirement benefits Termination benefits are payable whenever an employee's employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value using incremental borrowing rates available to the Group. Housing benefits The Group sold staff quarters to its employees, subject to a number of eligibility requirements, at below market prices. When staff quarters are identified as being subject to sale under these arrangements, the carrying value of the staff quarters is written down to the net recoverable amount. Upon sale, any difference between sales proceeds and the carrying amount of the staff quarters is charged to the consolidated profit and loss accounts. The above staff quarters allocation scheme was phased out during the Relevant Periods in accordance with the policies of the PRC Government. In 1998, the State Council of the PRC issued a circular which stipulated that the sale of quarters to employees at preferential prices should be withdrawn. In 2000, the State Council further issued a circular stating that cash subsidies should be made to the employees following the withdrawal of allocation of staff quarters. However, the specific timetable and procedures to implement these policies were to be determined by individual provincial or municipal government based on the particular situation of the province or municipality. Based on the relevant detailed local government regulations promulgated, certain entities within the Group have adopted cash housing subsidy plans, whereby, for those eligible employees who have not been allocated with quarters at all or who have not been allocated with quarters up to the prescribed standards before the staff quarters allocation scheme were terminated, the Group will pay them one-off cash housing subsidies based on their years of service, positions and other criteria. These cash housing subsidies are charged to the consolidated profit and loss accounts in the year in which it was determined that the payment of such subsidies is probable and the amounts can be reasonably estimated. This was completed in year 2001. In addition, all full-time employees of the Group are entitled to participate in various government-sponsored housing funds. The Group contributes on a monthly basis to these funds based on certain percentages of the salaries of the employees. The Group's liability in respect of these funds is limited to the contributions payable in each period. (p) Foreign currency transactions Foreign currency transactions are accounted for at the exchange rates prevailing at the date of transaction. Gains and losses resulting from the settlement of such transaction and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated profit and loss accounts. F-18 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (q) Contingencies A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognized in the consolidated balance sheet but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that outflow is probable, it will then be recognized as a provision. (r) Segment reporting Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments. In accordance with the Group's internal financial reporting, the Group has determined that business segments be presented as the primary reporting format. All assets and operations of the Group for the Relevant Periods are located in the PRC, which is considered as one geographical location in an economic environment with similar risks and returns. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Details of the segment information are presented in Note 4. (s) Business risks and uncertainties The development of liabilities for future policy benefits for the Group's products requires management to make estimates and assumptions regarding mortality, morbidity, lapse, expense, and investment experience. Such estimates are primarily based on historical experience and future expectations of mortality, morbidity, expense, persistency, and investment assumptions. Actual results could differ materially from those estimates. Management monitors actual experience and, if circumstances warrant, revises its assumptions and the related future policy benefit estimates. The Group's investments are primarily comprised of fixed maturity securities, equity securities, investment properties and securities purchased under agreements to resell. Significant changes in prevailing interest rates and geographic conditions may adversely affect the timing and amount of cash flows on such investments and their related values. In addition, the value of these investments is often derived from an appraisal, an estimate or opinion of value. A significant decline in the fair value of these investments could have an adverse effect on the Group's financial condition. The Group's activities are with policyholders located in the PRC. Note 5 discusses the types of securities that the Group invests in. Note 4 discusses the types of insurance products that the Group offers. The Group does not have any significant concentrations to any one industry or policyholder. F-19 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. SEGMENT INFORMATION (a) Business segments The Group has the following main business segments: (1) Individual life insurance business Individual life insurance business relates primarily to the sale of life insurance contracts to individuals and is composed of participation life insurance business as well as traditional life insurance business. Participation life insurance business relates primarily to the sale of participating products, which provides the policyholder with a participation in the profits arising from the invested assets relating to the policy. Traditional life insurance business relates primarily to the sale of non-participating products and annuities policies, which provides guaranteed benefits to the insured without a participation in the profits. (2) Group life insurance business Group life insurance business relates primarily to the sale of life insurance contracts to group entities and is composed of participation life insurance business and traditional life insurance business as described above. (3) Accident and health insurance business The accident and health insurance business relates primarily to the sale of accident and health insurance and accident products. (4) Corporate and other Corporate and other business relates to equity interests in subsidiaries and associated companies not engaged in non-insurance businesses. F-20 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (b) Basis of allocating net investment income and administrative and other operating expenses Net investment income is allocated among segments in proportion to the respective segments' average statutory policyholder reserve and claims provision at the beginning and end of the period. Administrative and other operating expenses are allocated among segments in proportion to the expense loadings of products in the respective segments.
For the year ended December 31, 2002 ----------------------------------------------- Individual Group Accident Corporate & life life & health other Total ---------- ------ -------- ----------- ------- (RMB in millions) Revenues Gross written premiums and policy fees............. 58,902 749 9,118 -- 68,769 - -Term.............................................. 160 1 -- -- - -Whole............................................. 24,942 344 -- -- - -Endowment......................................... 19,182 23 -- -- - -Annuity........................................... 9,985 4 -- -- Policy fees........................................ 4,633 377 -- -- Net premiums earned and policy fees................ 58,902 749 6,773 -- 66,424 ------- ------ ------ ---- ------- Net investment income.............................. 7,078 1,152 117 -- 8,347 Net realized gains on investments.................. 225 37 4 -- 266 Net unrealized losses on investments............... (905) (147) (15) -- (1,067) Other income....................................... -- -- -- 338 338 ------- ------ ------ ---- ------- Segment revenue.................................... 65,300 1,791 6,879 338 74,308 ------- ------ ------ ---- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits........... (5,252) (1,735) (23) -- (7,010) Accident and health claims and claim adjustment expenses........................................ -- -- (4,053) -- (4,053) Increase in future life policyholder benefits..... (45,487) 113 -- -- (45,374) Policyholder dividends and participation in profits (614) (27) -- -- (641) Amortization of deferred policy acquisition costs.. (3,574) (103) (155) -- (3,832) Underwriting and policy acquisition costs.......... (1,258) (2) (401) -- (1,661) Administrative expenses............................ (5,216) (9) (937) -- (6,162) Other operating expenses........................... (370) (7) (47) (210) (634) Interest expense on bank borrowings................ -- -- -- (7) (7) Interest credited to policyholder contract deposits (4,599) (2,496) -- -- (7,095) Statutory insurance levy........................... -- -- (73) -- (73) ------- ------ ------ ---- ------- Segment benefits, claims and expenses.............. (66,370) (4,266) (5,689) (217) (76,542) ------- ------ ------ ---- ------- Segment results.................................... (1,070) (2,475) 1,190 121 (2,234) ------- ------ ------ ---- ------- Income tax expense................................. -- -- -- (14) (14) Minority interests................................. -- -- -- (2) (2) ------- ------ ------ ---- ------- Net profit/(loss).................................. (1,070) (2,475) 1,190 105 (2,250) ------- ------ ------ ---- -------
F-21 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2002 ---------------------------------------------- Individual Group Accident Corporate & life life & health other Total ---------- ------ -------- ----------- ------- (RMB in millions) Assets Investments...................................... 225,944 36,782 3,737 -- 266,463 Deferred policy acquisition costs................ 17,638 343 103 -- 18,084 Accrued investment income........................ 3,560 579 59 -- 4,198 ------- ------ ----- -- ------- Segment assets................................... 247,142 37,704 3,899 -- 288,745 Unallocated Property, plant and equipment.................... 18,457 Other assets..................................... 6,568 ------- Total............................................ 313,770 ======= Liabilities Future life policyholder benefits................ 304,043 1,320 -- -- 305,363 Policyholder contract deposits and other funds... 117,951 38,322 -- -- 156,273 Unearned premium reserves........................ -- -- 5,036 -- 5,036 Securities sold under agreements to repurchase... 3,054 497 51 -- 3,602 Reserves for claims and claim adjustment expenses -- -- 879 -- 879 ------- ------ ----- -- ------- Segment liabilities.............................. 425,048 40,139 5,966 -- 471,153 Unallocated Other liabilities................................ 17,915 ------- Total............................................ 489,068 =======
F-22 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001 ----------------------------------------------- Individual Group Accident Corporate & life life & health other Total ---------- ------ -------- ----------- ------- (RMB in millions) Revenues Gross written premiums and policy fees............. 47,571 1,350 7,948 -- 56,869 - -Term.............................................. 183 4 -- -- - -Whole............................................. 22,697 984 -- -- - -Endowment......................................... 12,976 29 -- -- - -Annuity........................................... 9,168 63 -- -- Policy fees........................................ 2,547 270 -- -- Net premiums earned and policy fees................ 47,571 1,350 6,045 -- 54,966 ------- ------ ------ ---- ------- Net investment income.............................. 5,249 926 101 -- 6,276 Net realized losses on investments................. (5) (1) -- -- (6) Net unrealized losses on investments............... (269) (48) (5) -- (322) Other income....................................... -- -- -- 293 293 ------- ------ ------ ---- ------- Segment revenue.................................... 52,546 2,227 6,141 293 61,207 ------- ------ ------ ---- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits........... (8,740) (1,348) (11) -- (10,099) Accident and health claims and claim adjustment expenses........................................ -- -- (3,829) -- (3,829) Increase in future life policyholder benefits..... (32,771) (350) -- -- (33,121) Policyholder dividends and participation in profits (165) (12) -- -- (177) Amortization of deferred policy acquisition costs.. (2,701) (123) (200) -- (3,024) Underwriting and policy acquisition costs.......... (1,914) (2) (260) -- (2,176) Administrative expenses............................ (3,923) (41) (1,136) -- (5,100) Other operating expenses........................... (723) (17) (151) (219) (1,110) Interest expense on bank borrowings................ -- -- -- (5) (5) Interest credited to policyholder contract deposits (3,947) (1,852) -- -- (5,799) Statutory insurance levy........................... -- -- (64) -- (64) ------- ------ ------ ---- ------- Segment benefits, claims and expenses.............. (54,884) (3,745) (5,651) (224) (64,504) ------- ------ ------ ---- ------- Segment results.................................... (2,338) (1,518) 490 69 (3,297) ------- ------ ------ ---- ------- Income tax expense................................. -- -- -- (4) (4) Minority interests................................. -- -- -- 6 6 ------- ------ ------ ---- ------- Net profit/(loss).................................. (2,338) (1,518) 490 71 (3,295) ------- ------ ------ ---- -------
F-23 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2001 ------------------------------------------------ Individual Group Accident & Corporate & life life health other Total ---------- ------ ---------- ----------- ------- (RMB in millions) Assets Investments...................................... 157,948 27,873 3,048 -- 188,869 Deferred policy acquisition costs................ 10,495 243 155 -- 10,893 Accrued investment income........................ 2,949 521 57 -- 3,527 ------- ------ ----- -- ------- Segment assets................................... 171,392 28,637 3,260 -- 203,289 Unallocated Property, plant and equipment.................... 18,347 Other assets..................................... 6,472 ------- Total............................................ 228,108 ======= Liabilities Future life policyholder benefits................ 258,556 1,433 -- -- 259,989 Policyholder contract deposits and other funds... 70,701 34,908 -- -- 105,609 Unearned premium reserves........................ -- -- 4,441 -- 4,441 Securities sold under agreements to repurchase... 12,216 2,156 236 -- 14,608 Reserves for claims and claim adjustment expenses -- -- 867 -- 867 ------- ------ ----- -- ------- Segment liabilities.............................. 341,473 38,497 5,544 -- 385,514 Unallocated Other liabilities................................ 14,779 ------- Total............................................ 400,293 =======
F-24 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2000 ------------------------------------------------- Individual Group Accident & Corporate & life life health other Total ---------- ------ ---------- ----------- ------- (RMB in millions) Revenues Gross written premiums and policy fees............. 36,814 495 7,405 -- 44,714 - -Term.............................................. 206 -- -- -- - -Whole............................................. 20,248 -- -- -- - -Endowment......................................... 5,406 26 -- -- - -Annuity........................................... 8,788 12 -- -- Policy fees........................................ 2,166 457 -- -- Net premiums earned and policy fees................ 36,814 495 5,590 -- 42,899 ------- ------ ------ ---- ------- Net investment income.............................. 3,566 731 77 -- 4,374 Net realized losses on investments................. (19) (4) -- -- (23) Net unrealized gains on investments................ 243 50 5 -- 298 Other income....................................... -- -- -- 827 827 ------- ------ ------ ---- ------- Segment revenue.................................... 40,604 1,272 5,672 827 48,375 ------- ------ ------ ---- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits........... (7,962) (499) (6) -- (8,467) Accident and health claims and claim adjustment expenses........................................ -- -- (2,767) -- (2,767) Increase in future life policyholder benefits..... (28,011) 273 -- -- (27,738) Policyholder dividends and participation in profits (7) -- -- -- (7) Amortization of deferred policy acquisition costs.. (1,483) (79) (183) -- (1,745) Underwriting and policy acquisition costs.......... (2,789) (61) (223) -- (3,073) Administrative expenses............................ (2,833) (140) (1,345) -- (4,318) Other operating expenses........................... (1,244) (78) (418) (862) (2,602) Interest expense on bank borrowings................ -- -- -- (29) (29) Interest credited to policyholder contract deposits (3,048) (1,457) -- -- (4,505) Statutory insurance levy........................... -- -- (59) -- (59) ------- ------ ------ ---- ------- Segment benefits, claims and expenses.............. (47,377) (2,041) (5,001) (891) (55,310) ------- ------ ------ ---- ------- Segment results.................................... (6,773) (769) 671 (64) (6,935) ------- ------ ------ ---- ------- Income tax expense................................. -- -- -- (14) (14) Minority interests................................. -- -- -- (41) (41) ------- ------ ------ ---- ------- Net profit/(loss).................................. (6,773) (769) 671 (119) (6,990) ------- ------ ------ ---- -------
F-25 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2000 ------------------------------------------------ Individual Group Accident & Corporate & life life health other Total ---------- ------ ---------- ----------- ------- (RMB in millions) Assets Investments...................................... 105,995 21,710 2,293 -- 129,998 Deferred policy acquisition costs................ 5,567 229 200 -- 5,996 Accrued investment income........................ 2,473 507 53 -- 3,033 ------- ------ ----- -- ------- Segment assets................................... 114,035 22,446 2,546 -- 139,027 Unallocated Property, plant and equipment.................... 15,617 Other assets..................................... 7,733 ------- Total............................................ 162,377 ======= Liabilities Future life policyholder benefits................ 225,785 1,083 -- -- 226,868 Policyholder contract deposits and other funds... 58,499 30,874 -- -- 89,373 Unearned premium reserves........................ -- -- 4,131 -- 4,131 Securities sold under agreements to repurchase... 73 15 2 -- 90 Reserves for claims and claim adjustment expenses -- -- 716 -- 716 ------- ------ ----- -- ------- Segment liabilities.............................. 284,357 31,972 4,849 -- 321,178 Unallocated Other liabilities................................ 11,075 ------- Total............................................ 332,253 =======
F-26 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the six months ended June 30, 2003 ------------------------------------------------- Individual Group Accident & Corporate & life life health other Total ---------- ------ ---------- ----------- ------- (RMB in millions) Revenues Gross written premiums and policy fees............. 30,956 369 4,766 -- 36,091 Gross written premiums............................. 27,315 191 -- -- - -Term.............................................. 195 -- -- -- - -Whole............................................. 14,426 191 -- -- - -Endowment......................................... 7,841 -- -- -- - -Annuity........................................... 4,853 -- -- -- Policy fees........................................ 3,641 178 -- -- Net premiums earned and policy fees................ 30,956 369 4,093 -- 35,418 Net investment income.............................. 4,377 631 62 -- 5,070 Net realized gains on investments.................. 597 86 8 -- 691 Net unrealized gains on investments................ 242 35 3 -- 280 Other income....................................... -- -- -- 122 122 ------- ------ ------ ---- ------- Segment revenue.................................... 36,172 1,121 4,166 122 41,581 ------- ------ ------ ---- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits........... (3,925) (655) -- -- (4,580) Accident and health claims and claim adjustment expenses........................................ -- -- (2,455) -- (2,455) Increase in future life policyholder benefits..... (23,266) 74 -- -- (23,192) Policyholder dividends and participation in profits (838) (24) -- -- (862) Amortization of deferred policy acquisition costs.. (2,551) (42) (55) -- (2,648) Underwriting and policy acquisition costs.......... (528) (2) (178) -- (708) Administrative expenses............................ (2,624) (100) (281) -- (3,005) Other operating expenses........................... (201) (8) (19) (476) (704) Interest expense on bank borrowings................ -- -- -- (5) (5) Interest credited to policyholder contract deposits (2,738) (1,371) -- -- (4,109) Statutory insurance levy........................... -- -- (38) -- (38) ------- ------ ------ ---- ------- Segment benefits, claims and expenses.............. (36,671) (2,128) (3,026) (481) (42,306) ------- ------ ------ ---- ------- Segment results.................................... (499) (1,007) 1,140 (359) (725) ------- ------ ------ ---- ------- Income tax expense................................. -- -- -- (8) (8) Minority interests................................. -- -- -- 19 19 ------- ------ ------ ---- ------- Net profit/(loss).................................. (499) (1,007) 1,140 (348) (714) ------- ------ ------ ---- -------
F-27 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of June 30, 2003 ------------------------------------------------ Individual Group Accident & Corporate & life life health other Total ---------- ------ ---------- ----------- ------- (RMB in millions) Assets Investments..................................... 289,928 41,812 4,100 -- 335,840 Deferred policy acquisition costs............... 20,798 387 97 -- 21,282 Accrued investment income....................... 3,692 533 52 -- 4,277 ------- ------ ----- -- ------- Segment assets.................................. 314,418 42,732 4,249 -- 361,399 Unallocated Property, plant and equipment................... 18,610 Other assets.................................... 7,929 ------- Total........................................... 387,938 ======= Liabilities Future life policyholder benefits............... 327,309 1,246 -- -- 328,555 Policyholder contract deposits and other funds.. 165,273 45,702 -- -- 210,975 Unearned premium reserves....................... -- -- 4,719 -- 4,719 Securities sold under agreements to repurchase.. -- -- -- -- -- Reserves for claims and claim adjustment expense -- -- 910 -- 910 ------- ------ ----- -- ------- Segment liabilities............................. 492,582 46,948 5,629 -- 545,159 Unallocated Other liabilities............................... 18,986 ------- Total........................................... 564,145 =======
F-28 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the six months ended June 30, 2002 ------------------------------------------------- Individual Group Accident & Corporate & life life health other Total ---------- ------ ---------- ----------- ------- (RMB in millions) Revenues Gross written premiums and policy fees............. 30,027 413 3,724 -- 34,164 Gross written premiums............................. 27,055 247 -- -- - -Term.............................................. 71 2 -- -- - -Whole............................................. 12,112 226 -- -- - -Endowment......................................... 9,887 17 -- -- - -Annuity........................................... 4,985 2 -- -- Policy fees........................................ 2,972 166 -- -- Net premiums earned and policy fees................ 30,027 413 3,265 -- 33,705 Net investment income.............................. 3,383 551 57 -- 3,991 Net realized gains on investments.................. 580 94 10 -- 684 Net unrealized losses on investments............... (64) (10) (1) -- (75) Other income....................................... -- -- -- 121 121 ------- ------ ------ --- ------- Segment revenue.................................... 33,926 1,048 3,331 121 38,426 ------- ------ ------ --- ------- Benefits, claims and expenses Insurance benefits and claims Life insurance death and other benefits........... (3,427) (432) (10) -- (3,869) Accident and health claims and claim adjustment expenses........................................ -- -- (1,959) -- (1,959) Increase in future life policyholder benefits..... (22,784) (9) -- -- (22,793) Policyholder dividends and participation in profits (296) (14) -- -- (310) Amortization of deferred policy acquisition costs.. (1,969) (40) (93) -- (2,102) Underwriting and policy acquisition costs.......... (691) (1) (130) -- (822) Administrative expenses............................ (2,629) (7) (280) -- (2,916) Other operating expenses........................... (208) (5) (8) (95) (316) Interest expense on bank borrowings................ -- -- -- (4) (4) Interest credited to policyholder contract deposits (2,176) (1,033) -- -- (3,209) Statutory insurance levy........................... -- -- (30) -- (30) ------- ------ ------ --- ------- Segment benefits, claims and expenses.............. (34,180) (1,541) (2,510) (99) (38,330) ------- ------ ------ --- ------- Segment results.................................... (254) (493) 821 22 96 ------- ------ ------ --- ------- Income tax expense................................. -- -- -- (3) (3) Minority interests................................. -- -- -- (2) (2) ------- ------ ------ --- ------- Net profit/(loss).................................. (254) (493) 821 17 91 ------- ------ ------ --- -------
F-29 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of June 30, 2002 ------------------------------------------------ Individual Group Accident & Corporate & life life health other Total ---------- ------ ---------- ----------- ------- (RMB in millions) Assets Investments...................................... 198,006 32,233 3,336 -- 233,575 Deferred policy acquisition costs................ 13,763 298 124 -- 14,185 Accrued investment income........................ 3,394 552 57 -- 4,003 ------- ------ ----- -- ------- Segment assets................................... 215,163 33,083 3,517 -- 251,763 Unallocated Property, plant and equipment.................... 18,237 Other assets..................................... 8,145 ------- Total............................................ 278,145 ======= Liabilities Future life policyholder benefits................ 281,387 1,395 -- -- 282,782 Policyholder contract deposits and other funds... 110,353 29,222 -- -- 139,575 Unearned premium reserves........................ -- -- 4,058 -- 4,058 Securities sold under agreements to repurchase... 3,816 621 64 -- 4,501 Reserves for claims and claim adjustment expenses -- -- 1,010 -- 1,010 ------- ------ ----- -- ------- Segment liabilities.............................. 395,556 31,238 5,132 -- 431,926 Unallocated Other liabilities................................ 17,436 ------- Total............................................ 449,362 =======
F-30 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. INVESTMENTS 5.1 Investment Results
Net investment income ------------------------------------- For the For the year ended six months ended December 31, June 30, -------------------- --------------- 2000 2001 2002 2002 2003 ----- ----- ------ ----- ----- (RMB in millions) Fixed maturity securities...................... 1,776 1,918 2,723 1,278 1,431 Equity securities.............................. 371 893 240 181 188 Term deposits and cash and cash equivalents.... 1,910 2,714 4,310 1,972 2,732 Investment properties.......................... (3) 29 67 34 58 Investments in associated companies............ (45) (32) (6) (14) 16 Policy loans................................... 4 3 7 3 3 Securities purchased under agreements to resell 342 815 1,094 584 653 Other investments.............................. 21 4 9 6 7 ----- ----- ------ ----- ----- Subtotal....................................... 4,376 6,344 8,444 4,044 5,088 Securities sold under agreements to repurchase. -- (56) (71) (36) (2) Investment expense............................. (2) (12) (26) (17) (16) ----- ----- ------ ----- ----- Total.......................................... 4,374 6,276 8,347 3,991 5,070 ===== ===== ====== ===== ===== Net realized gains/(losses) ------------------------------------- For the For the year ended six months ended December 31, June 30, -------------------- --------------- 2000 2001 2002 2002 2003 ----- ----- ------ ----- ----- (RMB in millions) Fixed maturity securities Gross realized gains.......................... 24 222 602 570 615 Gross realized losses......................... (125) (34) (97) (19) (50) Impairment.................................... (28) -- (59) (36) (7) ----- ----- ------ ----- ----- Subtotal....................................... (129) 188 446 515 558 Equity securities Gross realized gains.......................... 110 627 239 218 273 Gross realized losses......................... (1) (810) (417) (49) (140) Impairment.................................... (3) (11) (2) -- -- ----- ----- ------ ----- ----- Subtotal....................................... 106 (194) (180) 169 133 ----- ----- ------ ----- ----- Total.......................................... (23) (6) 266 684 691 ===== ===== ====== ===== ===== Net unrealized gains/(losses) ------------------------------------- For the For the year ended six months ended December 31, June 30, -------------------- --------------- 2000 2001 2002 2002 2003 ----- ----- ------ ----- ----- (RMB in millions) Equity securities.............................. 298 (322) (1,067) (75) 280 ----- ----- ------ ----- ----- Total.......................................... 298 (322) (1,067) (75) 280 ===== ===== ====== ===== =====
F-31 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5.2 Non-trading securities
Cost or Gross Gross Estimated amortized cost unrealized gains unrealized losses fair value -------------- ---------------- ----------------- ---------- As of December 31, 2002 (RMB in millions) Fixed maturity securities Government bonds......... 49,661 1,634 (316) 50,979 Government agency bonds.. 20,615 351 (151) 20,815 Corporate bonds.......... 3,212 126 (15) 3,323 ------ ----- ---- ------ Subtotal................. 73,488 2,111 (482) 75,117 ------ ----- ---- ------ Equity securities Common stocks, unlisted.. 957 -- -- 957 Funds.................... 7,523 3 (382) 7,144 ------ ----- ---- ------ Subtotal................. 8,480 3 (382) 8,101 ------ ----- ---- ------ Total.................... 81,968 2,114 (864) 83,218 ====== ===== ==== ======
Cost or Gross Gross Estimated amortized cost unrealized gains unrealized losses fair value -------------- ---------------- ----------------- ---------- As of December 31, 2001 (RMB in millions) Fixed maturity securities Government bonds......... 37,016 2,092 (30) 39,078 Government agency bonds.. 10,688 148 -- 10,836 Corporate bonds.......... 1,956 35 (9) 1,982 ------ ----- --- ------ Subtotal................. 49,660 2,275 (39) 51,896 ------ ----- --- ------ Equity securities Common stocks, unlisted.. 872 -- -- 872 Funds.................... 1,135 -- (5) 1,130 ------ ----- --- ------ Subtotal................. 2,007 -- (5) 2,002 ------ ----- --- ------ Total.................... 51,667 2,275 (44) 53,898 ====== ===== === ======
Cost or Gross Gross Estimated amortized cost unrealized gains unrealized losses fair value -------------- ---------------- ----------------- ---------- As of December 31, 2000 (RMB in millions) Fixed maturity securities Government bonds......... 33,829 1,237 (227) 34,839 Government agency bonds.. 353 -- -- 353 Corporate bonds.......... 887 8 (1) 894 ------ ----- ---- ------ Subtotal................. 35,069 1,245 (228) 36,086 ------ ----- ---- ------ Equity securities Common stocks, unlisted.. 1,119 -- -- 1,119 ------ ----- ---- ------ Subtotal................. 1,119 -- -- 1,119 ------ ----- ---- ------ Total.................... 36,188 1,245 (228) 37,205 ====== ===== ==== ======
F-32 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cost or Gross Gross Estimated amortized cost unrealized gains unrealized losses fair value -------------- ---------------- ----------------- ---------- As of June 30, 2003 (RMB in millions) Fixed maturity securities Government bonds......... 58,754 1,455 (373) 59,836 Government agency bonds.. 17,193 88 (99) 17,182 Corporate bonds.......... 4,095 102 (25) 4,172 ------- ------- ------- ------- Subtotal................. 80,042 1,645 (497) 81,190 ------- ------- ------- ------- Equity securities Common stocks, unlisted.. 899 -- -- 899 Funds.................... 8,225 6 (105) 8,126 ------- ------- ------- ------- Subtotal................. 9,124 6 (105) 9,025 ------- ------- ------- ------- Total.................... 89,166 1,651 (602) 90,215 ======= ======= ======= =======
Cost or Gross Gross Estimated amortized cost unrealized gains unrealized losses fair value -------------- ---------------- ----------------- ---------- As of June 30, 2002 (RMB in millions) Fixed maturity securities Government bonds......... 41,362 2,666 (178) 43,850 Government agency bonds.. 13,667 631 (100) 14,198 Corporate bonds.......... 2,048 122 (12) 2,158 ------ ----- ---- ------ Subtotal................. 57,077 3,419 (290) 60,206 ------ ----- ---- ------ Equity securities Common stocks, unlisted.. 959 -- -- 959 Funds.................... 1,973 85 -- 2,058 ------ ----- ---- ------ Subtotal................. 2,932 85 -- 3,017 ------ ----- ---- ------ Total.................... 60,009 3,504 (290) 63,223 ====== ===== ==== ======
The proceeds from sales of non-trading securities and the gross realized gains and gross realized losses for the years ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003 were as follows:
For the year ended For the six months December 31, ended June 30, - ---------------------- ----------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Proceeds from sales of non-trading securities 14,191 17,039 14,390 10,823 20,651 Gross realized gains......................... 29 457 697 653 686 Gross realized losses........................ (126) (51) (389) (53) (64)
F-33 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5.3 Equity securities
As of December 31, As of June 30, - ------------------ -------------- 2000 2001 2002 2002 2003 ----- ----- ------ ----- ------ (RMB in millions) Common stocks 1,203 963 957 959 899 Funds........ 5,591 6,735 11,214 6,125 13,898 ----- ----- ------ ----- ------ Total........ 6,794 7,698 12,171 7,084 14,797 ===== ===== ====== ===== ======
5.4 Fixed maturity securities--maturity schedule
As of December 31, As of June 30, - ----------------- -------------- 2000 2001 2002 2002 2003 ----- ----- ----- ----- ---- (RMB in millions) Held-to-maturity amortized cost Maturing: Within one year...................... 221 268 437 421 224 After one year but within five years. 857 603 373 449 295 After five years but within ten years 518 516 406 372 308 After ten years...................... 2 1 4 1 -- ----- ----- ----- ----- --- Total................................ 1,598 1,388 1,220 1,243 827 ===== ===== ===== ===== ===
As of December 31, As of June 30, - -------------------- ------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Non-trading amortized cost Maturing: Within one year...................... 1,062 1,338 3,146 2,123 5,963 After one year but within five years. 9,616 16,400 18,174 14,777 15,170 After five years but within ten years 24,332 22,927 32,603 23,942 36,944 After ten years...................... 59 8,995 19,565 16,235 21,965 ------ ------ ------ ------ ------ Total................................ 35,069 49,660 73,488 57,077 80,042 ====== ====== ====== ====== ======
As of December 31, As of June 30, - ----------------- -------------- 2000 2001 2002 2002 2003 ----- ----- ----- ----- ---- (RMB in millions) Held-to-maturity estimated fair value Maturing: Within one year...................... 231 273 442 388 228 After one year but within five years. 896 635 400 474 322 After five years but within ten years 520 532 427 406 332 After ten years...................... 2 1 4 1 -- ----- ----- ----- ----- --- Total................................ 1,649 1,441 1,273 1,269 882 ===== ===== ===== ===== ===
F-34 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, As of June 30, - -------------------- ------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Non-trading estimated fair value Maturing: Within one year...................... 1,088 1,368 3,179 2,218 6,099 After one year but within five years. 9,826 17,556 19,026 15,832 15,658 After five years but within ten years 25,095 23,824 33,340 25,407 37,549 After ten years...................... 77 9,148 19,572 16,749 21,884 ------ ------ ------ ------ ------ Total................................ 36,086 51,896 75,117 60,206 81,190 ====== ====== ====== ====== ======
5.5 Investments in associated companies
As of December 31, As of June 30, ------------------- ------------ 2000 2001 2002 2002 2003 ----- ----- ----- ----- ----- (RMB in millions) Investment cost.................. 266 266 266 266 266 Share of post-acquisition loss... (121) (153) (159) (167) (143) ----- ----- ----- ----- ----- 145 113 107 99 123 Advances to associated companies* 1,886 1,923 1,928 1,928 1,870 ----- ----- ----- ----- ----- Interest in associated companies. 2,031 2,036 2,035 2,027 1,993 ===== ===== ===== ===== =====
----- * The advances to associated companies are non-interest bearing, unsecured and have no fixed repayment terms. The following is the principal associated company as of December 31, 2000, 2001 and 2002, and June 30, 2002 and 2003:
Interest Place of establishment held Name and operation Principal activity indirectly ---- ---------------------- ------------------ ---------- Huixian Holding Co., Ltd People's Republic Investment and 19.75%* of China property holding
----- * The Group holds 20% of the effective voting rights of Huixian Holding Co., Ltd. 5.6 Term deposits
As of December 31, As of June 30, --------------------- -------------- 2000 2001 2002 2002 2003 ------ ------ ------- ------ ------- (RMB in millions) Maturing: Within one year...................... 15,107 5,929 6,621 6,571 4,100 After one year but within five years. 18,457 48,143 108,953 70,226 122,271 After five years but within ten years 6,089 21,011 7,101 20,000 14,670 After ten years...................... -- 1,000 1,000 1,001 1,002 ------ ------ ------- ------ ------- Total................................ 39,653 76,083 123,675 97,798 142,043 ====== ====== ======= ====== =======
F-35 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5.7 Statutory deposits--restricted
As of December 31, As of June 30, ------------------ -------------- 2000 2001 2002 2002 2003 ---- ---- ---- ---- ---- (RMB in millions) Maturing: Within one year..................... 40 40 41 41 42 After one year but within five years -- 950 950 950 950 -- --- --- --- --- Total............................... 40 990 991 991 992 == === === === ===
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. 5.8 Securities purchased under agreements to resell
As of December 31, As of June 30, -------------------- ------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Maturing: Within 30 days.................. 8,464 15,836 14,740 11,159 27,182 After 30 days but within 90 days 2,923 6,229 6,186 11,783 17,368 Over 90 days.................... 8,453 8,415 15,462 23,305 25,511 ------ ------ ------ ------ ------ Total........................... 19,840 30,480 36,388 46,247 70,061 ====== ====== ====== ====== ======
6. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm's length transaction, rather than in a forced or liquidation sale. The methods and assumptions used by the Group in estimating the fair value of the financial instruments are: . Cash and cash equivalents, term deposits, and securities purchased or sold under agreements to resell or repurchase: the carrying amounts of these assets in the balance sheet approximate fair values. . Fixed maturity securities: fair values are generally based upon quoted market prices. Where quoted market prices are not readily available, fair values are estimated using either prices observed in recent transactions or values obtained from quoted market prices of comparable investments. . Equity securities: fair values are based on quoted market prices, except certain common stocks, which are carried at cost as a reasonable estimate of their fair value. . Policy and other loans: the carrying values for policy loans approximate fair value. . Policyholder contract deposits and other funds: fair values are calculated by discounted cash flow projections using current market interest rates. F-36 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) . Other investment assets: as quoted market prices are generally not readily available for these assets, impairment is assessed on a regular basis, and as significant unrealized gains for the Group are not expected to arise, the carrying value of these assets in the balance sheet (generally cost less provision for impairment) is used as an estimate of the fair value. . Bank borrowings: As the bank borrowings are at variable interest rates, their carrying values approximate their fair values at the reporting date. Fair value of financial instruments
Total fair value ----------------------------------------------- As of December 31, As of June 30, --------------------------- ------------------ 2000 2001 2002 2002 2003 ------- -------- -------- -------- -------- (RMB in millions) Fixed maturity securities............... 37,735 53,337 76,390 61,475 82,072 Equity securities....................... 6,794 7,698 12,171 7,084 14,797 Term deposits........................... 39,653 76,083 123,675 97,798 142,043 Securities purchased under agreements to resell................................ 19,840 30,480 36,388 46,247 70,061 Policy loans............................ 109 107 106 105 136 Other investments....................... 572 336 231 299 209 Cash and cash equivalents............... 23,275 17,855 14,529 17,575 23,592 Policyholder contract deposits and other funds................................. (99,328) (116,012) (165,727) (150,898) (211,493) Bank borrowings......................... (921) (379) (313) (325) (311) Securities sold under agreements to repurchase............................ (90) (14,608) (3,602) (4,501) --
Total carrying value ----------------------------------------------- As of December 31, As of June 30, --------------------------- ------------------ 2000 2001 2002 2002 2003 ------- -------- -------- -------- -------- (RMB in millions) Fixed maturity securities............... 37,684 53,284 76,337 58,345 80,869 Equity securities....................... 6,794 7,698 12,171 6,928 15,591 Term deposits........................... 39,653 76,083 123,675 97,798 142,043 Securities purchased under agreements to resell................................ 19,840 30,480 36,388 46,247 70,061 Policy loans............................ 109 107 106 105 136 Other investments....................... 572 336 231 299 209 Cash and cash equivalents............... 23,275 17,855 14,529 17,575 23,592 Policyholder contract deposits and other funds................................. (89,373) (105,609) (156,273) (139,575) (210,975) Bank borrowings......................... (921) (379) (313) (325) (311) Securities sold under agreements to repurchase............................ (90) (14,608) (3,602) (4,501) --
The Group's activities expose it to a variety of financial risks, including the effects of changes in fixed maturity securities and equity market prices, and interest rates. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. F-37 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Risk management is carried out by a central assets management department under policies approved by management. The central asset management department identifies, evaluates and hedges financial risks in close co-operation with the Group's operating units. The management provides written principles for overall risk management, as well as written policies covering specific areas, such as managing interest rate risk, credit risk, and liquidity risk. (i) Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. Many of the Group's insurance policies offer guaranteed returns to policyholders. These guarantees expose the Group to interest rate risk. Interest rate risk is normally controlled through matching such liabilities with suitable assets. The limited availability of matching assets and the current regulatory constraints in the PRC mean that the Group can only mitigate interest rate risk to a certain extent. If the regulatory constraints are eased, the Group expects to be able to take action to further mitigate the risk. (ii) Market risk The Group's investments include mainly securities investment funds and bonds. Among these, the prices of listed securities investment funds and bonds are determined by market forces. The Company's policy is to hold an appropriately diversified investment portfolio as permitted by laws and regulations to reduce the risk of concentration in one specific industry or company. The Company also actively monitors the market prices of the securities. (iii) Credit risk Credit risk is the risk that one party to a financial transaction or the issuer of a financial instrument will fail to discharge an obligation and cause another party to incur a financial loss. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. Where appropriate, the Group obtains collateral in the form of rights to cash, securities, property and equipment. (iv) Liquidity risk Liquidity risk is the risk that the Group will not have access to sufficient funds to meet its liabilities as they become due. In the normal course of business, the Group attempts to match the maturity of invested assets to the maturity of insurance liabilities. F-38 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. DEFERRED POLICY ACQUISITION COSTS
Six months ended Year ended December 31, June 30, ---------------------- -------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Gross Balance as of January 1................. 2,285 6,241 11,182 11,182 18,411 Acquisition costs deferred.............. 5,819 8,376 11,240 5,646 5,979 Amortization charged to income.......... (1,987) (3,269) (4,121) (2,243) (2,816) Unrealized gains/(losses) on investments 124 (166) 110 (103) 25 ------ ------ ------ ------ ------ Balance at period end................... 6,241 11,182 18,411 14,482 21,599 ====== ====== ====== ====== ====== Ceded Balance as of January 1................. (242) (245) (289) (289) (327) Acquisition costs deferred.............. (245) (289) (327) (149) (158) Amortization charged to income.......... 242 245 289 141 168 ------ ------ ------ ------ ------ Balance at period end................... (245) (289) (327) (297) (317) ====== ====== ====== ====== ====== Net Balance as of January 1................. 2,043 5,996 10,893 10,893 18,084 Acquisition costs deferred.............. 5,574 8,087 10,913 5,497 5,821 Amortization charged to income.......... (1,745) (3,024) (3,832) (2,102) (2,648) Unrealized gains/(losses) on investments 124 (166) 110 (103) 25 ------ ------ ------ ------ ------ Balance at period end................... 5,996 10,893 18,084 14,185 21,282 ====== ====== ====== ====== ======
8. REINSURANCE ASSETS
As of December 31, As of June 30, ---------------- -------------- 2000 2001 2002 2002 2003 ---- ----- ----- ----- ---- (RMB in millions) Ceded unearned premiums........... 826 887 1,006 812 708 Claims recoverable from reinsurers 143 174 176 200 172 Due from reinsurance companies.... 1 39 42 79 91 --- ----- ----- ----- --- Total............................. 970 1,100 1,224 1,091 971 === ===== ===== ===== ===
Approximately 100% of reinsurance assets as of the balance sheet dates were reinsured with China Reinsurance Company. F-39 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. PROPERTY, PLANT AND EQUIPMENT
Office equipment, furniture Assets Investment and Motor under Leasehold properties Buildings fixtures vehicles construction improvements Total ---------- --------- ---------- -------- ------------ ------------ ------ (RMB in millions) Cost or deemed cost As of January 1, 2000........ 826 11,622 1,424 1,876 2,693 126 18,567 Additions.................... 15 536 345 255 1,256 37 2,444 Disposals.................... -- (1,591) (138) (140) -- (16) (1,885) Transfer upon completion..... -- 1,244 -- -- (1,244) -- -- ----- ------ ----- ----- ------ --- ------ As of December 31, 2000...... 841 11,811 1,631 1,991 2,705 147 19,126 ----- ------ ----- ----- ------ --- ------ Additions.................... 44 752 510 275 739 51 2,371 Disposals.................... -- (752) (152) (221) -- (4) (1,129) Transfer from assets held for sale....................... 2,108 -- -- -- -- -- 2,108 Transfer upon completion..... -- 1,584 -- -- (1,584) -- -- ----- ------ ----- ----- ------ --- ------ As of December 31, 2001...... 2,993 13,395 1,989 2,045 1,860 194 22,476 ----- ------ ----- ----- ------ --- ------ Additions.................... 18 493 354 277 617 55 1,814 Disposals.................... -- (462) (119) (368) -- (4) (953) Transfer upon completion..... -- 1,066 -- -- (1,066) -- -- ----- ------ ----- ----- ------ --- ------ As of December 31, 2002...... 3,011 14,492 2,224 1,954 1,411 245 23,337 ===== ====== ===== ===== ====== === ====== As of January 1, 2002........ 2,993 13,395 1,989 2,045 1,860 194 22,476 Additions.................... 10 246 143 59 299 12 769 Disposals.................... -- (277) (27) (83) -- -- (387) Transfer upon completion..... -- 507 -- -- (507) -- -- ----- ------ ----- ----- ------ --- ------ As of June 30, 2002.......... 3,003 13,871 2,105 2,021 1,652 206 22,858 ----- ------ ----- ----- ------ --- ------ As of January 1, 2003........ 3,011 14,492 2,224 1,954 1,411 245 23,337 Additions.................... -- 802 91 64 330 95 1,382 Disposals.................... (11) (175) (138) (116) -- (56) (496) Revaluation.................. (181) -- -- -- -- -- (181) Transfer upon completion..... -- 292 -- -- (292) -- -- ----- ------ ----- ----- ------ --- ------ As of June 30, 2003.......... 2,819 15,411 2,177 1,902 1,449 284 24,042 ===== ====== ===== ===== ====== === ======
F-40 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Office equipment, furniture Assets Investment and Motor under Leasehold properties Buildings fixtures vehicles construction improvements Total ---------- --------- ---------- -------- ------------ ------------ ------ (RMB in millions) Accumulated depreciation As of January 1, 2000.. -- (1,399) (573) (894) (61) (29) (2,956) Charges for the year... -- (374) (218) (288) -- (34) (914) Impairment loss........ -- (5) -- -- (19) -- (24) Disposals.............. -- 195 69 111 -- 10 385 ----- ------ ------ ------ ----- ---- ------ As of December 31, 2000 -- (1,583) (722) (1,071) (80) (53) (3,509) ----- ------ ------ ------ ----- ---- ------ Charges for the year... -- (477) (271) (301) -- (36) (1,085) Impairment loss........ -- (13) -- -- 25 -- 12 Disposals.............. -- 130 138 184 -- 1 453 ----- ------ ------ ------ ----- ---- ------ As of December 31, 2001 -- (1,943) (855) (1,188) (55) (88) (4,129) ----- ------ ------ ------ ----- ---- ------ Charges for the year... -- (631) (371) (280) -- (41) (1,323) Impairment loss........ -- (7) -- -- -- -- (7) Disposals.............. -- 157 111 309 -- 2 579 ----- ------ ------ ------ ----- ---- ------ As of December 31, 2002 -- (2,424) (1,115) (1,159) (55) (127) (4,880) ===== ====== ====== ====== ===== ==== ====== As of January 1, 2002.. -- (1,943) (855) (1,188) (55) (88) (4,129) Charges for the year... -- (295) (184) (145) -- (19) (643) Impairment loss........ -- (3) -- -- -- -- (3) Disposals.............. -- 64 21 69 -- -- 154 ----- ------ ------ ------ ----- ---- ------ As of June 30, 2002.... -- (2,177) (1,018) (1,264) (55) (107) (4,621) ----- ------ ------ ------ ----- ---- ------ As of January 1, 2003.. -- (2,424) (1,115) (1,159) (55) (127) (4,880) Charges for the year... -- (214) (223) (221) -- (62) (720) Impairment loss........ -- (76) -- -- (10) -- (86) Disposals.............. -- 69 72 113 -- -- 254 ----- ------ ------ ------ ----- ---- ------ As of June 30, 2003.... -- (2,645) (1,266) (1,267) (65) (189) (5,432) ===== ====== ====== ====== ===== ==== ====== Net book value As of December 31, 2000 841 10,228 909 920 2,625 94 15,617 ===== ====== ====== ====== ===== ==== ====== As of December 31, 2001 2,993 11,452 1,134 857 1,805 106 18,347 ===== ====== ====== ====== ===== ==== ====== As of December 31, 2002 3,011 12,068 1,109 795 1,356 118 18,457 ===== ====== ====== ====== ===== ==== ====== As of June 30, 2002.... 3,003 11,694 1,087 757 1,597 99 18,237 ===== ====== ====== ====== ===== ==== ====== As of June 30, 2003.... 2,819 12,766 911 635 1,384 95 18,610 ===== ====== ====== ====== ===== ==== ======
F-41 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The analysis of the cost or valuation as of December 31, 2002 of the above assets is as follows:
Office equipment, furniture Assets Investment and Motor under Leasehold properties Buildings fixtures vehicles construction improvements Total ---------- --------- ---------- -------- ------------ ------------ ------ (RMB in millions) At cost..... -- 12,068 1,109 795 1,356 118 15,446 At valuation 3,011 -- -- -- -- -- 3,011 ----- ------ ----- --- ----- --- ------ 3,011 12,068 1,109 795 1,356 118 18,457 ===== ====== ===== === ===== === ======
The analysis of the cost or valuation as of December 31, 2001 of the above assets is as follows:
Office equipment, furniture Assets Investment and Motor under Leasehold properties Buildings fixtures vehicles construction improvements Total ---------- --------- ---------- -------- ------------ ------------ ------ (RMB in millions) At cost..... -- 11,452 1,134 857 1,805 106 15,354 At valuation 2,993 -- -- -- -- -- 2,993 ----- ------ ----- --- ----- --- ------ 2,993 11,452 1,134 857 1,805 106 18,347 ===== ====== ===== === ===== === ======
The analysis of the cost or valuation as of December 31, 2000 of the above assets is as follows:
Office equipment, furniture Assets Investment and Motor under Leasehold properties Buildings fixtures vehicles construction improvements Total ---------- --------- ---------- -------- ------------ ------------ ------ (RMB in millions) At cost..... -- 10,228 909 920 2,625 94 14,776 At valuation 841 -- -- -- -- -- 841 --- ------ --- --- ----- -- ------ 841 10,228 909 920 2,625 94 15,617 === ====== === === ===== == ======
The analysis of the cost or valuation as of June 30, 2003 of the above assets is as follows:
Office equipment, furniture Assets Investment and Motor under Leasehold properties Buildings fixtures vehicles construction improvements Total ---------- --------- ---------- -------- ------------ ------------ ------ (RMB in millions) At cost..... -- 12,766 911 635 1,384 95 15,791 At valuation 2,819 -- -- -- -- -- 2,819 ----- ------ --- --- ----- -- ------ 2,819 12,766 911 635 1,384 95 18,610 ===== ====== === === ===== == ======
F-42 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The analysis of the cost or valuation as of June 30, 2002 of the above assets is as follows:
Office equipment, furniture Assets Investment and Motor under Leasehold properties Buildings fixtures vehicles construction improvements Total ---------- --------- ---------- -------- ------------ ------------ ------ (RMB in millions) At cost..... -- 11,694 1,087 757 1,597 99 15,234 At valuation 3,003 -- -- -- -- -- 3,003 ----- ------ ----- --- ----- -- ------ 3,003 11,694 1,087 757 1,597 99 18,237 ===== ====== ===== === ===== == ======
Investment properties were revalued as of June 30, 2003 on the basis of their open market value by Sallmanns (Far East) Limited, an independent firm of chartered surveyors. 10. ACCRUED INVESTMENT INCOME
As of December 31, As of June 30, ----------------- -------------- 2000 2001 2002 2002 2003 ----- ----- ----- ----- ----- (RMB in millions) Accrued interest income Term deposits............ 1,592 2,068 2,589 2,356 2,629 Fixed maturity securities 1,366 1,430 1,591 1,626 1,633 Others................... 60 22 18 21 15 Accrued dividend income... 15 7 -- -- -- ----- ----- ----- ----- ----- Total..................... 3,033 3,527 4,198 4,003 4,277 ===== ===== ===== ===== =====
11. PREMIUMS RECEIVABLE The ageing of premiums receivable is within two months. 12. OTHER ASSETS
As of December 31, As of June 30, ----------------- -------------- 2000 2001 2002 2002 2003 ----- ----- ----- ----- ----- (RMB in millions) Advances.................................. 1,413 1,254 1,420 1,362 1,390 Entrusted funds receivable................ 1,494 1,494 1,513 1,504 1,523 Receivable for fund unit redeemed......... -- -- -- 428 -- Deposits.................................. 121 105 103 129 76 Inventory held by real estate subsidiaries 1,996 254 240 256 200 Foreclosed assets......................... 96 196 200 201 218 Long-term deferred expenses............... 70 56 57 63 31 Others.................................... 185 169 54 233 238 ----- ----- ----- ----- ----- Total..................................... 5,375 3,528 3,587 4,176 3,676 ===== ===== ===== ===== =====
F-43 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. BENEFITS, CLAIMS AND EXPENSES
Gross -------------------------------------- Year ended Six months December 31, ended June 30, ---------------------- -------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Accident and health claims and claim adjustment expenses..................................... 3,459 4,786 5,066 2,449 2,888 Life insurance death and other benefits........ 8,467 10,099 7,010 3,869 4,580 Increase in future life policyholder benefits.. 27,738 33,121 45,374 22,793 23,192 ------ ------ ------ ------ ------ Total insurance benefits and claims............ 39,664 48,006 57,450 29,111 30,660 ====== ====== ====== ====== ====== Ceded -------------------------------------- Year ended Six months December 31, ended June 30, ---------------------- -------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Accident and health claims and claim adjustment expenses..................................... (692) (957) (1,013) (490) (433) ------ ------ ------ ------ ------ Total insurance benefits and claims............ (692) (957) (1,013) (490) (433) ====== ====== ====== ====== ====== Net -------------------------------------- Year ended Six months December 31, ended June 30, ---------------------- -------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) Accident and health claims and claim adjustment expenses..................................... 2,767 3,829 4,053 1,959 2,455 Life insurance death and other benefits........ 8,467 10,099 7,010 3,869 4,580 Increase in future life policyholder benefits.. 27,738 33,121 45,374 22,793 23,192 ------ ------ ------ ------ ------ Total insurance benefits and claims............ 38,972 47,049 56,437 28,621 30,227 ====== ====== ====== ====== ======
14. INSURANCE RESERVES Long duration contract liabilities arising from traditional life insurance products include, depending on contract type, policyholder account balances or the present value of future benefits less present value of valuation premiums. Short duration contract liabilities relate to accident and health products of one year duration or less. F-44 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The liabilities for future life policyholder benefits have been established in accordance with the provisions of Statement of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance Enterprises". In accordance with the provisions of this standard, the present value of estimated future policy benefits less the present value of estimated future net premiums to be collected from policyholders are accrued when premium revenue is recognized. These estimates are based on the following assumptions: (i) Interest rates are based on estimates of future yields on the Company's investments. The discount rates used increase from 3.8% to 5.0%, with a margin of provision for adverse deviation ranging from 0.25% to 0.50%. In determining its interest rate assumptions, the Company considers past investment experience, the current and future mix of its investment portfolio and trends in yields. Actual investment yields in the years ended December 31, 2000, 2001 and 2002 were 3.8%, 4.1% and 3.8%, respectively. Assumed interest rates in future years reflect increased investment in higher yielding securities, including corporate bonds, longer duration securities and equity securities. (ii) Mortality, morbidity and surrender rates varying by contract type are based on expected experience at date of contract issue plus, where applicable, a margin for adverse deviation. Expected rates have been based upon actual experience of the Group for similar contract types, with allowances for any trends or expected differences. Actual mortality experience is based on the "CL" series of life tables issued by the People's Bank of China, adjusted based on the results of an analysis of death claims incurred by the Company in 2001 and 2002. Actual surrender and morbidity experience is based on an analysis of lapses and morbidity incurred by the Company in 2001 and 2002. The analyses performed in 2001 and 2002 are considered representative of policies in effect as of December 31, 1999 and those issued during the year ended December 31, 2000 due to the stable pattern of mortality, surrender and morbidity experience between 1999 and 2002. The aggregate number of deaths divided by in-force policies at the beginning of the year was 0.122% in 2000, 0.124% in 2001 and 0.127% in 2002. The aggregate number of lapses and terminations divided by the number of in-force policies at the beginning of the year was 9.30% in 2000, 9.56% in 2001 and 9.37% in 2002. (iii) Expense rates have been based on expected unit costs plus, where applicable, a margin for adverse deviation. Unit costs have been based on an analysis of actual experience. The per-policy costs were estimated to be 2% of premiums plus a fixed per-policy expense. For contract in loss recognition, the assumptions reflect best estimates of interest rates, mortality and expenses and with no provision for adverse deviation. For interest rates this was generally 3.8%. Policyholder account balances for investment-type contracts are equal to the policy account values. Account values consist of an accumulation of gross premium payments less loadings for expenses, mortality and profit plus credited interest less withdrawals and other exits. The amount of policyholder dividends to be paid is determined annually. Policyholder dividends include life policyholders' share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments relating to future policyholder benefits and policyholder contract deposits vary according to the type of contract. F-45 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Investment, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory provisions. Reserves for claims and claim adjustment expenses were as follows:
Six months ended Year ended December 31, June 30, ---------------------- -------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ------ (RMB in millions) As of January 1 Gross reserves for claims and claim adjustment expenses.................................... 804 716 867 867 879 Reinsurance recoverable....................... (161) (143) (174) (174) (176) ------ ------ ------ ------ ------ Net reserves for claims and claim adjustment expenses.................................... 643 573 693 693 703 ------ ------ ------ ------ ------ Claims and claim adjustment expenses incurred. 3,458 4,786 5,066 2,449 2,888 Claims and claim adjustment expenses paid..... (3,546) (4,635) (5,054) (2,306) (2,857) As of December 31/June 30 Net reserves for claims and claim adjustment expenses.................................... 573 693 703 810 774 Reinsurance recoverable....................... 143 174 176 200 136 ------ ------ ------ ------ ------ Gross reserves for claims and claim adjustment expenses.................................... 716 867 879 1,010 910 ====== ====== ====== ====== ======
Accident and health claims are generally settled within two months of when the claims are reported. Accordingly, no material amount of the charge for claims incurred relates to prior years. The Group believes that the final claims and claim adjustment expenses incurred would not differ materially from the amounts provided at period ends. Claims paid and incurred, and the ratios of claims incurred to net accident and health premiums were as follows:
For the six For the year ended months ended December 31, June 30, ----------------- ----------- 2000 2001 2002 2002 2003 ----- ----- ----- ----- ----- (RMB in millions) Claims incurred--net. 2,767 3,829 4,053 1,959 2,455 Claims incurred ratio 49% 63% 60% 60% 60%
15. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Liabilities are due within thirty days from the balance sheet date. The carrying values of fixed maturity securities pledged as collateral are as follows:
As of December 31, As of June 30, ----------------- -------------- 2000 2001 2002 2002 2003 ---- ------ ----- ----- ---- (RMB in millions) Fixed maturity securities pledged 89 14,600 3,600 4,500 -- == ====== ===== ===== ==
F-46 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. BANK BORROWINGS
As of As of December 31, June 30, ------------------ --------- 2000 2001 2002 2002 2003 ---- ---- ---- ---- ---- Maturity schedule (RMB in millions) Short-term borrowings. 907 370 311 322 309 Long-term borrowings.. Within 1 year........ -- -- 2 -- 2 Between 1 and 2 years -- -- -- 3 -- Between 2 and 5 years -- 9 -- -- -- Over 5 years......... 14 -- -- -- -- --- --- --- --- --- Subtotal.............. 14 9 2 3 2 --- --- --- --- --- Total................. 921 379 313 325 311 === === === === ===
As of December 31, As of June 30, ------------------ -------------- 2000 2001 2002 2002 2003 ----- ---- ---- ----- ---- (RMB in millions) Carrying value of investment properties, net, pledged.. -- 563 365 506 184 Carrying value of inventory pledged.................... 1,905 -- -- -- -- Net book value of property, plant and equipment pledged 84 88 65 84 56 ----- --- --- ----- --- Total.................................................. 1,989 651 430 590 240 ===== === === ===== ===
F-47 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. PROVISION Provision for early retirement and termination relates to benefits payable whenever an employee's employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits.
Early retirement and termination ---------------- (RMB in millions) As of January 1, 2000.. 24 Additional provision... 62 Payment for the year... (13) ---- As of December 31, 2000 73 ---- Additional provision... 324 Payment for the year... (67) ---- As of December 31, 2001 330 ---- Additional provision... 224 Payment for the year... (109) ---- As of December 31, 2002 445 ---- As of January 1, 2003.. 445 Additional provision... 74 Payment for the year... (59) ---- As of June 30, 2003.... 460 ---- As of January 1, 2002.. 330 Additional provision... 112 Payment for the year... (54) ---- As of June 30, 2002.... 388 ----
18. STATUTORY INSURANCE FUND According to the PRC's "Financial Regulations for Insurance Companies", the Group is required to provide for the insurance guarantee fund at 1% of the net premiums of general insurance, accident insurance, short-term health insurance and reinsurance. No additional insurance guarantee fund will be provided once it reaches 6% of total assets. F-48 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 19. OTHER LIABILITIES
As of December 31, As of June 30, ----------------- -------------- 2000 2001 2002 2002 2003 ----- ----- ----- ----- ----- (RMB in millions) Reserve for commission and expenses 964 1,110 1,047 1,204 1,138 Agent deposits..................... 248 351 451 420 477 Salary payable..................... 285 385 667 1,000 810 Staff welfare payable.............. 276 405 561 454 594 Tax payable........................ 247 236 258 227 208 Payable to constructors............ 373 397 336 362 324 Reinsurance liabilities............ 95 191 200 183 96 Regulatory fee payable............. -- 55 108 29 54 Others............................. 1,001 1,076 1,088 1,088 1,099 ----- ----- ----- ----- ----- Total.............................. 3,489 4,206 4,716 4,967 4,800 ===== ===== ===== ===== =====
20. PROFIT/(LOSS) BEFORE TAXATION Profit/(loss) before taxation is stated after charging the following:
Six month ended Year ended December 31, June 30, ----------------------- --------------- 2000 2001 2002 2002 2003 ----- ----- ----- ------- ------- (RMB in millions) Charging Staff costs.......................................... Wages and salary..................................... 1,241 1,726 2,493 1,411 1,594 Housing benefits..................................... 1,476 565 90 41 54 Contribution to the defined contribution pension plan 60 105 146 80 77 Depreciation--owned property, plant and equipment.... 914 1,085 1,323 643 720 Loss on disposal of property, plant and equipment.... 39 49 91 32 36 Deficit on revaluation of investment properties...... -- -- -- -- 181
21. TAXATION The reconciliation between the Group's effective tax rate and the statutory tax rate of 33% in the PRC is as follows:
Six months ended Year ended December 31, June 30, ---------------------- --------------- 2000 2001 2002 2002 2003 ------ ------ ------ ------ ---- (RMB in millions) Profit/(loss) before income tax expenses and minority interests.......................................... (6,935) (3,297) (2,234) 96 (725) ------ ------ ------ ------ ---- Tax computed at the statutory tax rate of 33%........ (2,289) (1,087) (737) 32 (239) Non-taxable income.................................. (21) (14) (8) (2) -- Expenses not deductible for tax purposes............ 510 1,267 1,546 531 575 Valuation allowance................................. 1,814 (162) (787) (558) (328) ------ ------ ------ ------ ---- Income taxes at effective tax rate................... 14 4 14 3 8 ====== ====== ====== ====== ====
F-49 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) No deferred tax assets have been recognized by the Group. Deferred tax book assets and liabilities, and valuation allowance, are analyzed as follows:
Six months ended Year ended December 31, June 30, ------------------------- ---------------- 2000 2001 2002 2002 2003 ------- ------- ------- ------- ------- (RMB in millions) Provided for in respect of: Tax value of loss carried forward............ 11,993 11,862 10,082 11,798 10,904 Future policyholder benefits and policyholder contract deposits and other funds.......... 42,723 44,036 47,041 45,993 47,468 Provision for asset impairment............... 2,196 2,013 1,708 1,981 2,039 Deferred policy acquisition costs............ (1,938) (3,608) (5,945) (4,730) (6,993) Others....................................... 151 566 915 243 903 ------- ------- ------- ------- ------- 55,125 54,869 53,801 55,285 54,321 Valuation allowance........................... (55,125) (54,869) (53,801) (55,285) (54,321) ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
As of December 31, 2000, 2001, and 2002 and June 30, 2002 and 2003 the Group had unrecognized tax losses of RMB 36,342 million, RMB 35,945 million, RMB 30,551 million, RMB 35,750 million and RMB 33,042 million respectively, to carry forward to offset against future taxable income. These tax losses will expire in five years. 22. EARNINGS/LOSS PER SHARE Basic earnings/loss per share for the Relevant Periods have been computed by dividing the profit/loss for the period by 20,000 million shares, the number of shares issued by the Company upon its incorporation on June 30, 2003. There is no difference between basic and diluted earnings/loss per share. 23. SIGNIFICANT RELATED PARTY TRANSACTIONS (a) Related parties Related parties are those parties which have the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.
Significant related party Relationship with the Company ------------------------- ----------------------------- Huixian Holding Company. Associated company
(b) Related party transactions In addition to the related party transactions undertaken in connection with the Restructuring described in Note 1 above, during the Relevant Periods the Group has not entered into other transactions with related parties. F-50 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 24. CONTINGENCIES The following is a summary of the significant contingent liabilities:
As of June As of December 31, 30, ------------------ --------- 2000 2001 2002 2002 2003 ---- ---- ---- ---- ---- (RMB in millions) Outstanding loan guarantees 442 447 443 445 145 Pending lawsuits........... 56 73 189 166 87
(a) The Group has acted as the guarantor for external borrowings by certain third-party entities. For those guarantees where management believes it is probable that the Group will have to pay up those guarantees, provision has been made for the probable losses to the Group and at amounts based on its best estimate. Other outstanding guarantees are disclosed as contingent liabilities above. (b) The Group has been named in a number of lawsuits arising in the ordinary course of business. Provision has been made for the probable losses to the Group on those claims when management can reasonably estimate the outcome of the lawsuits taking into account the legal advice. No provision has been made for pending lawsuits when the outcome of the lawsuits cannot be reasonably estimated or management believes the probability of loss is remote. (c) For the above contingent liabilities, provision of RMB 4 million, RMB 4 million and RMB 42 million, RMB 31 million and RMB 71 million has been made as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, respectively. 25. COMMITMENTS (a) Capital commitments The Group has the following outstanding capital commitments not provided for in the consolidated financial statements:
As of December 31, As of June 30, ------------------ -------------- 2000 2001 2002 2002 2003 ---- ---- ---- ---- ---- (RMB in millions) Acquisition of property, plant and equipment 211 238 752 961 532
(b) Operating lease commitments The Group has commitments to make the following future minimum lease payments under non-cancelable operating leases:
As of December 31, As of June 30, ------------------ -------------- 2000 2001 2002 2002 2003 ---- ---- ---- ---- ---- (RMB in millions) Land and buildings Not later than one year.......................... 41 17 63 66 64 Later than one year but not later than five years 88 97 169 108 120 Later than five years............................ 8 33 22 14 12
F-51 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The operating lease payments charged to the profit and loss accounts for the years ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003 were RMB 239 million, RMB 241 million, RMB 287 million, RMB 123 million and RMB 139 million, respectively. 26. RECONCILIATION OF H.K. GAAP AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("U.S. GAAP") The consolidated financial statements of the Group have been prepared in accordance with H.K. GAAP, which differs in certain significant respects from U.S. GAAP. Differences between H.K. GAAP and U.S. GAAP, which may have significant impacts on consolidated net profit/(loss) and consolidated owners' equity, are described below. The effect on net profit/(loss) of significant differences between H.K. GAAP and U.S. GAAP for the year ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003 is as follows:
Six months ended Year ended December 31, June 30, ---------------------- --------- 2000 2001 2002 2002 2003 - ------ ------ ------ ---- ---- (RMB in millions) Net profit/(loss) under H.K. GAAP............... (6,990) (3,295) (2,250) 91 (714) U.S. GAAP adjustments Depreciation of investment properties.......... (36) (41) (67) (30) (23) Deficit on revaluation of investment properties -- -- -- -- 181 ------ ------ ------ --- ---- Net profit/(loss) under U.S. GAAP............... (7,026) (3,336) (2,317) 61 (556) ====== ====== ====== === ====
The effect on owners' equity of significant differences between H.K. GAAP and U.S. GAAP as of December 31, 2001 and 2002 and June 30, 2003 is as follows:
Six months ended Year ended December 31 June 30 --------------------- ---------- 2001 2002 2003 - -------- -------- ---------- (RMB in millions) Owners' equity under H.K. GAAP.................... (172,348) (175,463) (176,353) U.S. GAAP adjustments Accumulated depreciation of investment properties (111) (178) (201) Deficit on revaluation of investment properties.. -- -- 181 -------- -------- -------- Owners' equity under U.S. GAAP.................... (172,459) (175,641) (176,373) ======== ======== ========
Investment Properties Under H.K. GAAP, investment properties are valued on an open market basis. Under U.S. GAAP, investment properties are stated at historical cost less accumulated depreciation and accumulated impairment loss. Cost of investment properties, less residual value, is depreciated using a straight line method over its estimated useful life. F-52 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property, plant, and equipment Certain property, plant and equipment on hand as of January 1, 2000 have been valued at fair values rather than at historical cost less depreciation, which is required by U.S. GAAP. The Group has not been able to quantify the effect of the difference in accounting treatment because, prior to January 1, 1997, the predecessor company did not maintain sufficiently detailed historical cost records. The fair market values recorded in the opening balance of the Group as of January 1, 2000 have been carried forward as the deemed cost. Accumulated other comprehensive income/(loss) represents the cumulative gains and losses on items that are not reflected in earnings. The balances and activities for the years ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003 are as follows:
Six months Year ended December 31, ended June 30, ---------------------- ------------- 2000 2001 2002 2002 2003 ------ ----- ---- ---- ---- (RMB in millions) Changes in net unrealized gains/ (losses) on investment securities: Net unrealized gains/(losses) arising during the period....... (1,048) 1,601 (234) 826 (191) Reclassification adjustment for gains/(losses) included in net earnings.................................................... 18 (387) (747) 157 (10) ------ ----- ---- ---- ---- Changes in net unrealized gains/(losses) on investment securities.................................................. (1,030) 1,214 (981) 983 (201) Adjustments for: Deferred acquisition costs.................................... 124 (166) 110 (103) 25 ------ ----- ---- ---- ---- Total other comprehensive income/(loss)....................... (906) 1,048 (871) 880 (176) ====== ===== ==== ==== ====
Statutory capital information
2000 2001 2002 ------- ------- ------- (RMB in millions) Statutory capital and surplus........................................ (54,903) (78,309) (71,680) Minimum statutory capital and surplus necessary to satisfy regulatory requirements....................................................... 11,642 13,649 17,453
According to Article 2003.1 issued by the China Insurance Regulatory Commission (CIRC), all insurance companies have to report their statutory capital and surplus (i.e., solvency margin) to the CIRC at the end of each fiscal year. The solvency adequacy ratio is computed by dividing the actual solvency margin by the minimum solvency margin. CIRC will closely monitor those insurance companies with solvency adequacy ratio less than 100% and may, depending on the individual circumstances, undertake certain regulatory measures, including but not limited to restricting the payment of dividends. As of December 31, 2001 and 2002 and June 30, 2003, the Group had accumulated losses and no amounts were available for dividend payments to stockholders. Recently issued accounting standards In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143. "Accounting for Asset Retirement Obligations". SFAS No. 143 F-53 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) requires the Group to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Group is required to adopt SFAS No. 143 on January 1, 2003. The Group has not determined the potential effects that the adoption of this Statement will have on the Group's combined financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. SFAS No. 146 requires an entity to record a liability for costs associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management's intended future actions and does not meet the requirement for recognizing a liability and the related expense. An entity is required to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit or disposal activity is initiated and in any subsequent period until the activity is completed. The Group is required to adopt SFAS No. 146 on January 1, 2003. The provisions of SFAS No. 146 are required to be applied prospectively after the adoption date to newly exited or disposed activities. Therefore, management cannot determine the potential effects that the adoption of SFAS No. 146 will have on the Group's combined financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to SFAS No. 123 in paragraphs 2(a)-2(e) of the Statement shall be effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 in paragraph 2(f) of the Statement and the amendment to Opinion 28 in paragraph 3 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Group does not expect that the adoption of SFAS No. 148 will have a material impact on the Group's combined financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement clarifies when a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component. This statement also amends the definition of an underlying to conform to the language contained in FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Group is currently assessing the impact of this statement on its results of operations, financial position and cash flows upon adoption and has not yet completed that assessment. F-54 CHINA LIFE INSURANCE COMPANY LIMITED AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or "mezzanine" equity, but now requires those instruments to be classified as liabilities (or assets in some circumstances) in the balance sheet. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Group is currently assessing the impact of this statement on its results of operations, financial position and cash flows upon adoption and has not yet completed that assessment. In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees." FIN 45 requires a guarantor to recognize a liability at the inception of certain guarantees for the fair value of the obligation, including the ongoing obligation to stand ready to perform over the term of the guarantee. Guarantees, as defined in FIN 45, include contracts that contingently require the Group to make payments to a guaranteed party based on changes in an underlying that is related to an asset, liability or equity security of the guaranteed party, performance guarantees, indemnification agreements or indirect guarantees of indebtedness of others. This new accounting is effective for certain guarantees issued or modified after December 31, 2002. In addition, FIN 45 requires certain additional disclosures that are presented in Note 29. Management does not expect that the adoption of FIN 45 will have a material impact on the Group's financial position or its results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," an interpretation of ARB No. 51. FIN 46 provides a new framework for identifying variable interest entities ("VIEs") and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of VIEs in its consolidated financial statements. FIN 46 requires VIEs to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIEs' activities or entitled to receive a majority of the entity's residual returns, or both. FIN 46 is effective immediately for VIEs created after January 31, 2003 and is effective January 1, 2004 for VIEs created prior to February 1, 2003. The Group is currently assessing the impact of FIN 46 on its financial position and its operations. In July 2003, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for Separate Accounts." The SOP provides guidance on accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. The SOP is effective for financial statements for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. The SOP may not be applied retroactively to prior years' financial statements, and initial application should be as of the beginning of an entity's fiscal year. Management does not expect that the adoption of SOP 03-1 will have a material impact on the Group's financial position or its results of operations. F-55 ANNEX A--ACTUARIAL CONSULTANTS' REPORT OF TILLINGHAST-TOWERS PERRIN [GRAPHIC] 20 November 2003 The Directors China Life Insurance Company Limited 16 Chaowai Avenue Chaoyang District Beijing 100020 Dear Sirs ACTUARIAL CONSULTANTS' REPORT 1. Introduction Tillinghast-Towers Perrin, the financial services consulting division of Towers, Perrin, Forster & Crosby Inc, ("Tillinghast") has been engaged by China Life Insurance Company Limited ("China Life") to provide actuarial advice and opinions on matters relating to China Life's life insurance business. As part of this engagement, we have been asked to assess embedded value and value of one year's sales of China Life and to prepare a report on these matters for inclusion in a prospectus accompanying this report ("the Prospectus") and in connection with the proposed offering of American depository shares ("ADSs") and overseas listed foreign-invested shares ("H shares"). This report sets out the scope of work that we have undertaken and summarises the results of our work. As described more fully in the section of the Prospectus "The Restructuring", China Life was formed on 30 June 2003 as a joint stock company in connection with the restructuring of China Life Insurance Company ("CLIC") and a restructuring agreement has been signed between CLIC and China Life giving effect to the restructuring. The restructuring agreement between CLIC and China Life defines the policies that were transferred from CLIC to China Life. The definition of a transferred policy is summarised in the section of the Prospectus "The Restructuring". Cash, specified investment assets and various other assets were also transferred to China Life under the restructuring agreement. The net assets (defined as assets less policy reserves and other liabilities, all measured on the statutory bases of the People's Republic of China ("PRC") ) transferred to China Life had a carrying value at 30 June 2003 of RMB 29.6 billion. In consideration of this transfer, China Life issued 20 billion domestic shares to CLIC. A-1 CLIC's contracts with its intermediaries were also transferred to China Life. China Life has entered into certain management and other agreements with CLIC, as more fully explained in the section of the Prospectus "Relationship with CLIC". These agreements include a Policy Management Agreement, under which China Life has agreed to provide a number of policy administration services to CLIC relating to the non-transferred policies. In addition, China Life and CLIC have established a jointly owned asset management company, China Life Asset Management Company Limited, which in turn entered into agreements with China Life and with CLIC to provide investment management services to each company. 2. Scope of Work The scope of our work was to assess and report on embedded value and value of one year's sales of China Life as follows: . Embedded value at 30 June 2003; and . Value of one year's sales in respect of business issued during the year to 30 June 2003. For this purpose, embedded value has been determined on the basis of the restructuring having been effective at 30 June 2003, and value of one year's sales has been determined as if China Life had been fully operational during the year to 30 June 2003. The scope of our work did not include consideration of the financial implications for China Life of the Policy Management Agreement, its holding in China Life Asset Management Company Limited, or of other operational agreements between China Life and CLIC. Consequently, the results shown in this report exclude any value impact for China Life arising from these arrangements. 3. Definition of Embedded Value and Value of One Year's Sales The embedded value of a life insurer is defined as the sum of the adjusted net worth and the value of in force business allowing for the cost of solvency margin held. Adjusted net worth is equal to the sum of: . Net assets, defined as assets less policy reserves and other liabilities, all measured on PRC statutory basis; and . Adjustment for relevant differences between the market value of assets and the value determined on PRC statutory basis, together with relevant adjustments to other liabilities. The value of in force business and the value of one year's sales are calculated as the discounted value of the projected stream of future after-tax distributable profits for existing business in force at the valuation date and for one year's sales respectively. Distributable profits are those profits arising after allowance for policy reserves on the required PRC statutory reserving basis and after allowance for solvency margins at the required regulatory minimum level. The basis of calculation of the minimum solvency margin is described in the section of the Prospectus "Regulation". A-2 In Tables 4 and 5, we provide measures of China Life's embedded value and value of one year's sales for long term business, on a range of assumptions, to assist China Life in forming a view on the value of this business. In Table 6, we provide measures of China Life's value of one year's sales for short term business, on a range of assumptions, to assist China Life in forming a view on the value of this business. We have shown the cost of solvency margin as a separate component of the embedded values and we have shown the value of one year's sales before and after cost of solvency margin. This is to facilitate assessment of the impact on value of holding alternative levels of solvency margin in excess of the required regulatory minimum capital. The values shown in this report have been determined using a deterministic discounted cashflow methodology. This methodology makes implicit allowance for the cost of investment guarantees and policyholder options, asset/liability mismatch risk, credit risk and the economic cost of capital through the use of a risk-adjusted discount rate. Clearly, the higher the discount rate, the greater the allowance for these factors. As a relatively recent development, alternative valuation methodologies and approaches have emerged (for example, "market-consistent" methods) that make explicit allowance for the above factors. Our work in preparing this report has included consideration of measures of value that may be obtained from applying such an alternative method. Based on this work, we have concluded that, under current market and economic conditions and given the current nature and mix of business offered by China Life, the range of deterministic valuation results shown in this report incorporate reasonable allowance for the above factors. It should be noted that, in assessing the total value of a life insurer, the value attributable to future sales may be determined as the product of the value of sales issued in one year and a multiplier which reflects an allowance for future sales growth and the risks associated with achieving future sales at the assumed profit margin. Tillinghast's scope of work for this opinion did not extend to a consideration of those matters by which to assess the total value of future sales of China Life. 4. Policy Data We have been provided with the policy database underlying the summary of transferred individual and group policies ("long term business policies") shown in the section of the Prospectus "The Restructuring". Our determination of the value of in force business for these policies at 30 June 2003 is based on this database. We have also used the policy databases as at 30 June 2003 and 31 December 2002 to estimate the volume and mix of new long term insurance business issued during each of the preceding six months from these dates in order to estimate the volume and mix of new long term insurance business issued during the year to 30 June 2003. We have used this estimate of new business volumes and mix as the basis for our calculation of the value of one year's sales for the year to 30 June 2003. The manner in which data has been recorded in the above policy databases has required us to exercise our professional judgement in order to derive estimates of China Life's historical new business volumes from these databases. In the absence of another source of new business data against which to validate our estimates, we have undertaken certain tests that have sought to establish, with reasonable assurance, whether this exercise of professional judgement has been reasonable. We consider that the tests we have applied are reasonable in the circumstances and we are satisfied that these tests provide us with reasonable assurance that the aggregate values of one year's sales shown in this report are not materially misstated on account of the estimation process we have applied. We are therefore satisfied that our exercise of professional judgement has been reasonable in the circumstances. New business premium volumes in respect of short term health and accident business have been based on premiums received in the year to 30 June 2003. A-3 5. Embedded Values and Values of One Year's Sales Subject to the reliances and limitations set out in this report, we set out in Tables 4 and 5 at the end of this report our assessment of China Life's embedded value and value of one year's sales for long term business under alternative assumptions. In Table 6, we set out our assessment of China Life's value of one year's sales for short term business, under alternative assumptions. In preparing these results, we have used a financial projection model of China Life's life insurance business. In developing this model, we have relied on information provided by, or on behalf of, China Life and which is summarised in Section 6 of this report. Section 6 also sets out important limitations behind any assessment of the value of life insurance business, to which the reader's attention is drawn. The values in Tables 4, 5 and 6 have been shown under alternative assumptions given the particular uncertainties associated with the future investment environment in China and other future operational matters in relation to China Life's portfolio. These uncertainties are described more fully in the section of the Prospectus "Risk Factors". The reader should consider all of the risk factors set out in the Prospectus in assessing and interpreting the results shown in Tables 4, 5 and 6 at the end of this report. In our assessment, the situation of China Life is markedly different in nature from that of companies in mature markets and stable environments. The environment in which China Life is operating is extremely dynamic: China Life is a rapidly growing company, introducing new ranges of products, undertaking a substantial restructuring, and introducing a substantial change in strategy and operations in a relatively immature market undergoing regulatory reform. In these circumstances, past operational experience is less reliable as an indicator of likely future experience than the past experience of a mature company operating in a mature market. Consequently, we have had to develop assumptions based on our judgement, our knowledge of the Chinese insurance market and general industry experience, which is largely drawn from other Asian markets in similar situations, although it must be stressed that China Life is in a unique position in a unique market. Thus our assumptions should be regarded only as being illustrative of possible future experience. We strongly recommend that the readers of this report consider the significance of each assumption by referring to the various values given in order to gain an understanding of the impact on value that results from the use of alternative assumptions. In the remainder of this section we discuss the key assumptions used in the determination of embedded value and value of one year's sales. Discount Rates We have shown values at a range of discount rates. The discount rate appropriate to an investor will depend on the investor's own requirements, tax position and perception of the risks associated with the realisation of future profits. In calculating values at alternative discount rates, all other assumptions, including those relating to investment returns, have been left unchanged. Net Worth Adjustments In developing the adjusted net worth, we have allowed, where relevant, for the difference between the market value of assets and the value as determined on the PRC statutory basis. We have also allowed for certain miscellaneous adjustments to current liabilities. The total net of tax adjustment amounted to a reduction of RMB 0.1 billion. A-4 Reserving Basis The China Insurance Regulatory Commission ("CIRC") has introduced a new reserving basis in respect of participating business to be effective from 31 December 2003 (in the case of China Life). The values shown in Tables 4 and 5 allow for the effect of the new reserving basis as if the new basis had been effective as at 30 June 2003. The impact on value of the estimated increase in reserve and solvency margin of approximately RMB 0.1 billion as at 30 June 2003 under the new basis has been allowed for in the value of in force business and cost of solvency margin shown in Table 4. We have calculated the value of one year's sales using the new reserving basis for participating business. Values using the previous reserving basis are also shown. Investment Returns We have shown values under alternative investment scenarios. Under Scenario 1, future returns are based on forward rates derived from yields available on Chinese Government Bonds in the Interbank market over the 10 trading days prior to the valuation date. The forward rates are such that investment returns used in the valuation are projected to increase. The investment return assumptions have been set to be consistent with the basis of valuation of the assets backing the policy liabilities. Projected returns have been set on a book yield basis for assets assumed to be held to maturity, and on a market yield basis for other assets. We have applied the projected returns by asset class to the long term asset mix indicated by China Life management. The resulting assumed investment returns are shown in Table 1. Table 1 Investment Return Assumption as at 30 June 2003
Calendar Year Investment Return Assumption ------------- ---------------------------- 2003 3.64% 2004 3.70% 2005 3.79% 2006 3.90% 2007 4.01% 2008 4.11% 2009 4.19% 2010 4.26% 2011 4.33% 2012 4.41% 2013 4.48% 2014 4.55% 2015 4.62% 2016 4.69% 2017 4.75% 2018 4.83% 2019 4.89% 2020 4.94% 2021 4.97% 2022+ 4.99%
A-5 Values using the following alternative investment scenarios are also shown: . Investment returns representing a scenario under which higher returns are assumed for some asset classes with additional allowance for the impact of a change in asset mix arising from a potential future relaxation of regulations restricting permitted investments. This scenario has been prepared by China Life. These returns are shown in Table 2. Table 2 China Life's Higher Investment Return Assumption
Calendar Year Investment Return Assumption ------------- ---------------------------- 2003 3.90% 2004 4.00% 2005 4.10% 2006 4.20% 2007 4.30% 2008 4.40% 2009 4.55% 2010 4.70% 2011 4.85% 2012+ 5.00%
. Investment return of a constant 4% pa. Expenses Unit cost assumptions have been developed using the total non-commission expense base in 2002 of China Life and CLIC combined. The projected expenses based on these unit costs when combined with the explicit allowance for commissions and handling fees (see below) equate to approximately 95% of expense allowances priced into products which is consistent with China Life and CLIC combined experience over the last three years. Based on China Life management's stated intention to improve the expense efficiency of its operations, Scenario 1 assumes no future inflation of per policy expenses. Values using the following alternative scenarios are also shown: . Expenses equivalent to approximately 90% of expense allowances; . Expense equivalent to approximately 100% of expense allowances; and . Per policy expenses inflating at 2.5% pa. Our assessment of embedded value of China Life excludes expenses incurred by China Life in connection with the administration and investment management of CLIC policies and assets under the Policy Management and Asset Management Agreements. In addition, it excludes all revenue derived by China Life in respect of these agreements. Commission and Handling Fees We have allowed for commission payments under the commission schedules provided to us by China Life. For Group business and for products sold via banks, we have allowed for a handling fee as a percentage of new premium, based on experience in 2002. Mortality Assumptions have been developed based on input from China Life as to their past experience and expectations of current and future experience, our knowledge of the Chinese insurance market and our A-6 knowledge of other Asian markets. Mortality assumptions have been expressed as a percentage of the standard industry mortality tables: "China Life Tables". No allowance has been made in the assumed mortality basis for AIDS-related deaths. China Life's policies exclude payment of benefits in such circumstances and we have relied on the effectiveness of this exclusion in setting the assumed mortality basis. Scenario 1 assumes ultimate mortality rates of: . Life products: 65% of China Life Table for non-annuitants. . Deferred annuity products: 65% of China Life Table for annuitants, together with an allowance for future mortality improvements. In both cases, selection factors were also applied of 50% in year 1 and 25% in year 2, with ultimate rates applicable thereafter. Values using the following alternative scenarios are also shown: . Ultimate mortality rates increased by 25 percentage points (i.e. to ultimate rates of 90% of the above tables together with an allowance for future mortality improvements for annuitants); and . Ultimate mortality rates of non-annuitants increased by 25 percentage points (i.e. to ultimate rates of 90% of table) and of annuitants decreased by 25 percentage points (i.e. to ultimate rates of 40% of table) together with an allowance for future mortality improvements. Morbidity Since the transferred long term policies of China Life have all been issued on or after 10 June 1999, China Life has no morbidity experience on its policies beyond the 4/th/ policy year. Assumptions have been developed based on input from China Life as to their past experience and expectations of current and future experience, our knowledge of the Chinese insurance market, our knowledge of other Asian markets and our understanding of typical terms available from reinsurers for such risks. Scenario 1 assumes claims equal to 95% of the claims rates assumed in the product pricing basis. Values using the following alternative scenarios are also shown: . 120% of pricing basis; and . 70% of pricing basis. Lapse and Surrender Rates Since the transferred long term policies of China Life have all been issued on or after 10 June 1999, China Life has no experience of lapse and surrender rates on its policies beyond the 4/th/ policy year. A-7 Assumptions have been developed based on input from China Life management as to their past lapse and surrender experience and expectations of current and future experience, our knowledge of the Chinese insurance market and our knowledge of other Asian markets. Scenario 1 assumes lapse and surrender rates as shown in Table 3:
Table 3 Lapse and Surrender Assumptions Policy Year ------------------ 1 2 3 4+ - --- --- --- --- Regular Premium during premium paying period Annuity.............................................. 25% 10% 10% 5% Education............................................ 7.5% 5% 5% 5% Others............................................... 10% 7.5% 5% 5% Single Premium and after end of premium paying period Annuity.............................................. 1% 5% 5% 5% Others............................................... 1% 2.5% 2.5% 2.5%
The value of in force business and value of one year's sales are highly sensitive to the assumed future lapse and surrender rates. Values using the following alternative scenarios are also shown: . First 2 policy years lapse and surrender rates doubled (with the lapse and surrender rate assumptions for regular premium annuity being capped at 35% in policy year 1); and . All lapse and surrender rates doubled (with the lapse and surrender rate assumptions for regular premium annuity being capped at 35% in policy year 1). Policyholder Dividends Policyholder dividends were allowed for on the basis of China Life's intended approach to the management of dividends, as advised by the company: . Individual participating business: 70% of interest and mortality surplus; and . Group participating annuity business: 70% of interest surplus. Values assuming 80% rather than 70% are also shown as an alternative scenario. Tax Tax is assumed to be payable at 33% of profits, with exemption for certain investment income, including income from Chinese government bonds, and dividend income from investment funds. It is also assumed that certain salary expenses are not deductible. Based on advice received from the management of China Life we have assumed that 25% of total investment income is tax-exempt, and that 5% of non-commission expenses are not deductible in determining taxable profits. Values assuming that no income is tax-exempt are also shown as an alternative scenario. Values assuming that all non-commission expenses are tax deductible and values assuming 10% of non-commission expenses are not tax deductible are also shown as alternative scenarios. A-8 Staff Welfare Fund All values are after allowance for contributions to the staff welfare fund of 10% of after tax profits (where positive). New Business Product Mix The mix of new business used to determine the value of one year's sales is based on the actual mix of new business sold in the 12 months to 30 June 2003. New long term individual single premium business is predominantly participating business. New long term individual regular premium business issued in the 12 months to 30 June 2003 is split approximately 51%:49% participating: non-participating. To illustrate the effect of a different mix of new long term individual regular premium business, values assuming a split of 66%:34% participating: non-participating are also shown as an alternative scenario. Short Term Business Short term business covers accident business and health business. This business has a term of one year, and all renewals are regarded as new business. As such, a nil value is attributed to this business in the embedded value, and the value of one year's sales represents the value of one year's profits from the business written or renewed in the prior year. Values are shown in Table 6. We have set claim ratio and expense ratio assumptions based on China Life's experience in 2001 and 2002 and on input from China Life management on the intended basis for managing this business. In Scenario 1, claim ratios as a percentage of premium income are assumed to be 40% for accident and 100% for health business. China Life management have further informed us that this business will be closely monitored and controlled. Consequently, value using alternative scenarios based on relatively small changes in claim ratios of 10 percentage points are shown. Additional alternative scenarios can thus be determined by simple interpolation and extrapolation. 6. Reliances and Limitations In performing our work, we have relied on audited and unaudited information supplied to us by, or on behalf of, China Life for periods up to 30 June 2003 and on information from a range of other sources. In particular, we have relied on: . The databases of China Life's long term insurance policies, including the numbers of and types of policies issued and in force (including policy details), levels of in force premiums and volumes of new business written; . Data regarding China Life's short term insurance business; . Historical and pro forma financial information in relation to China Life as at 30 June 2003 and prior dates; A-9 . The terms of the restructuring agreement between CLIC and China Life; . Information regarding both market and book value of China Life's assets; . Information regarding the exemption of certain investment income for the purpose of determining taxable profits; . Information regarding the deductibility of salary expenses for the purpose of determining taxable profits; and . Information regarding the difference between the market value of assets and the value as determined on the PRC statutory basis. Reliance was also placed on, but not limited to, the accuracy and completeness of information regarding historical operating experience, commission and override payments to agents and distributors, regulatory returns, details of policy terms and conditions and the terms of reinsurance arrangements. We have reviewed summary statistics from the database of China Life's long term insurance policies for reasonableness and consistency, which has comprised primarily a series of reconciliations to the information previously reported by CLIC in the regulatory returns for its insurance business. We have also reviewed certain of the more general business information provided to us for reasonableness and consistency with our knowledge of the life insurance industry but we have adopted, without review, the financial statement information and information regarding asset values, as these fall outside of our area of expertise. It should be noted that we have not carried out an independent verification, or audit, of the accuracy or completeness of the policy data and other information supplied to us. In determining the results shown in this report, we have considered only those claims made by life insurance policyholders in the normal course of business under the terms of the transferred policies, as defined by the restructuring agreement. We have not reviewed the value or quality of the asset portfolio of China Life, nor have we reviewed the adequacy of balance sheet provisions. The values attributed to the life insurance business are highly dependent on the results of financial projections. In developing the projections, numerous assumptions have been made with respect to economic conditions and other factors, many of which are beyond China Life's control. Changes in the internal or external environment will affect the suitability of the parameters used in the projections and could alter the projected results substantially. In addition, deviations from most probable experience are normal and are to be expected. Even without changes in the perceived environments, and in parameters used to reflect them, actual results will vary from those projected due to normal random fluctuations. A-10 7. Disclosures and Consents Tillinghast has previously been engaged by CLIC to provide advice and assistance on various actuarial matters in connection with the restructure of CLIC and the offer of shares in China Life. Tillinghast has given, and not withdrawn, its written consent to the inclusion of this report and its name within the Prospectus in the form and context in which they are included. Tillinghast does not authorise or cause the issue of this Prospectus and takes no responsibility for its contents. Yours faithfully for Tillinghast-Towers Perrin /s/ Mark Saunders Mark Saunders Principal Fellow of the Institute of Actuaries A-11 Table 4 Embedded Value of China Life at 30 June 2003, with variation in assumptions under alternative scenarios (RMB million)
Expense Lapse Investment Expense Expense Scenario 4 Scenario 2 Lapse Risk Reserve Investment Scenario 3 Scenario 2 Scenario 3 "Inflation "Double Scenario 3 Discount Scenario 2 Scenario 2 "Level "c.90% "c.100% of 2.5% 1st 2 "Double Rate Scenario 1 "Previous" "Higher" 4%" allowances" allowances" p.a." years" all years" -------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- Adjusted Net Worth...... 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 Value of In Force...... 10.0% 30,299 30,475 33,366 27,313 30,734 29,878 29,600 28,565 22,271 Cost of Solvency Margin..... 10.0% (6,042) (6,032) (5,855) (6,194) (6,042) (6,042) (6,042) (5,749) (4,425) ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ Embedded Value...... 10.0% 53,740 53,926 56,995 50,601 54,175 53,319 53,041 52,299 47,330 Adjusted Net Worth...... 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 Value of In Force...... 12.5% 24,512 24,727 27,071 22,578 24,911 24,129 23,992 23,129 18,872 Cost of Solvency Margin..... 12.5% (6,887) (6,875) (6,727) (6,981) (6,887) (6,887) (6,887) (6,565) (5,225) ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ Embedded Value...... 12.5% 47,107 47,334 49,828 45,080 47,506 46,724 46,588 46,046 43,130 Adjusted Net Worth...... 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 Value of In Force...... 15.0% 20,391 20,637 22,566 19,128 20,761 20,037 19,988 19,254 16,293 Cost of Solvency Margin..... 15.0% (7,469) (7,455) (7,329) (7,526) (7,469) (7,469) (7,469) (7,132) (5,837) ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ Embedded Value...... 15.0% 42,404 42,665 44,720 41,085 42,775 42,051 42,002 41,605 39,939
Policyholder Mortality Tax Expense Expense Dividend Scenario 3 Morbidity Morbidity Exempt Deduction Deduction Scenario 2 Mortality "+25% life Scenario 2 Scenario 3 Scenario 2 Scenario 2 Scenario 3 "80% Scenario 2 -25% "120% "70% "0% "All tax "10% Not distributed" "+25%" annuitants" table" table" exempt" deductible" deductible" ------------ ---------- ----------- ---------- ---------- ---------- ----------- ----------- Adjusted Net Worth...... 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 Value of In Force...... 29,342 29,212 29,252 28,899 31,742 24,227 30,391 30,207 Cost of Solvency Margin..... (6,044) (6,004) (6,013) (6,010) (6,075) (6,340) (6,042) (6,042) ------ ------ ------ ------ ------ ------ ------ ------ Embedded Value...... 52,781 52,691 52,722 52,372 55,150 47,369 53,832 53,648 Adjusted Net Worth...... 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 Value of In Force...... 23,696 23,642 23,680 23,360 25,695 19,565 24,592 24,431 Cost of Solvency Margin..... (6,890) (6,853) (6,861) (6,858) (6,918) (7,133) (6,887) (6,887) ------ ------ ------ ------ ------ ------ ------ ------ Embedded Value...... 46,290 46,272 46,302 45,985 48,260 41,915 47,187 47,027 Adjusted Net Worth...... 29,483 29,483 29,483 29,483 29,483 29,483 29,483 29,483 Value of In Force...... 19,680 19,665 19,701 19,414 21,393 16,241 20,462 20,319 Cost of Solvency Margin..... (7,471) (7,439) (7,445) (7,443) (7,496) (7,676) (7,469) (7,469) ------ ------ ------ ------ ------ ------ ------ ------ Embedded Value...... 41,692 41,709 41,739 41,454 43,379 38,047 42,476 42,333
Section 5 provides fuller descriptions of the various scenarios. Figures might not be additive due to rounding. A-12 Table 5 Value of One Year's Sales of Long Term Business in the 12 months to 30 June 2003 of China Life, with variation in assumptions under alternative scenarios (RMB million)
Expense Lapse Investment Expense Expense Scenario 4 Scenario 2 Lapse Risk Reserve Investment Scenario 3 Scenario 2 Scenario 3 "Inflation "Double Scenario 3 Discount Scenario 2 Scenario 2 "Level "c.90% "c.100% of 2.5% 1st 2 "Double Rate Scenario 1 "Previous" "Higher" 4%" allowances" allowances" p.a." years" all years" -------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- Value of Sales before Cost of Solvency Margin.. 10.0% 6,736 6,789 7,501 6,159 7,176 6,298 6,537 5,661 4,509 12.5% 5,294 5,358 5,923 4,951 5,714 4,876 5,145 4,456 3,699 15.0% 4,278 4,350 4,806 4,079 4,680 3,877 4,161 3,605 3,091 ---- ----- ----- ----- ----- ----- ----- ----- ----- ----- Value of Sales after Cost of Solvency Margin.. 10.0% 5,010 5,067 5,830 4,404 5,451 4,572 4,812 4,119 3,220 12.5% 3,333 3,402 4,010 2,976 3,754 2,916 3,185 2,694 2,184 15.0% 2,164 2,241 2,733 1,958 2,566 1,763 2,047 1,694 1,409
Policyholder Mortality Tax Expense Expense Dividend Scenario 3 Morbidity Morbidity Exempt Deduction Deduction Product Scenario 2 Mortality "+25% life Scenario 2 Scenario 3 Scenario 2 Scenario 2 Scenario 3 Mix "80% Scenario 2 -25% "120% "70% "0% "All tax "10% Not Scenario distributed" "+25%" annuitants" table" table" exempt" deductible" deductible" "66%:34%" ------------ ---------- ----------- ---------- ---------- ---------- ----------- ----------- --------- Value of Sales before Cost of Solvency Margin.. 6,277 6,500 6,511 6,421 7,059 4,912 6,822 6,649 5,972 4,901 5,109 5,119 5,037 5,556 3,794 5,376 5,212 4,733 3,935 4,126 4,135 4,061 4,498 3,011 4,356 4,200 3,856 ----- ----- ----- ----- ----- ----- ----- ----- ----- Value of Sales after Cost of Solvency Margin.. 4,550 4,783 4,792 4,702 5,326 3,098 5,097 4,923 4,312 2,940 3,156 3,164 3,082 3,590 1,762 3,415 3,251 2,842 1,820 2,019 2,026 1,952 2,379 835 2,242 2,086 1,811
Section 5 provides fuller descriptions of the various scenarios. Figures might not be additive due to rounding. A-13 Table 6 Value of One Year's Sales of Short Term Business in the 12 months to 30 June 2003 of China Life with variation in assumptions under alternative claim ratio scenarios (RMB million)
Scenario 2 Scenario 3 Scenario 4 Risk Discount "Health "Health "Accident Rate Scenario 1 +10%" -10%" +10%" ------------- ---------- ---------- ---------- ---------- Value of Sales before Cost of Solvency Margin 10.0% 352 104 601 67 12.5% 326 85 566 50 15.0% 301 68 534 34 ---- --- --- --- ---- Value of Sales after Cost of Solvency Margin. 10.0% 259 10 508 (26) 12.5% 206 (35) 446 (70) 15.0% 157 (76) 390 (110)
Section 5 provides fuller descriptions of the various scenarios. Figures might not be additive due to rounding. A-14 ANNEX B--VALUATION REPORT OF SALLMANNS (FAR EAST) LTD. The following is the text of a letter, summary of values and valuation certificates, prepared for the purpose of incorporation in this prospectus received from Sallmanns (Far East) Limited, an independent valuer, in connection with its valuation as at 30 September 2003 of the property interests of the Company. [LOGO] 20 November 2003 The Directors China Life Insurance Company Limited No.16 Chaowai Avenue Chaoyang District Beijing The People's Republic of China Dear Sirs, In accordance with your instructions to value the property interests in which China Life Insurance Company Limited (hereinafter referred to as the "Company") has interest in the People's Republic of China (the "PRC"), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the values of the relevant property interests as at 30 September 2003. In valuing the property interests which are held by the Company, we have categorised the property interests into 36 sub-groups according to their location and the Company's management structure. The property interests of each sub-group are located in a province, an autonomous region, a directly administered municipality or a municipality with independent planning in the PRC, and are managed by a first-level (provincial) branch of the Company. Wherever possible, our valuations of the property interests are our opinion of the open market value which we would define as intended to mean "the best price at which an interest in a property would have been completed unconditionally for cash consideration on the date of the valuation assuming: (a) a willing seller; (b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale; (c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation; B-1 (d) that no account is taken of any additional bid by a purchaser with a special interest; and (e) that both parties to the transaction had acted knowledgeably prudently and without compulsion." In cases where open market value basis is adopted, our valuations have been made on the assumption that the owner sells the property interests on the open market in their existing state without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to affect the values of the property interests. For some property interests in Group I, our valuations are our opinion of their fair market value. Fair market value is defined as the estimated amount at which the subject asset in its continued use might be expected to be purchased and sold between a willing buyer and a willing seller, neither being under compulsion, each having a reasonable knowledge of all relevant facts, with equity to both, for continuation of the current operation of the relevant property interests as part of an on-going business. Where, due to the nature of the buildings and structures constructed on some property interests in Group I, there are no market sales comparables, the property interests have been valued on the basis of their depreciated replacement cost. Depreciated replacement cost is defined as "the aggregate amount of the value of the land for the existing use or a notional replacement site in the same locality, and the gross replacement cost of the buildings and other site works, from which appropriate deductions may then be made to allow for the age, condition, economic or functional obsolescence and environmental factors etc; all of these might result in the existing property being worth less to the undertaking in occupation than would a new replacement." This opinion of value does not necessarily represent the amount that might be realised from the disposal of the subject assets in the open market, and this basis has been used due to the lack of an established market upon which to base comparable transactions. However, this approach generally furnishes the most reliable indication of value for a property without a known used market. In valuing the property interests in Group I which are currently under construction, we have valued on the basis of their prevailing cost level and status of construction as at the date of valuation and we have assumed that all consents, approvals and licenses from the relevant government authorities for their development have been granted without any onerous conditions or undue delay, which might affect their values. The property interests in Group II which are rented by the Company have no commercial value due mainly to the short term nature or the prohibition against assignment or sub-letting or otherwise due to the lack of substantial profit rents. The Company holds land use rights in respect of 2,978 parcels of land with an aggregate site area of approximately 3,145,000 sq.m.. The Company holds 3,443 completed buildings and various ancillary structures with an aggregate gross floor area of approximately 3,997,000 sq.m., and 65 buildings and structures which are under construction with an aggregate gross floor area of approximately 350,000 sq.m upon completion. Of the 3,443 buildings, 372 items with an aggregate gross floor area of approximately 66,800 sq.m. are leased to independent third parties. The Company also leases 2,597 buildings with an aggregate gross floor area of approximately 1,697,000 sq.m. from China Life Insurance (Group) Company ("CLIC"). Of the leased properties, 833 buildings with an aggregate gross floor area of approximately 637,000 sq.m. are owned by CLIC and 1,764 buildings with an aggregate gross floor area of approximately 1,060,000 sq.m. are subleased by CLIC from independent third parties. According to an opinion given by the Company's PRC legal adviser, King & Wood, the Property Leasing Agreement entered into between the Company and CLIC is lawful and the Company is entitled to occupy and use the leased properties under the Property Leasing Agreement. CLIC has undertaken to indemnify the Company against any losses, claims or impediments in relation to the use of the leased properties. B-2 In our valuations, we have complied with all the requirements contained in Practice Note 12 to the Rules Governing the Listing of Securities issued by The Stock Exchange of Hong Kong Limited except for those in respect of which waiver has been applied in respect of Rule 5.06(1) and paragraph 5(2)(a) of Practice Note 12 to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. We have also complied with all the requirements contained in the Hong Kong Guidance Notes on the Valuation of Property Assets (2nd Edition) published by the Hong Kong Institute of Surveyors in March 2000. We have been shown copies of various title documents and official site plans relating to the property interests that are held by the Company. However, we have not searched the original documents to verify any amendments which may not appear on the copies handed to us. In our valuations, we have relied to a considerable extent on the legal opinion provided by the Company's legal adviser, King & Wood, on the PRC laws regarding the property interests of the Company in the PRC. We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the relevant property interests but have assumed that the site areas shown on the documents and official site plans handed to us are correct. Based on our experience of valuation of similar property interests in the PRC, we consider the assumptions so made to be reasonable. All documents and contracts have been used as reference only and all dimensions measurements and areas are approximations. No on-site measurements have been taken. We have inspected the exterior and, where possible, the interior of the property interests that we have attributed values, in respect of which we have been provided with such information, as we have required for the purpose of our valuations. However, no structural survey has been made, but in the course of our inspection we did not note any apparent serious defects. We are not, however, able to report that the property interests are free from rot, infestation or any other structural defects. No tests were carried out to any of the services. No allowance has been made in our report for any charges, mortgage or amounts owing on the property interests nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property interests are free from encumbrances, restrictions and outgoings of an onerous nature which could affect their values. We have relied to a considerable extent on the information provided to us and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, occupation, letting, rentals, site and floor areas and all other relevant matters. We have had no reason to doubt the truth and accuracy of the information provided to us by the Company. We have also sought and received confirmation from the Company that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and have no reason to suspect that any material information has been withheld. Unless otherwise stated, all monetary amounts stated in this report are in Renminbi (RMB). Our valuations are summarised below and the valuation certificates are attached. Yours faithfully, for and on behalf of Sallmanns (Far East) Limited /s/ Paul L. Brown ------------------------- Paul L. Brown BSc. FRICS FHKIS Director Note: Paul L. Brown is a Chartered Surveyor who has 20 years of experience in the valuation of properties in the PRC and 23 years of property valuation experience in Hong Kong, the United Kingdom and the Asia-Pacific region. B-3 SUMMARY OF VALUES
Capital value in existing state as at No. Property 30 September 2003 - --- -------- ------------------------- RMB Group I--Property interests held by the Company in the PRC 1. Land, various buildings and structures located at Anhui Province, the PRC 378,140,000 2. Land, various buildings and structures located at Beijing, the PRC 486,490,000 3. Land, various buildings and structures located at Dalian City Liaoning Province, 62,080,000 the PRC 4. Land, various buildings and structures located at Fujian Province (excluding 407,650,000 Xiamen City), the PRC 5. Land, various buildings and structures located at Gansu Province, the PRC 66,850,000 6. Land, various buildings and structures located at Guangxi Zhuang Autonomous 187,700,000 Region, the PRC 7. Land, various buildings and structures located at Guangdong Province 526,450,000 (excluding Shenzhen ), the PRC 8. Land, various buildings and structures located at Guizhou Province, the PRC 143,840,000 9. Land, various buildings and structures located at Hainan Province, the PRC 26,060,000 10. Land, various buildings and structures located at Hebei Province , the PRC 392,210,000 11. Land, various buildings and structures located at Henan Province, the PRC 535,510,000 12. Land, various buildings and structures located at Heilongjiang Province, the PRC 456,390,000 13. Land, various buildings and structures located at Hubei Province, the PRC 484,150,000 14. Land, various buildings and structures located at Hunan Province, the PRC 702,230,000 15. Land, various buildings and structures located at Jilin Province, the PRC 109,880,000 16. Land, various buildings and structures located at Jiangsu Province, the PRC 985,490,000 17. Land, various buildings and structures located at Jiangxi Province, the PRC 368,730,000 18. Land, various buildings and structures located at Liaoning Province (excluding 412,850,000 Dalian City), the PRC 19. Land, various buildings and structures located at Inner Mongolia Autonomous 264,540,000 Region, the PRC 20. Land, various buildings and structures located at Ningbo City Zhejiang Province, 102,110,000 the PRC 21. Land, various buildings and structures located at Ningxia Hui Autonomous 47,120,000 Region, the PRC 22. Land, various buildings and structures located at Qingdao City Shandong 112,230,000 Province, the PRC 23. Land, various buildings and structures located at Qinghai Province, the PRC [81,650,000
B-4
Capital value in existing state as at No. Property 30 September 2003 - --- -------- ------------------------- RMB 24. Land, various buildings and structures located at Shandong Province (excluding 546,710,000 Qingdao City), the PRC 25. Land, various buildings and structures located at Shanxi Province, 213,720,000 the PRC 26. Land, various buildings and structures located at Shannxi Province, 280,990,000 the PRC 27. Land, various buildings and structures located at Shanghai, the PRC 513,470,000 28. Land, various buildings and structures located at Shenzhen City Guangdong 134,850,000 Province, the PRC 29. Land, various buildings and structures located at Sichuan Province, the PRC 557,250,000 30. Land, various buildings and structures located at Tianjin, the PRC 90,720,000 31. Land, various buildings and structures located at Xiamen City Fujian Province, 41,200,000 the PRC 32. Land, various buildings and structures located at Xinjiang Uygur Autonomous 196,440,000 Region, the PRC 33. Land, various buildings and structures located at Yunnan Province, the PRC 180,170,000 34. Land, buildings and structures located at Zhejiang Province (excluding Ningbo 742,170,000 City), the PRC 35. Land, various buildings and structures located at Chongqing, the PRC 101,130,000 36. A portion of a building located at Beijing (Head Office) The PRC No commercial value ------------------- Sub-total : 10,939,170,000 ------------------- Group II--Property interests rented by the Company in the PRC 37. 101 leased properties located at Anhui Province, the PRC No Commercial Value 38. 28 leased properties located at Beijing, the PRC No Commercial Value 39. 4 leased properties located at Dalian City Liaoning Province, the PRC No Commercial Value 40. 112 leased properties located at Fujian Province (excluding Xiamen City), the No Commercial Value PRC 41. 150 leased properties located at Gansu Province, the PRC No Commercial Value 42. 56 leased properties located at Guangxi Zhuang Autonomous Region, the PRC No Commercial Value 43. 230 leased properties located at Guangdong Province (excluding Shenzhen ), the No Commercial Value PRC 44. 49 leased properties located at Guizhou Province, the PRC No Commercial Value 45. 16 leased properties located at Hainan Province, the PRC No Commercial Value 46. 112 leased properties located at Hebei Province, the PRC No Commercial Value
B-5
Capital value in existing state as at No. Property 30 September 2003 - --- -------- ------------------------- RMB 47. 168 leased properties located at Henan Province, the PRC No Commercial Value 48. 72 leased properties located at Heilongjiang Province, the PRC No Commercial Value 49. 97 leased properties located at Hubei Province, the PRC No Commercial Value 50. 80 leased properties located at Hunan Province, the PRC No Commercial Value 51. 65 leased properties located at Jilin Province, the PRC No Commercial Value 52. 97 leased properties located at Jiangsu Province, the PRC No Commercial Value 53. 93 leased properties located at Jiangxi Province, the PRC No Commercial Value 54. 52 leased properties located at Liaoning Province (excluding Dalian City), No Commercial Value the PRC 55. 29 leased properties located at Inner Mongolia Autonomous Region, No Commercial Value the PRC 56. 58 leased properties located at Ningbo City Zhejiang Province, the PRC No Commercial Value 57. 24 leased properties located at Ningxia Hui Autonomous Region, the PRC No Commercial Value 58. 14 leased properties located at Qingdao City Shandong Province, the PRC No Commercial Value 59. 11 leased properties located at Qinghai Province, the PRC No Commercial Value 60. 170 leased properties located at Shandong Province (exculding Qingdao City), No Commercial Value the PRC 61. 147 leased properties located at Shanxi Province, the PRC No Commercial Value 62. 115 leased properties located at Shannxi Province, the PRC No Commercial Value 63. 32 leased properties located at Shanghai, the PRC No Commercial Value 64. 10 leased properties located at Shenzhen Guangdong Province, the PRC No Commercial Value 65. 75 leased properties located at Sichuan Province, the PRC No Commercial Value 66. 11 leased properties located at Tianjin, the PRC No Commercial Value 67. 11 leased properties located at Xiamen City Fujian Province, the PRC No Commercial Value 68. 61 leased properties located at Xinjiang Uygur Autonomous Region, the PRC No Commercial Value 69. 105 leased properties located at Yunnan Province, the PRC No Commercial Value 70. 95 leased properties located at Zhejiang Province (excluding Ningbo City), No Commercial Value the PRC 71. 46 leased properties located at Chongqing Sichuan Province, the PRC No Commercial Value 72. 1 leased properties located at Beijing (Head Office), the PRC No Commercial Value ------------------- Sub-total: Nil ------------------- Total: 10,939,170,000 ===================
B-6 VALUATION CERTIFICATE Group I--Property interests held by the Company in the PRC
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ---------------------------------- ------------------------- ------------- RMB 1. Land, various buildings The properties comprise 126 The properties are 378,140,000 and structures office buildings and other currently occupied by the located at ancillary buildings and structures Company for office Anhui Province with a total gross floor area of purposes. The PRC approximately 144,468 sq.m., mainly completed in various stages from 1984 to 2003 (the "Completed Properties"). The main buildings include office buildings, storehouses, carports, dining halls, etc. The properties are located on 131 parcels of land with a total site area of approximately 117,318 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 131 parcels of land with a total site area of approximately 117,318 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 131 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 125 buildings of the Completed Properties with a total gross floor area of approximately 138,137 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the remaining item of building of the Completed Properties with a gross floor area of approximately 6,331 sq.m, we have not been provided with any Building Ownership Certificate or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus we have attributed no commercial value to such building. B-7 iii. According to an opinion given by the Company's PRC legal adviser, 125 buildings of the Completed Properties with a total gross floor area of approximately 138,137 sq.m are legally owned by the Company. There is no material legal impediment for the 125 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof ) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the value of the Completed Property to which we have attributed no commercial value, is in the amount of RMB6,770,000 as at the valuation date, providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-8 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- ------------------------- ------------- RMB 2. Land, various buildings The properties comprise 16 office The properties are 486,490,000 and structures buildings and other ancillary currently occupied by the located at buildings and structures with a Company mainly for office Beijing total gross floor area of purposes. The PRC approximately 60,486 sq.m., mainly completed in various stages from 1984 to 2001 (the "Completed Properties"). The main buildings include office buildings and composite buildings The properties are located on 14 parcels of land with a total site area of approximately 39,152 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 14 parcels of land with a total site area of approximately 39,152 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 14 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 16 buildings of the Completed Properties with a total gross floor area of approximately 60,486 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 16 buildings of the Completed Properties with a total gross floor area of approximately 60,486 sq.m are legally owned by the Company. There is no material legal impediment for the 16 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. B-9 iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-10 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- --------------------------- ------------- RMB 3. Land, various buildings The properties comprise 17 office The properties are 62,080,000 and structures buildings and other ancillary currently occupied by the located at buildings and structures with a Company for office Dalian City total gross floor area of purposes, exempt for Liaoning Province approximately 19,449 sq.m., those, which comprise 2 The PRC mainly completed in various Completed Properties with stages from 1989 to 1999 (the a total gross floor area of "Completed Properties"). The approximately 334 sq.m. main buildings include office which are leased to buildings. independent third parties. The properties are located on 17 parcels of land with a total site area of approximately 8,203 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 17 parcels of land with a total site area of approximately 8,203 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 17 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 17 buildings of the Completed Properties with a total gross floor area of approximately 19,449 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 17 buildings of the Completed Properties with a total gross floor area of approximately 19,449 sq.m are legally owned by the Company. There is no material legal impediment for the 17 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-11 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 4. Land, various buildings The properties comprise 165 The properties are 407,650,000 and structures office buildings and other currently occupied by the located at ancillary buildings and structures Company mainly for office Fujian Province with a total gross floor area of purposes, exempt for (excluding Xiamen City) approximately 158,404 sq.m., those, which comprise 25 The PRC mainly completed in various Completed Properties with stages from 1992 to 1998 (the a total gross floor area of "Completed Properties"). The approximately 3,340 sq.m. main buildings include office which are leased to buildings, storehouses, carports, independent third parties. dining halls etc. The properties also comprise 7 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 58,430,000, of which some RMB 39,590,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 24,173 sq.m. upon completion. The CIP properties are scheduled to be completed in about 2005. The properties are located on 154 parcels of land with a total site area of approximately 65,181 sq.m.for commercial use.
Notes: I. Land Use Rights i. For the 154 parcels of land with a total site area of approximately 65,181 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 154 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-12 2. Completed Properties and CIP Properties i. For 146 buildings of the Completed Properties with a total gross floor area of approximately 137,281 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 7 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction iii. For the rest 19 items of buildings of the Completed Properties with a total gross floor area of approximately 21,123 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 146 buildings of the Completed Properties with a total gross floor area of approximately 137,281 sq.m and the 7 CIP Properties are legally owned by the Company. There is no material legal impediment for the 146 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 7 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties to which we have attributed no commercial value, are in the amount of RMB 37,440,000, as at the valuation date providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-13 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- ------------------------- ------------- RMB 5. Land, various buildings The properties comprise 35 office The properties are 66,850,000 and structures located at buildings and other ancillary currently occupied by the Gansu Province buildings and structures with a Company mainly for office The PRC total gross floor area of purposes. approximately 49,315 sq.m., mainly completed in various stages from 1986 to 2002 (the "Completed Properties"). The main buildings include office buildings, guardrooms etc. The properties are located on 35 parcels of land with a total site area of approximately 47,885 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 35 parcels of land with a total site area of approximately 47,885 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 35 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 35 buildings of the Completed Properties with a total gross floor area of approximately 49,315 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 35 buildings of the Completed Properties with a total gross floor area of approximately 49,315 sq.m are legally owned by the Company. There is no material legal impediment for the 35 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. B-14 iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-15 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ---------------------------------------------- ------------------------ ------------- RMB 6. Land, various The properties comprise 98 office buildings The properties are 187,700,000 buildings and and other ancillary buildings and structures currently occupied by structures located with a total gross floor area of approximately the Company mainly at Guangxi Zhuang 77,477 sq.m., mainly completed in various for office purposes, Autonomous Region stages from 1978 to 2002 (the "Completed exempt for this, The PRC Properties"). The main buildings include which comprises 1 office buildings, carports, storehouses, etc. Completed Property with a gross floor The properties also comprise 2 buildings area of approximately which are under construction as at the date of 90 sq.m. which is valuation (the "CIP Properties"). The leased to independent estimated total construction cost is third parties. approximately RMB 19,650,000, of which some RMB 9,340,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 6,680 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 101 parcels of land with a total site area of approximately 74,427 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 101 parcels of land with a total site area of approximately 74,427 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 101 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties and CIP Properties i. For 95 buildings of the Completed Properties with a total gross floor area of approximately 76,327 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. B-16 ii. For 1 CIP Property, CLIC has obtained various relevant approvals to undertake the construction. For the remaining building of the CIP Properties, CLIC is in the process of application of relevant approvals to undertake the construction. iii. For the rest 3 items of buildings of the Completed Properties with a total gross floor area of approximately 1,150 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 95 buildings of the Completed Properties with a total gross floor area of approximately 76,327 sq.m and 1 CIP Property are legally owned by the Company. There is no material legal impediment for the 95 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for 1 CIP Property upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties and CIP Properties to which we have attributed no commercial value, are in the amount of RMB 8,280,000 as at the valuation date providing that Building Ownership Certificates and Construction Permits have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-17 VALUATION CERTIFICATE
Capital value in existing state as at No. Property Description and tenure Particulars of occupancy 30 September 2003 - --- -------- ----------------------------------- --------------------------- ----------------------- RMB 7 Land, various The properties comprise 243 The properties are 526,450,000 buildings and office buildings and other currently occupied by the structures located at ancillary buildings and structures Company mainly for office Guangdong with a total gross floor area of purposes, exempt for Province (excluding approximately 192,473 sq.m., those, which comprise 7 Shenzhen ) mainly completed in various Completed Properties with The PRC stages from 1982 to 2001 (the a total gross floor area of "Completed Properties"). The approximately 1,021 sq.m. main buildings include office which are leased to buildings, storehouses, carports, independent third parties. dining halls, etc. The properties also comprise 3 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 61,780,000, of which some RMB 42,830,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 17,070 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 225 parcels of land with a total site area of approximately 61,551 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 225 parcels of land with a total site area of approximately 61,551 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 225 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-18 2. Completed Properties and CIP Properties i. For 243 buildings of the Completed Properties with a total gross floor area of approximately 192,473 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 3 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction iii. According to an opinion given by the Company's PRC legal adviser, 243 buildings of the Completed Properties with a total gross floor area of approximately 192,473 sq.m and the 3 CIP Properties are legally owned by the Company. There is no material legal impediment for the 243 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 3 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-19 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 8 Land, various buildings The properties comprise 108 The properties are 143,840,000 and structures located at office buildings and other currently occupied by the Guizhou Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 69,978 sq.m., those, which comprise 36 mainly completed in various Completed Properties with stages from 1971 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 1,692 sq.m. main buildings include office which are leased to buildings, carports, hostel, etc. independent third parties. The properties also comprise 2 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 18,060,000, of which some RMB 17,130,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 9,599 sq.m. upon completion. The CIP properties are scheduled to be completed in 2004. The properties are located on 102 parcels of land with a total site area of approximately 59,545 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 102 parcels of land with a total site area of approximately 59,545 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 102 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-20 2. Completed Properties and CIP Properties i. For 104 buildings of the Completed Properties with a total gross floor area of approximately 65,126 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to construction. iii. For the 4 items of buildings of the Completed Properties with a total gross floor area of approximately 4,852 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 104 buildings of the Completed Properties with a total gross floor area of approximately 65,126 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 104 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties to which we have attributed no commercial value, are in the amount of RMB 7,140,000 as at the valuation date, providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-21 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- --------------------------- ----------------- RMB 9. Land, various buildings The properties comprise 16 office The properties are 26,060,000 and structures located at buildings and other ancillary currently occupied by the Hainan Province buildings and structures with a Company for office The PRC total gross floor area of purposes, exempt for approximately 12,146 sq.m., those, which comprise 3 mainly completed in various Completed Properties with stages from 1986 to 2000 (the a total gross floor area of "Completed Properties"). The approximately 570 sq.m. main buildings include office which are leased to buildings, carports, hostel, etc. independent third parties. The properties are located on 16 parcels of land with a total site area of approximately 20,050 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 16 parcels of land with a total site area of approximately 20,050 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 16 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 16 buildings of the Completed Properties with a total gross floor area of approximately 12,146 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 16 buildings of the Completed Properties with a total gross floor area of approximately 12,146 sq.m are legally owned by the Company. There is no material legal impediment for the 16 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims charges or expenses arising from the formalizing/changing of building title registration. B-22 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 10. Land, various buildings The properties comprise 120 The properties are 392,210,000 and structures located at office buildings and other currently occupied by the Hebei Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 126,672 sq.m., those, which comprise 5 mainly completed in various Completed Properties with stages from 1984 to 2001 (the a total gross floor area of "Completed Properties"). The approximately 95 sq.m. main buildings include office which are leased to buildings, boiler rooms, independent third parties. guardrooms, carports, etc. The properties also comprise 11 buildings and various structures which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 245,970,000 of which some RMB 157,770,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 58,951 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 111 parcels of land with a total site area of approximately 180,695 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 111 parcels of land with a total site area of approximately 180,695 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 111 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, B-23 expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties and CIP Properties i. For 117 buildings of the Completed Properties with a total gross floor area of approximately 123,572 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 8 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. For 3 CIP Properties, CLIC is in the process of application of relevant approvals to undertake the construction. iii. For the 3 items of buildings of the Completed Properties with a total gross floor area of 3,100 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing /changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 117 buildings of the Completed Properties with a total gross floor area of approximately 123,572 sq.m and the 8 CIP Properties are legally owned by the Company. There is no material legal impediment for the 117 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 8 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties and CIP Properties to which we have attributed no commercial value, are in the amount of RMB 30,840,000 as at the valuation date providing that all Building Ownership Certificates and Construction Permits have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-24 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ----------------------------------- --------------------------- ------------- RMB 11. Land, various buildings The properties comprise 186 The properties are 535,510,000 and structures located at office buildings and other currently occupied by the Henan Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 260,635 sq.m., those, which comprise 14 mainly completed in various Completed Properties with stages from 1983 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 536 sq.m. main buildings include office which are leased to buildings, boiler rooms, independent third parties. guardrooms, carports, etc. The properties also comprise 1 building which is under construction as at the date of valuation (the "CIP Property"). The estimated total construction cost is approximately RMB 13,500,000, of which some RMB 13,000,000 has been incurred at the valuation date. The gross floor area of the building will be 7,127 sq.m. upon completion. The CIP Property are scheduled to be completed in 2004. The properties are located on 122 parcels of land with a total site area of approximately 255,156 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 122 parcels of land with a total site area of approximately 255,156 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 122 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, B-25 expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties and CIP Properties i. For 182 buildings of the Completed Properties with a total gross floor area of approximately 253,285 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 1 CIP Property, CLIC has obtained various relevant approvals to undertake the construction iii. For the 4 items of buildings of the Completed Properties with a total gross floor area of approximately 7,350 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 182 buildings of the Completed Properties with a total gross floor area of approximately 253,285 sq.m and the 1 CIP Property are legally owned by the Company. There is no material legal impediment for the 182 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 1 CIP Property upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties to which we have attributed no commercial value, are in the amount of RMB 12,270,000 as at the valuation date providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-26 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ----------------------------------- --------------------------- ----------------- RMB 12. Land, various buildings The properties comprise 133 The properties are 456,390,000 and structures located at office buildings and other currently occupied by the Heilongjiang Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 165,334 sq.m., those, which comprise 1 mainly completed in various Completed Properties with stages from 1976 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 310 sq.m. main buildings include office which is leased to buildings, boiler rooms, independent third parties. guardrooms, carports, etc. The properties also comprise 1 building which is under construction as at the date of valuation (the "CIP Property"). The estimated total construction cost is approximately RMB 13,000,000, of which some RMB 9,500,000 has been incurred as at the valuation date. The gross floor area of the building will be 4,200 sq.m. upon completion. The CIP Property is scheduled to be completed in December 2003. The properties are located on 110 parcels of land with a total site area of approximately 96,463 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 110 parcels of land with a total site area of approximately 96,463 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 110 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-27 2. Completed Properties and CIP Properties i. For 133 buildings of the Completed Properties with a total gross floor area of approximately 165,334 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 1 CIP Property, CLIC has obtained various relevant approvals to undertake the construction. iii. According to an opinion given by the Company's PRC legal adviser, 133 buildings of the Completed Properties with a total gross floor area of approximately 165,334 sq.m and the 1 CIP Properties are legally owned by the Company. There is no material legal impediment for the 133 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 1 CIP Property upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Property after completion) upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-28 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 13. Land, various buildings The properties comprise 129 The properties are 484,150,000 and structures located at office buildings and other currently occupied by the Hubei Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 224,425 sq.m., those, which comprise 5 mainly completed in various Completed Properties with stages from 1981 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 1,002 sq.m. main buildings include office which are leased to buildings, boiler rooms, dining independent third parties. halls, carports, dormitories, etc. The properties are located on 117 parcels of land with a total site area of approximately 165,249 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 117 parcels of land with a total site area of approximately 165,249 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 117 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 129 buildings of the Completed Properties with a total gross floor area of approximately 224,425 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 129 buildings of the Completed Properties with a total gross floor area of approximately 224,425 sq.m are legally owned by the Company. There is no material legal impediment for the 129 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. B-29 iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For the building with a gross floor area of approximately 2,739 sq.m. which was purchased by the Company recently, the relevant Land Use Rights Certificate is in the process of application. It's transferability is unknown. So we have attributed no commercial value to it. For reference purpose, we are of the opinion that the value of the building is in the amount of RMB 20,380,000. B-30 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ----------------------------------- --------------------------- ----------------- RMB 14. Land, various buildings The properties comprise 223 The properties are 702,230,000 and structures located at office buildings and other currently occupied by the Hunan Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 254,445 sq.m., those, which comprise 48 mainly completed in various Completed Properties with stages from 1980 to 2001 (the a total gross floor area of "Completed Properties"). The approximately 10,393 main buildings include office sq.m. which are leased to buildings, carports, guardrooms, independent third parties. dining halls, etc. The properties also comprise 2 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 132,020,000, of which some RMB 118,630,000 has been incurred to the valuation date. The total gross floor area of the buildings will be 31,069 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 217 parcels of land with a total site area of approximately 276,575 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 217 parcels of land with a total site area of approximately 276,575 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 217 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-31 2. Completed Properties and CIP Properties i. For 222 buildings of the Completed Properties with a total gross floor area of approximately 252,585 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii. For the remaining building of the Completed Properties with a gross floor area of approximately 1,860 sq.m, we have not been provided with any Building Ownership Certificate or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. As such, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 222 buildings of the Completed Properties with a total gross floor area of approximately 252,585 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 222 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties to which we have attributed no commercial value, are in the amount of RMB 1,780,000 as at the valuation date providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-32 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- ------------------------- ------------- RMB 15. Land, various buildings The properties comprise 45 office The properties are 109,880,000 and structures located at buildings and other ancillary currently occupied by the Jilin Province buildings and structures with a Company mainly for office The PRC total gross floor area of purposes. approximately 58,827 sq.m., mainly completed in various stages from 1986 to 2001 (the "Completed Properties"). The main buildings include office buildings, carports, etc. The properties also comprise 2 buildings which are under construction as of the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 6,630,000, of which RMB 3,250,000 has been incurred as at the date of valuation. The total gross floor area of the buildings will be 3,882 sq.m. upon completion. The CIP Properties are scheduled to be completed in late 2004. The properties are located on 36 parcels of land with a total site area of approximately 40,061 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 36 parcels of land with a total site area of approximately 40,061 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 36 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-33 2. Completed Properties and CIP Properties i. For 45 buildings of the Completed Properties with a total gross floor area of approximately 58,827 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii. According to an opinion given by the Company's PRC legal adviser, 45 buildings of the Completed Properties with a total gross floor area of approximately 58,827 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 45 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon its completion. The Company can then freely sublet, transfer or mortgage the buildings, (including CIP properties after completion) upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-34 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 16. Land, various buildings The properties comprise 121 The properties are 985,490,000 and structures located at office buildings and other currently occupied by the Jiangsu Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 280,990 sq.m., those, which comprise 21 mainly completed in various Completed Properties with stages from 1986 to 2003 (the a total gross floor area of "Completed Properties"). The approximately 4,157 sq.m. main buildings include office which are leased to buildings, carports, etc. independent third parties. The properties also comprise 6 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 99,000,000, of which some RMB 92,110,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 53,859 sq.m. upon completion. The CIP Properties are scheduled to be completed in late 2004. The properties are located on 131 parcels of land with a total site area of approximately 183,556 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 131 parcels of land with a total site area of approximately 183,556 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 131 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-35 2. Completed Properties and CIP Properties i. For 120 buildings of the Completed Properties with a total gross floor area of approximately 280,530 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. For the remaining item of the CIP property, CLIC is in the process of application of relevant approvals to undertake the construction. iii. For the remaining item of the Completed Properties with a gross floor area of approximately 460 sq.m, we have not been provided with any Building Ownership Certificate or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such building. iv. According to an opinion given by the Company's PRC legal adviser, 120 buildings of the Completed Properties with a total gross floor area of approximately 280,530 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 120 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties and CIP Properties to which we have attributed no commercial value, are in the amount of RMB 27,810,000 as at the valuation date providing that all Building Ownership Certificates and Construction Permits have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-36 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ----------------------------------- --------------------------- ----------------- RMB 17. Land, various buildings The properties comprise 101 The properties are 368,730,000 and structures located at office buildings and other currently occupied by the Jiangxi Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 146,194 sq.m., those, which comprise 1 mainly completed in various Completed Properties with stages from 1978 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 160 sq.m. main buildings include office which is leased to buildings, carports, guardrooms, independent third parties. dining halls, etc. The properties also comprise 2 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 33,000,000, of which some RMB 22,520,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 11,830 sq.m. upon completion. The CIP Properties are scheduled to be completed in late 2003. The properties are located on 99 parcels of land with a total site area of approximately 126,722 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 99 parcels of land with a total site area of approximately 126,722 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 99 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-37 2. Completed Properties and CIP Properties i. For 100 buildings of the Completed Properties with a total gross floor area of approximately 145,894 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii. For 1 item of building of the Completed Properties with a gross floor area of approximately 300 sq.m, we have not been provided with any Building Ownership Certificate or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such building. iv. According to an opinion given by the Company's PRC legal adviser, 100 buildings of the Completed Properties with a total gross floor area of approximately 145,894 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 100 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of Completed Properties to which we have attributed no commercial value, are in the amount of RMB 190,000 as at the valuation date providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-38 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 18. Land, various buildings The properties comprise 60 office The properties are 412,850,000 and structures located at buildings and other ancillary currently occupied by the Liaoning Province buildings and structures with a Company mainly for office (excluding Dalian City) total gross floor area of purposes, exempt for The PRC approximately 167,823 sq.m., those, which comprise 18 mainly completed in various Completed Properties with stages from 1985 to 2001 (the a total gross floor area of "Completed Properties"). The approximately 3,908 sq.m. main buildings include office which are leased to buildings, boiler rooms, carports, independent third parties. hostel, etc. The properties also comprise 2 buildings and structures which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 45,000,000, of which some RMB 29,500,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 12,375 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 57 parcels of land with a total site area of approximately 97,338 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 57 parcels of land with a total site area of approximately 97,338 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 57 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-39 2. Completed Properties and CIP Properties i. For 58 buildings of the Completed Properties with a total gross floor area of approximately 145,361 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii. For the 2 items of buildings of the Completed Properties with a total gross floor area of approximately 22,462 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 58 buildings of the Completed Properties with a total gross floor area of approximately 145,361 sq.m are legally owned by the Company. There is no material legal impediment for the 58 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties to which we have attributed no commercial value, are in the amount of RMB 74,050,000, as at the valuation date providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-40 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ----------------------------------- --------------------------- ------------- RMB 19. Land, various buildings The properties comprise 129 The properties are 264,540,000 and structures located at office buildings and other currently occupied by the Inner Mongolia ancillary buildings and structures Company mainly for office Autonomous Region with a total gross floor area of purposes, exempt for The PRC approximately 135,377 sq.m., those, which comprise 10 mainly completed in various Completed Properties with stages from 1989 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 251 sq.m. main buildings include office which are leased to buildings, boiler rooms, independent third parties. guardrooms, carports, dining halls, etc. The properties also comprise 6 buildings and structures which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 41,770,000, of which some RMB 29,316,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 11,618 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 89 parcels of land with a total site area of approximately 147,875 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 89 parcels of land with a total site area of approximately 147,875 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 89 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-41 2. Completed Properties and CIP Properties i. For 123 buildings of the Completed Properties with a total gross floor area of approximately 132,144 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For 5 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. For the remaining CIP property, CLIC is in the process of application of relevant approvals to undertake the construction. iii. For the 6 items of buildings of the Completed Properties with a total gross floor area of approximately 3,234 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. As such, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 123 buildings of the Completed Properties with a total gross floor area of approximately 132,144 sq.m and the 5 CIP Properties are legally owned by the Company. There is no material legal impediment for the 123 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 5 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties and CIP Properties to which we have attributed no commercial value, are in the amount of RMB 7,170,000 as at the valuation date providing that all Building Ownership Certificates and Construction Permits have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-42 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- --------------------------- ------------- 20. Land, various buildings The properties comprise 23 office The properties are 102,110,000 and structures located at buildings and other ancillary currently occupied by the Ningbo City buildings and structures with a Company mainly for office Zhejiang Province total gross floor area of purposes, exempt for The PRC approximately 24,737 sq.m., those, which comprise 5 mainly completed in various Completed Properties with stages from 1987 to 1999 (the a total gross floor area of "Completed Properties"). The approximately 604 sq.m. main buildings include office which are leased to buildings, carports, etc. independent third parties. The properties are located on 21 parcels of land with a total site area of approximately 7,338 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 21 parcels of land with a total site area of approximately 7,338 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 21 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 23 buildings of the Completed Properties with a total gross floor area of approximately 24,737 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 23 buildings of the Completed Properties with a total gross floor area of approximately 24,737 sq.m are legally owned by the Company. There is no material legal impediment for the 23 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. B-43 iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-44 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ---------------------------------- ------------------------- ------------- RMB 21. Land, various buildings The properties comprise 54 office The properties are 47,120,000 and structures located at buildings and other ancillary currently occupied by the Ningxia Hui Autonomous buildings and structures with a Company mainly for office Region total gross floor area of purposes. The PRC approximately 21,461 sq.m., mainly completed in various stages from 1983 to 2002 (the "Completed Properties"). The main buildings include office buildings, boiler rooms, carports, etc. The properties are located on 39 parcels of land with a total site area of approximately 17,971 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 39 parcels of land with a total site area of approximately 17,971 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 39 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 54 buildings of the Completed Properties with a total gross floor area of approximately 21,461 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 54 buildings of the Completed Properties with a total gross floor area of approximately 21,461 sq.m are legally owned by the Company. There is no material legal impediment for the 54 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. B-45 iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-46 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ----------------------------------- --------------------------- ------------- RMB 22. Land, various buildings The properties comprise 17 office The properties are 112,230,000 and structures located at buildings and other ancillary currently occupied by the Qingdao City buildings and structures with a Company mainly for office Shandong Province total gross floor area of purposes, exempt for The PRC approximately 23,449 sq.m., those, which comprise 2 mainly completed in various Completed Properties with stages from 1974 to 2001 (the a total gross floor area of "Completed Properties"). The approximately 121 sq.m. main buildings include office which are leased to buildings, carports, etc. independent third parties. The properties also comprise 1 building which is under construction as at the date of valuation (the "CIP Property"). The estimated total construction cost is approximately RMB 8,000,000, of which RMB 10,000 has been incurred as at the date of valuation. The gross floor area of the building will be 4,000 sq.m. upon completion. The CIP Property is scheduled to be completed in 2004. The properties are located on 12 parcels of land with a total site area of approximately 36,617 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 12 parcels of land with a total site area of approximately 36,617 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 12 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-47 2. Completed Properties i. For 17 buildings of the Completed Properties with a total gross floor area of approximately 23,449 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the CIP Property, CLIC has obtained various relevant approvals to undertake the construction. iii. According to an opinion given by the Company's PRC legal adviser, 17 buildings of the Completed Properties with a total gross floor area of approximately 23,449 sq.m and the CIP Property are legally owned by the Company. There is no material legal impediment for the 18 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificate for the CIP Property upon its completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Property after Completion) upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-48 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- --------------------------- ------------- RMB 23. Land, various buildings The properties comprise 54 office The properties are 81,650,000 and structures located at buildings and other ancillary currently occupied by the Qinghai Province buildings and structures with a Company mainly for office The PRC total gross floor area of purposes, exempt for approximately 31,222 sq.m., those, which comprise 10 mainly completed in various Completed Properties with stages from 1961 to 2003 (the a total gross floor area of "Completed Properties"). The approximately 1,955 sq.m. main buildings include office which are leased to buildings, boiler rooms, independent third parties. guardrooms, carports, etc. The properties are located on 30 parcels of land with a total site area of approximately 34,031 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 30 parcels of land with a total site area of approximately 34,031 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 30 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 54 buildings of the Completed Properties with a total gross floor area of approximately 31,222 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 54 buildings of the Completed Properties with a total gross floor area of approximately 31,222 sq.m. There is no material legal impediment for the 54 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. B-49 iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-50 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 24. Land, various buildings The properties comprise 228 The properties are 546,710,000 and structures located at office buildings and other currently occupied by the Shandong Province ancillary buildings and structures Company mainly for office (excluding Qingdao City) with a total gross floor area of purposes, exempt for The PRC approximately 247,680 sq.m., those, which comprise 2 mainly completed in various Completed Properties with stages from 1968 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 2,180 sq.m. main buildings include office which are leased to buildings, boiler room, independent third parties. guardroom, carports, etc. The properties are located on 127 parcels of land with a total site area of approximately 264,903 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 127 parcels of land with a total site area of approximately 264,903 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 127 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 223 buildings of the Completed Properties with a total gross floor area of approximately 244,912 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 5 items of buildings of the Completed Properties with a total gross floor area of approximately 2,768 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. As such, we have attributed no commercial value to such buildings. B-51 iii. According to an opinion given by the Company's PRC legal adviser, 223 buildings of the Completed Properties with a total gross floor area of approximately 244,912 sq.m are legally owned by the Company. There is no material legal impediment for the 223 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties to which we have attributed no commercial value, are in the amount of RMB 2,240,000 as at the valuation date providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-52 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ----------------------------------- --------------------------- ------------- RMB 25. Land, various buildings The properties comprise 63 office The properties are 213,720,000 and structures located at buildings and other ancillary currently occupied by the Shanxi Province buildings and structures with a Company mainly for office The PRC total gross floor area of purposes, exempt for approximately 78,122 sq.m., those, which comprise 10 mainly completed in various Completed Properties with stages from 1985 to 2001 (the a total gross floor area of "Completed Properties"). The approximately 998 sq.m. main buildings include office which are leased to buildings, boiler rooms, carports, independent third parties. etc. The properties also comprise 3 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 230,500,000, of which some RMB 81,870,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 26,766 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 58 parcels of land with a total site area of approximately 77,375 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 58 parcels of land with a total site area of approximately 77,375 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 58 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-53 2. Completed Properties and CIP Properties i. For 61 buildings of the Completed Properties with a total gross floor area of approximately 76,938 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. For the remaining CIP Property, CLIC is in the process of application of relevant approvals to undertake the construction. iii. For the remaining 2 items of buildings of the Completed Properties with a total gross floor area of approximately 1,184 sq.m, we have not been provided with proper Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. As such, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 61 buildings of the Completed Properties with a total gross floor area of approximately 76,938 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 61 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the value of the Completed Properties and the CIP Property to which we have attributed no commercial value, are in the amount of RMB 14,680,000 as at the valuation date, providing that all Building Ownership Certificates and Construction Permits have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-54 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ---------------------------------- --------------------------- ------------- RMB 26. Land, various buildings The properties comprise 118 The properties are 280,990,000 and structures located at office buildings and other currently occupied by the Shanxi Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 113,562 sq.m., those, which comprise 11 mainly completed in various Completed Properties with stages from 1965 to 2003 (the a total gross floor area of "Completed Properties"). The approximately 7,379 sq.m. main buildings include office which are leased to buildings, boiler rooms, independent third parties. guardrooms, carports, etc. The properties also comprise 5 buildings and various structure which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 57,700,000, of which some RMB 43,310,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 20,637 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 113 parcels of land with a total site area of approximately 125,961 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 113 parcels of land with a total site area of approximately 125,961 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 113 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, B-55 expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties and CIP Properties i. For 117 buildings of the Completed Properties with a total gross floor area of approximately 112,830 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 5 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii For the remaining item of the Completed Properties with a gross floor area of approximately 732 sq.m, we have not been provided with any Building Ownership Certificate of Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such building. iv. According to an opinion given by the Company's PRC legal adviser, 117 buildings of the Completed Properties with a total gross floor area of approximately 112,830 sq.m and the 5 CIP Properties are legally owned by the Company. There is no material legal impediment for the 117 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 5 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the value of the Completed Property to which we have attributed no commercial value, is in the amount of RMB 580,000 as at the valuation date providing that all the Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage the completed property. B-56 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- --------------------------- ------------- RMB 27. Land, various buildings The properties comprise 58 office The properties are 513,470,000 and structures located at buildings and other ancillary currently occupied by the Shanghai buildings and structures with a Company mainly for office The PRC total gross floor area of purposes, exempt for approximately 64,100 sq.m., those, which comprise 5 mainly completed in various Completed Properties with stages from 1986 to 1999 (the a total gross floor area of "Completed Properties"). The approximately 1,003 sq.m. main buildings include office which are leased to buildings, dining halls, etc. independent third parties. The properties are located on 33 parcels of land with a total site area of approximately 20,781 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 33 parcels of land with a total site area of approximately 20,781 sq.m of the properties, CLIC has obtained Realty Title Certificates in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 33 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Realty Title Certificates. iii. CLIC has undertaken to have Realty Title Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 58 buildings of the Completed Properties with a total gross floor area of approximately 64,100 sq.m, CLIC has obtained Realty Title Certificates. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 58 buildings of the Completed Properties with a total gross floor area of approximately 64,100 sq.m are legally owned by the Company. There is no material legal impediment for the 58 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Realty Title Certificates. B-57 iii. CLIC has undertaken to have Realty Title Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-58 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- --------------------------------- ------------------------- ------------- RMB 28. Land, various buildings The properties comprise 48 office The properties are 134,850,000 and structures located at buildings and other ancillary currently occupied by the Shenzhen City buildings and structures with a Company for office Guangdong Province total gross floor area of purposes. The PRC approximately 19,710 sq.m., mainly completed in various stages from 1994 to 2000 (the "Completed Properties"). The properties are located on 48 parcels of land with a total site area of approximately 10,465 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 48 parcels of land with a total site area of approximately 10,465 sq.m of the properties, CLIC has obtained Realty Title Certificates in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 48 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Realty Title Certificates. iii. CLIC has undertaken to have Realty Title Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 48 buildings of the Completed Properties with a total gross floor area of approximately 19,710 sq.m, CLIC has obtained Realty Title Certificates. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 48 buildings of the Completed Properties with a total gross floor area of approximately 19,710 sq.m are legally owned by the Company. There is no material legal impediment for the 48 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Realty Title Certificates. B-59 iii. CLIC has undertaken to have Realty Title Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-60 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ---------------------------------- --------------------------- -------------- RMB 29. Land, various buildings The properties comprise 245 The properties are 557,250,000 and structures located at office buildings and other currently occupied by the Sichuan Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 287,849 sq.m., those, which comprise 98 mainly completed in various Completed Properties with stages from 1983 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 14,690 main buildings include office sq.m. which are leased to buildings, carports, etc. independent third parties. The properties also comprise 2 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 22,900,000, of which some RMB 11,590,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 7,356 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 234 parcels of land with a total site area of approximately 154,630 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 229 parcels of land with a total site area of approximately 152,669 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. For the 5 parcels of land with a total site area of approximately 1,961 sq.m of the properties, we have not been provided with any title documents. CLIC is in the process of formalizing title registration under the name of the Company. Thus, we have attributed no commercial value to such land. iii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 229 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. B-61 iv. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties and CIP Properties i. For 239 buildings of the Completed Properties with a total gross floor area of approximately 272,027 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii. For the 6 items of buildings of the Completed Properties with a total gross floor area of approximately 15,822 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. As such, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 239 buildings of the Completed Properties with a total gross floor area of approximately 272,027 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 239 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the land, Completed Properties and CIP Properties to which we have attributed no commercial value, are in the amount of RMB 56,180,000, as at the valuation date providing that all granted Land Use Rights Certificates, Building Ownership Certificates and Construction Permits have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-62 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ----------------------------------- ------------------------- ------------- RMB 30. Land, various buildings The properties comprise 17 office The properties are 90,720,000 and structures located at buildings and other ancillary currently occupied by the Tianjin buildings and structures with a Company mainly for office The PRC total gross floor area of purposes. approximately 26,779 sq.m., mainly completed in various stages from 1984 to 2001 (the "Completed Properties"). The main buildings include office buildings, storehouses, etc. The properties also comprise 2 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 21,000,000, of which no money has been incurred as at the valuation date. The total gross floor area of the buildings will be 7,410 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2004. The properties are located on 13 parcels of land with a total site area of approximately 29,323 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 13 parcels of land with a total site area of approximately 29,323 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 13 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-63 2. Completed Properties and CIP Properties i. For 15 buildings of the Completed Properties with a total gross floor area of approximately 26,484 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 2 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii. For the 2 items of buildings of the Completed Properties with a total gross floor area of approximately 296 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 15 buildings of the Completed Properties with a total gross floor area of approximately 26,484 sq.m and the 2 CIP Properties are legally owned by the Company. There is no material legal impediment for the 15 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 2 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties to which we have attributed no commercial value, are in the amount of RMB 350,000,000 as at the valuation date providing that all Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-64 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ----------------------------------- ------------------------- ------------- RMB 31. Land, various buildings The properties comprise 39 office The properties are 41,200,000 and structures located at buildings and other ancillary currently occupied by the Xiamen City buildings and structures with a Company mainly for office Fujian Province total gross floor area of purposes. The PRC approximately 9,031 sq.m., mainly completed in various stages from 1992 to 1998 (the "Completed Properties"). The main buildings include office buildings, carports, dining halls, etc. The properties are located on 39 parcels of land with a total site area of approximately 3,031 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 39 parcels of land with a total site area of approximately 3,031 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 39 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties i. For 39 buildings of the Completed Properties with a total gross floor area of approximately 9,031 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, 39 buildings of the Completed Properties with a total gross floor area of approximately 9,031 sq.m are legally owned by the Company. There is no material legal impediment for the 39 buildings to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the buildings upon obtaining Building Ownership Certificates. B-65 iii. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims charges or expenses arising from the formalizing/changing of building title registration. B-66 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- ---------------------------------- --------------------------- -------------- RMB 32. Land, various buildings The properties comprise 113 The properties are 196,440,000 and structures located at office buildings and other currently occupied by the Xinjiang Uygur ancillary buildings and structures Company mainly for office Autonomous Region with a total gross floor area of purposes, exempt for The PRC approximately 88,035 sq.m., those, which comprise 11 mainly completed in various Completed Properties with stages from 1983 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 2,970 sq.m. main buildings include office which are leased to buildings, boiler rooms, independent third parties. guardrooms, carports, etc. The properties also comprise 1 building which is under construction as at the date of valuation (the "CIP Property"). The estimated total construction cost is approximately RMB 4,580,000, of which some RMB 7,310,000 has been incurred to the valuation date. The gross floor area of the building will be 3,056 sq.m. upon completion. The CIP Property is scheduled to be completed in 2004. The properties are located on 92 parcels of land with a total site area of approximately 96,813 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 92 parcels of land with a total site area of approximately 96,813 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 92 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-67 2. Completed Properties and CIP Property i. For 113 buildings of the Completed Properties with a total gross floor area of approximately 88,035 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 1 CIP Property, CLIC has obtained various relevant approvals to undertake the construction. iii. According to an opinion given by the Company's PRC legal adviser, 112 buildings of the Completed Properties with a total gross floor area of approximately 88,035 sq.m and the 1 CIP Property are legally owned by the Company. There is no material legal impediment for the 113 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 1 CIP Property upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-68 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ----------------------------------- --------------------------- ------------- RMB 33. Land, various buildings The properties comprise 153 The properties are 180,170,000 and structures located at office buildings and other currently occupied by the Yunnan Province ancillary buildings and structures Company mainly for office The PRC with a total gross floor area of purposes, exempt for approximately 118,718 sq.m., those, which comprise 5 mainly completed in various Completed Properties with stages from 1980 to 2002 (the a total gross floor area of "Completed Properties"). The approximately 283 sq.m. main buildings include office which are leased to buildings, carports, dormitories, independent third parties. etc. The properties also comprise 4 buildings and structures which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 58,000,000, of which some RMB 9,440,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 9,205 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2005. The properties are located on 116 parcels of land with a total site area of approximately 118,759 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 113 parcels of land with a total site area of approximately 114,258 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. For the 3 parcels of land with a total site area of approximately 4,501 sq.m of the properties, we have not been provided with any title documents. CLIC is in the process of formalizing title registration under the name of the Company. Thus, we have attributed no commercial value to such land. iii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 113 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. B-69 iv. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties and CIP Properties i. For 142 buildings of the Completed Properties with a total gross floor area of approximately 95,685 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 4 CIP Properties, CLIC has obtained various relevant approvals to undertake the construction. iii. For the 11 items of buildings of the Completed Properties with a total gross floor area of approximately 23,034 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 142 buildings of the Completed Properties with a total gross floor area of approximately 95,685 sq.m and the 4 CIP Properties are legally owned by the Company. There is no material legal impediment for the 142 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 4 CIP Properties upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the land, Completed Properties to which we have attributed no commercial value, are in the amount of RMB 23,320,000 as at the valuation date providing that all granted Land Use Rights Certificates and Building Ownership Certificates have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-70 VALUATION CERTIFICATE
Capital value in existing state as at 30 September No. Property Description and tenure Particulars of occupancy 2003 - --- -------- ----------------------------------- ----------------------------- ------------- RMB 34. Land, various buildings The properties comprise 101 The properties are 742,170,000 and structures located at office buildings and other currently occupied by the Zhejiang Province ancillary buildings and structures Company mainly for office (excluding Ningbo City) with a total gross floor area of purposes, which comprise The PRC approximately 187,083 sq.m., 13 Completed Properties mainly completed in various with a total gross floor area stages from 1986 to 2002 (the of approximately 6,548 "Completed Properties"). The sq.m. which are leased to main buildings include office independent third parties. buildings, dining halls, carports, etc. The properties also comprise 2 buildings which are under construction as at the date of valuation (the "CIP Properties"). The estimated total construction cost is approximately RMB 58,000,000, of which some RMB 9,440,000 has been incurred as at the valuation date. The total gross floor area of the buildings will be 11,200 sq.m. upon completion. The CIP Properties are scheduled to be completed in 2005. The properties are located on 83 parcels of land with a total site area of approximately 65,395 sq.m. for commercial use.
Notes: 1. Land Use Rights i. For the 83 parcels of land with a total site area of approximately 65,395 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 83 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. B-71 2. Completed Properties and CIP Properties i. For 99 buildings of the Completed Properties with a total gross floor area of approximately 179,027 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For 1 CIP Property, CLIC has obtained various relevant approvals to undertake the construction For the remaining item of the CIP property, CLIC is in the process of application of relevant approvals to undertake the construction. iii. For the 2 items of buildings of the Completed Properties with a total gross floor area of approximately 8,056 sq.m, we have not been provided with any Building Ownership Certificates or Building Title Proof. CLIC is in the process of formalizing/changing building title registration under the name of the Company. Thus, we have attributed no commercial value to such buildings. iv. According to an opinion given by the Company's PRC legal adviser, 99 buildings of the Completed Properties with a total gross floor area of approximately 179,027 sq.m and the 1 CIP Property are legally owned by the Company. There is no material legal impediment for the 99 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 1 CIP Property upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. v. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. 3. For reference purpose, we are of the opinion that the values of the Completed Properties and CIP Properties to which we have attributed no commercial value, are in the amount of RMB 20,480,000 as at the valuation date providing that all Building Ownership Certificates and Construction Permits have been obtained by the Company and the Company is entitled to freely sublet, transfer or mortgage such properties. B-72 VALUATION CERTIFICATE
Capital value in existing state as at Particulars of 30 September No. Property Description and tenure occupancy 2003 - --- -------- --------------------------------------------------- ------------------ ------------- RMB 35. Land, various The properties comprise 40 office buildings and The properties are 101,130,000 buildings and other ancillary buildings and structures with a currently occupied structures located at total gross floor area of approximately 35,391 by the Company Chongqing sq.m., mainly completed in various stages from mainly for office The PRC 1985 to 2002 (the "Completed Properties"). The purposes, exempt main buildings include office buildings, dining for those, which halls, carports, etc. comprise 5 Completed The properties also comprise 1 building which is Properties with a under construction as at the date of valuation (the total gross floor "CIP Properties"). The estimated total area of construction cost is approximately approximately RMB 17,800,000, of which some 205 sq.m. which RMB 6,900,000 has been incurred as at the are leased to valuation date. The total gross floor area of the independent third buildings will be 7,980 sq.m. upon completion. parties. The CIP Property is scheduled to be completed in 2004. The properties are located on 36 parcels of land with a total site area of approximately 18,525 sq.m.[for commercial use.
Notes: 1. Land Use Rights i. For the 36 parcels of land with a total site area of approximately 18,525 sq.m of the properties, CLIC has obtained either Granted Land Use Rights Certificates, or Allocated Land Use Rights Certificates, or Land Title Proof in CLIC's name, and the Company is in the process of applying for change of registration of land user under the name of the Company. ii. According to an opinion given by the Company's PRC legal adviser, the land use rights pertaining to the 36 parcels of the land are legally owned by the Company. There is no material legal impediment to change title registration from CLIC to the Company. The Company can then freely sublet, transfer or mortgage the land use rights upon obtaining Land Use Rights Certificates. iii. CLIC has undertaken to have Land Use Rights Certificates registered under the name of the Company within 12 months from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land title registration. 2. Completed Properties CIP Properties i. For 40 buildings of the Completed Properties with a total gross floor area of approximately 35,391 sq.m, CLIC has obtained either Building Ownership Certificates or Building Title Proof. The Company is in the process of applying for change of registration of building ownership under the name of the Company. ii. For the 1 CIP Property, CLIC has obtained various relevant approvals to undertake the construction. B-73 iii. According to an opinion given by the Company's PRC legal adviser, 40 buildings of the Completed Properties with a total gross floor area of approximately 35,391 sq.m and the 1 CIP Property are legally owned by the Company. There is no material legal impediment for the 40 buildings to change title registration from CLIC to the Company. There is no material legal impediment for the Company to obtain Building Ownership Certificates for the 1 CIP Property upon their completion. The Company can then freely sublet, transfer or mortgage the buildings (including CIP Properties after completion) upon obtaining Building Ownership Certificates. iv. CLIC has undertaken to have Building Ownership Certificates registered under the name of the Company within 12 months (for those buildings with Building Title Proof should be within the valid period of the Building Title Proof and for the CIP Properties should be upon their completion) from the incorporation date of the Company, to be responsible for any costs, expenses, claims incurred, and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of building title registration. B-74 VALUATION CERTIFICATE
Capital value in existing state as at [30 September No. Property Description and tenure Particulars of occupancy 2003] - --- -------- --------------------------------- ------------------------- ----------------- RMB 36. A portion of a The properties comprise Levels 23 The property is currently No commercial building Located at to 32 of a 32-storey office occupied by the Company value Beijing (Head Office) building (China Life Tower) for office purposes. The PRC completed in about 2002. The total gross floor area of the property is approximately 15,356.76 sq.m.
Notes: 1. The land use rights to China Life Tower have been granted to Beijing Zhongbaoxin Real Estate Development Company Limited, a connected party of the Company, for a term of 50 years expiring on 20 March 2045 for composite use. 2. According to a Commercial Property Purchasing Contract entered into between Beijing Zhongbaoxin Real Estate Development Company Limited and CLIC, Levels 23 to 32 of China Life Tower with a total gross floor area of approximately 15,356.76 sq.m. was purchased by CLIC in a consideration of RMB 321,362,846 and all the consideration will be fully paid before 31 January 2005. As confirmed by the Company, RMB 74,497,517.50 has been paid to the valuation date. 3. According to an opinion given by the Company's PRC legal adviser, i. China Life Tower has been mortgaged to Xinjiekou Subbranch of Beijing Branch of China Industrial and Commercial Bank by Beijing Zhongbaoxin Real Estate Development Company Limited. ii. CLIC is in the process of formalizing/changing land and building title registration under the name of the Company. The formalities to release the mortgage relation to the property is currently ongoing. iii. CLIC has undertaken to be responsible for any costs, expenses, claims incurred and indemnify the Company against any losses, claims, charges or expenses arising from the formalizing/changing of land and building title registration. iv. There is no material legal impediment for the Company to occupy the property before the registration formality is completed. 4. In our valuation, we have attributed no commercial value to the property without property title document under the name of the Company. B-75 American Depositary Shares Representing H Shares China Life Insurance Company Limited [LOGO] US$ per ADS [LOGO] ----------------- Prospectus November 20, 2003 ----------------- Joint Global Coordinators and Joint Global Bookrunners (in alphabetical order)
China International Citigroup Credit Suisse First Boston Deutsche Bank Capital Corporation --------- -------------------------- ------------- -------------------
PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 6. Indemnification of Directors and Officers There is no statute, charter provision, by-law, contract or other arrangement under which any of our controlling persons, directors or officers is insured or indemnified in any manner against liability which he may incur in his capacity as such. Item 7. Recent Sales of Unregistered Securities Upon the establishment of China Life on June 30, 2003, an aggregate of 20,000,000,000 state-owned shares were issued to CLIC. No other securities of China Life have been issued or sold by China Life within the past three years. The offer and sale of shares of China Life to CLIC took place outside the United States and were exempt from registration under the Securities Act of 1933 as provided by Regulation S under the Securities Act of 1933. Item 8. Exhibits and Financial Statement Schedules (a) Exhibits.
Exhibit No. Description of Exhibit - ------- ---------------------- 1.1 Form of U.S. and International Underwriting Agreement* 3.1 Articles of Association of the Registrant 4.1 Form of H share certificate* 4.2 Form of Deposit Agreement, including form of American Depositary Receipt 5.1 Opinion of King & Wood, PRC counsel to the Registrant* 5.2 Opinion of Ziegler, Ziegler & Associates LLP, counsel to the depositary, as to the validity of the American Depositary Receipts** 8.1 Opinion of King & Wood, PRC counsel to the Registrant, as to certain tax matters* 8.2 Opinion of Allen & Overy, Hong Kong legal advisor to the Registrant, as to certain tax matters* 8.3 Opinion of Debevoise & Plimpton, U.S. counsel to the Registrant, as to certain tax matters* 10.1 Restructuring Agreement 10.2 Trademark License Agreement 10.3 Policy Management Agreement 10.4 Asset Management Agreement between China Life Insurance Company Limited and China Life Insurance Asset Management Company Limited* 10.5 Asset Management Agreement between China Life Insurance (Group) Company and China Life Insurance Asset Management Company Limited* 10.6 Property Leasing Agreement 10.7 Non-Competition Agreement
II-1
Exhibit No. Description of Exhibit - ------- ---------------------- 10.8 Form of Hong Kong Underwriting Agreement* 21.1 List of subsidiaries of the Registrant* 23.1 Consent of PricewaterhouseCoopers 23.2 Consent of King & Wood (included as part of Exhibit 5.1)* 23.3 Consent of Allen & Overy (included as part of Exhibit 8.2)* 23.4 Consent of Debevoise & Plimpton (included as part of Exhibit 8.3)* 23.5 Consent of Sallmanns (Far East) Limited 23.6 Consent of Tillinghast-Towers Perrin 23.7 Consent of Ziegler, Ziegler & Associates LLP (included as part of Exhibit 5.2)** 24.1 Powers of Attorney (included in signature page)
- -------- * To be filed by amendment. ** Incorporated by reference to the Depositary's Registration Statement on Form F-6 (filed with respect to the American Depositary Receipts) (File No. 333- ), filed with the Commission on November 20, 2003. (b) Financial Statement Schedules All supplemental schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the financial statements or notes thereto. Item 9. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 6, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: 1. for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Registration Statement on Form F-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing, People's Republic of China, on November 20, 2003. CHINA LIFE INSURANCE COMPANY LIMITED By: /s/ Miao Fuchun ------------------------------ Name: Miao Fuchun Title: Director and Vice President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Wang Xianzhang and Miao Fuchun and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him in his name, place and stead, in any and all capacity, in connection with this Registration Statement, including to sign and file in the name and on behalf of the undersigned as director or officer of the Registrant (i) any and all amendments or supplements (including any and all stickers and post-effective amendments) to this Registration Statement, with all exhibits thereto, and other documents in connection therewith, and (ii) any and all additional registration statements, and any and all amendments thereto, relating to the same offering of securities as those that are covered by this Registration Statement that are filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended with the Securities and Exchange Commission and any applicable securities exchange or securities self-regulatory body, granting unto said attorney-in-fact and agents, and each of them full power and authority to do and perform each and every act and things requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. II-4 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ Wang Xianzhang Wang Xianzhang November 20, 2003 - ----------------------------- Chairman of the Board and President (principal executive officer) /s/ Liu Jiade Liu Jiade November 20, 2003 - ----------------------------- Vice President (principal financial and accounting officer) /s/ Miao Fuchun Miao Fuchun November 20, 2003 - ----------------------------- Director and Vice President /s/ Wu Yan Wu Yan November 20, 2003 - ----------------------------- Director /s/ Long Yongtu Long Yongtu November 20, 2003 - ----------------------------- Independent non-executive director /s/ Chau Tak Hay Chau Tak Hay November 20, 2003 - ----------------------------- Independent non-executive director II-5 SIGNATURE OF AUTHORIZED REPRESENTATIVE OF THE REGISTRANT Pursuant to the requirements of the Securities Act, the undersigned, the duly authorized representative in the United States of China Life Insurance Company Limited, has signed this Registration Statement or amendment thereto in Newark, Delaware on November 20, 2003. By: /s/ Donald J. Puglisi ------------------------------ Name: Donald J. Puglisi Title: Managing Director II-6 EXHIBIT INDEX
Exhibit No. Description of Exhibit - ------- ---------------------- 1.1 Form of U.S. and International Underwriting Agreement* 3.1 Articles of Association of the Registrant 4.1 Form of H share certificate* 4.2 Form of Deposit Agreement, including form of American Depositary Receipt 5.1 Opinion of King & Wood, PRC counsel to the Registrant* 5.2 Opinion of Ziegler, Ziegler & Associates LLP, counsel to the depositary, as to the validity of the American Depositary Receipts** 8.1 Opinion of King & Wood, PRC counsel to the Registrant, as to certain tax matters* 8.2 Opinion of Allen & Overy, Hong Kong legal advisor to the Registrant, as to certain tax matters* 8.3 Opinion of Debevoise & Plimpton, U.S. counsel to the Registrant, as to certain tax matters* 10.1 Restructuring Agreement 10.2 Trademark License Agreement 10.3 Policy Management Agreement 10.4 Asset Management Agreement between China Life Insurance Company Limited and China Life Insurance Asset Management Company Limited* 10.5 Asset Management Agreement between China Life Insurance (Group) Company and China Life Insurance Asset Management Company Limited* 10.6 Property Leasing Agreement 10.7 Non-Competition Agreement 10.8 Form of Hong Kong Underwriting Agreement* 21.1 List of subsidiaries of the Registrant* 23.1 Consent of PricewaterhouseCoopers 23.2 Consent of King & Wood (included as part of Exhibit 5.1)* 23.3 Consent of Allen & Overy (included as part of Exhibit 8.2)* 23.4 Consent of Debevoise & Plimpton (included as part of Exhibit 5.3)* 23.5 Consent of Sallmanns (Far East) Limited 23.6 Consent of Tillinghast-Towers Perrin 23.7 Consent of Ziegler, Ziegler & Associates LLP (included as part of Exhibit 5.2)** 24.1 Powers of Attorney (included in signature page)
- -------- * To be filed by amendment. ** Incorporated by reference to the Depositary's Registration Statement on Form F-6 (filed with respect to the American Depositary Receipts) (File No. 333- ), filed with the Commission on November 20, 2003. EX-3.1 3 dex31.txt ARTICLES OF ASSOCIATION OF THE REGISTRANT Exhibit 3.1 ENGLISH TRANSLATION OF CHINESE LANGUAGE ORIGINAL Articles of Association of China Life Insurance Company Limited November 10, 2003 Table of Contents Chapter 1 General Provisions.......................................................7 Article 1.......................................................................7 Article 2.......................................................................7 Article 3.......................................................................8 Article 4.......................................................................8 Article 5.......................................................................8 Article 6.......................................................................8 Article 7.......................................................................9 Article 8.......................................................................9 Chapter 2 The Company's Objectives and Scope of Business...........................9 Article 9.......................................................................9 Article 10.....................................................................10 Chapter 3 Shares and Registered Capital...........................................10 Article 11.....................................................................10 Article 12.....................................................................10 Article 13.....................................................................10 Article 14.....................................................................11 Article 15.....................................................................11 Article 16.....................................................................11 Article 17.....................................................................12 Article 18.....................................................................12 Article 19.....................................................................12 Article 20.....................................................................12 Article 21.....................................................................13 Chapter 4 Reduction of Capital and Repurchase of Shares...........................13 Article 22.....................................................................13 Article 23.....................................................................13 Article 24.....................................................................13 Article 25.....................................................................14 Article 26.....................................................................14 Article 27.....................................................................14 Article 28.....................................................................14 Chapter 5 Financial Assistance for Acquisition of Shares..........................15 Article 29.....................................................................15 Article 30.....................................................................16 Article 31.....................................................................16 Chapter 6 Share Certificates and Register of Shareholders.........................17 Article 32.....................................................................17 Article 33.....................................................................17 Article 34.....................................................................17
2 Article 35.....................................................................18 Article 36.....................................................................18 Article 37.....................................................................19 Article 38.....................................................................19 Article 39.....................................................................20 Article 40.....................................................................20 Article 41.....................................................................20 Article 42.....................................................................20 Article 43.....................................................................22 Article 44.....................................................................22 Chapter 7 Shareholders' Rights and Obligations....................................22 Article 45.....................................................................22 Article 46.....................................................................22 Article 47.....................................................................23 Article 48.....................................................................24 Article 49.....................................................................24 Chapter 8 Shareholders' General Meetings..........................................25 Article 50.....................................................................25 Article 51.....................................................................25 Article 52.....................................................................26 Article 53.....................................................................26 Article 54.....................................................................26 Article 55.....................................................................27 Article 56.....................................................................27 Article 57.....................................................................27 Article 58.....................................................................28 Article 59.....................................................................28 Article 60.....................................................................28 Article 61.....................................................................29 Article 62.....................................................................29 Article 63.....................................................................29 Article 64.....................................................................30 Article 65.....................................................................30 Article 66.....................................................................30 Article 67.....................................................................30 Article 68.....................................................................31 Article 69.....................................................................31 Article 70.....................................................................31 Article 71.....................................................................31 Article 72.....................................................................32 Article 73.....................................................................32 Article 74.....................................................................33 Article 75.....................................................................33 Article 76.....................................................................33 Article 77.....................................................................33 Article 78.....................................................................33
3 Article 79.....................................................................34 Chapter 9 Special Procedures for Voting by A Class of Shareholders................34 Article 80.....................................................................34 Article 81.....................................................................34 Article 82.....................................................................34 Article 83.....................................................................35 Article 84.....................................................................36 Article 85.....................................................................36 Article 86.....................................................................36 Article 87.....................................................................36 Chapter 10 Board of Directors.....................................................37 Article 88.....................................................................37 Article 89.....................................................................37 Article 90.....................................................................37 Article 91.....................................................................38 Article 92.....................................................................39 Article 93.....................................................................39 Article 94.....................................................................39 Article 95.....................................................................40 Article 96.....................................................................40 Article 97.....................................................................40 Article 98.....................................................................40 Article 99.....................................................................41 Article 100....................................................................41 Chapter 11 Secretary of the Board of Directors....................................41 Article 101....................................................................41 Article 102....................................................................41 Article 103....................................................................42 Chapter 12 Committees under the Board of the Directors............................42 Article 104....................................................................42 Article 105....................................................................42 Chapter 13 General Manager........................................................42 Article 106....................................................................42 Article 107....................................................................42 Article 108....................................................................43 Article 109....................................................................43 Chapter 14 Supervisory Board......................................................43 Article 110....................................................................43 Article 111....................................................................43 Article 112....................................................................44 Article 113....................................................................44 Article 114....................................................................44 Article 115....................................................................44 Article 116....................................................................45 Article 117....................................................................45 Article 118....................................................................45
4 Chapter 15 The Qualifications and Duties of the Directors, Supervisors, General Manager, Deputy General Managers and Other Senior Officer of the Company.......45 Article 119....................................................................45 Article 120....................................................................46 Article 121....................................................................46 Article 122....................................................................47 Article 123....................................................................47 Article 124....................................................................48 Article 125....................................................................49 Article 126....................................................................49 Article 127....................................................................49 Article 128....................................................................50 Article 129....................................................................50 Article 130....................................................................50 Article 131....................................................................51 Article 132....................................................................51 Article 133....................................................................51 Article 134....................................................................51 Article 135....................................................................52 Article 136....................................................................52 Chapter 16 Financial and Accounting Systems and Profit Distribution...............53 Article 137....................................................................53 Article 138....................................................................53 Article 139....................................................................53 Article 140....................................................................53 Article 141....................................................................54 Article 142....................................................................54 Article 143....................................................................54 Article 144....................................................................54 Article 145....................................................................54 Article 146....................................................................55 Article 147....................................................................55 Article 148....................................................................55 Article 149....................................................................55 Article 150....................................................................56 Article 151....................................................................56 Article 152....................................................................56 Article 153....................................................................56 Chapter 17 Appointment of Auditors................................................57 Article 154....................................................................57 Article 155....................................................................57 Article 156....................................................................57 Article 157....................................................................57 Article 158....................................................................58 Article 159....................................................................58 Article 160....................................................................58
5 Article 161....................................................................59 Chapter 18 Insurance..............................................................60 Article 162....................................................................60 Chapter 19 Labor and Personnel Management System..................................60 Article 163....................................................................60 Article 164....................................................................60 Article 165....................................................................60 Article 166....................................................................60 Chapter 20 Trade Unions...........................................................60 Article 167....................................................................60 Chapter 21 Merger and Division of the Company.....................................61 Article 168....................................................................61 Article 169....................................................................61 Article 170....................................................................61 Article 171....................................................................62 Chapter 22 Dissolution and Liquidation............................................62 Article 172....................................................................62 Article 173....................................................................62 Article 174....................................................................63 Article 175....................................................................63 Article 176....................................................................63 Article 177....................................................................64 Article 178....................................................................64 Article 179....................................................................64 Chapter 23 Procedures for Amendment of the Company's Articles of Association......65 Article 180....................................................................65 Article 181....................................................................65 Article 182....................................................................65 Chapter 24 Dispute Resolution.....................................................66 Article 183....................................................................66 Chapter 25 Notice.................................................................67 Article 184....................................................................67 Article 185....................................................................67 Article 186....................................................................67 Article 187....................................................................67 Article 188....................................................................68 Chapter 26 Supplementary..........................................................68 Article 189....................................................................68 Article 190....................................................................68 Article 191....................................................................68
6 These Articles of Association has been approved by: a special resolution of the second interim shareholders' meeting of year 2003 of China Life Insurance Company Limited on September 11, 2003; China Insurance Regulatory Commission on September 30, 2003; a special resolution of the third interim shareholders' meeting of year 2003 of China Life Insurance Company Limited on November 12, 2003; and, China Insurance Regulatory Commission on . --------------- Chapter 1 General Provisions Article 1. China Life Insurance Company Limited (the "Company") is a joint stock limited company established in accordance with the Insurance Law of the People's Republic of China (the "Insurance Law"), the Company Law of the People's Republic of China (the "Company Law"), the Securities Law of the People's Republic of China (the "Securities Law"), the State Council's Special Regulations on Overseas Offering and Listing of Joint Stock Limited Company (the "Special Regulations"), and other relevant laws and administrative regulations. The Company was established by way of promotion with China Life Insurance Company as the sole promoter, and with the approval of China Insurance Regulatory Commission (the "CIRC"), as evidenced by the approving document Bao Jian Fu [2003] No.115 of 2003. It is registered with, and has obtained a business license from, the State Administrative Bureau for Industry and Commerce on June 30, 2003. The Company's business license number is 1000001003796. The promoter of the Company is China Life Insurance (Group) Company. The predecessor of China Life Insurance (Group) Company is China Life Insurance Company. China Life Insurance Company was changed to China Life Insurance (Group) Company (the "Group Company") after obtaining the approval of the CIRC (Bao Jian Fu [2003] 108). The Group Company obtained its business license (Registration No. 1000001002372) reissued by the State Administration for Industry and Commerce on July 21, 2003; Article 2. The registered Chinese name of the Company is: (Chinese Character). 7 The short name for the registered Chinese name of the Company is: (Chinese Character). The English name of the Company is: China Life Insurance Company Limited. The short name for the English name of the Company is: China Life. Article 3. Address of the Company: China Life Building, No.16 Chao Yang Men Wai Avenue, Chaoyang District, Beijing Telephone Number: 010-85659999 Fax Number: 010-85659000 Post Code: 100020 Article 4. The Company's legal representative is the Chairman of the Board of Directors of the Company. Article 5. The Company is a joint stock limited company that has perpetual existence. The shareholders of the Company shall exercise their rights and bear their liabilities to the extent of their respective shareholdings in the Company. The Company shall be liable for the debts of the Company to the extent of all the property of the Company. The Company is an independent legal person under the jurisdiction and protection of the laws and administrative regulations of the People's Republic of China. Article 6. Pursuant to the Company Law, the Insurance Law, the Special Regulations, the Mandatory Provisions governing the Articles of Association of Overseas Listed Companies (hereinafter "Mandatory Provisions") and other laws, administrative regulations and relevant provisions, the Company has called a Second Interim Shareholders' Meeting of 2003 on September 11, 2003 to amend the Articles of Association of the Company as entered into as of the incorporation of the Company (the "Previous Articles of Association") and to duly enter into those Articles of Association (the "Company Articles of Association" or these "Articles of Association"). 8 The Articles of Association shall come into effect after it is approved by CIRC, and upon its coming into effect, it shall supersede the Previous Articles of Association of the Company. From the date on which the Company's Articles of Association come into effect, the Company's Articles of Association shall constitute a legally binding document regulating the Company's organization and activities, and the rights and obligations between the Company and each shareholder and among the shareholders. Article 7. The Company's Articles of Association are binding on the Company and its shareholders, directors, supervisors, general manager, deputy general manager and other senior officers of the Company; all of whom are entitled, in accordance with the Company's Articles of Association, to make suggestions with respect to the affairs of the Company. A shareholder may take action against the Company pursuant to the Company's Articles of Association and vice versa. A shareholder may also take action against another shareholder and the directors, supervisors, general manager, deputy general manager and other senior officers of the Company pursuant to the Company's Articles of Association. The actions referred to in the preceding paragraph include court proceedings and arbitrations. "Other senior officers" as used in the Company's Articles of Association refer to the secretary to the Board of Directors, chief financial officer and the chief actuary of the Company. Article 8. The Company may invest in other limited liability companies or joint stock limited companies. The Company's liability to an invested company shall be limited to the amount of its capital contribution to the invested company. Upon the approval of the companies approval authority authorized by the State Council, the Company may, according to its operating and management needs, operate as a holding company as prescribed in the second paragraph of Article 12 of the Company Law. Chapter 2 The Company's Objectives and Scope of Business Article 9. The Company's objectives are: to conform to the ideal of "mutual benefit" in operation; to observe the operational policy of fiduciary principle and steadfast operation; to improve the operation and management of the Company; with the 9 concentration on economical benefits and market-oriented direction, to facilitate the continual healthy growth of the Company; and to ensure the interests of the Company, its employees and shareholders. Article 10. The Company's scope of business shall be consistent with and subject to the scope of business approved by the insurance regulatory authority of the PRC and the authority responsible for company registrations. The Company's scope of business includes: personal insurance, health insurance, accident insurance and other personal insurance; reinsurance of personal insurance; the operation of funds as allowed by laws or regulations, or approved by the State Council; and various services, consulting and agency businesses relating to personal insurance. The Company may, according to the demand and supply of domestic and international markets, the Company's ability to develop and the requirements of the Company's business, adjust its scope of business in accordance with laws. Subject to compliance with the laws and administrative regulations of the People's Republic of China (the "PRC"), the Company has the power to raise and borrow money, which power includes (without limitation) the borrowing of money, the issuance of debentures, the charging or mortgaging of part or all of the Company's interests, and to provide guarantees for the debts of any third party (including but not limited to its subsidiaries or associated companies) under various circumstances. Chapter 3 Shares and Registered Capital Article 11. There must, at all times, be ordinary shares in the Company, which shall include Domestic-Invested and Foreign-Invested Shares. Subject to the approval by the Company approving department authorized by the State Council, the Company may, according to its requirements, create different classes of shares. Article 12. The shares issued by the Company shall each have a par value of Renminbi one (1) yuan. "Renminbi" means the lawful currency of the PRC. Article 13. Subject to the approval by the securities regulatory authority under the State Council, the Company may issue shares to Domestic Investors and Foreign Investors. "Foreign Investors" means those investors who subscribe for the shares of the Company and who are located in foreign countries and in the regions of Hong Kong, 10 Macau or Taiwan. "Domestic Investors" means those investors who subscribe for the shares of the Company and who are located within the territory of the PRC (excluding the regions of Hong Kong, Macau and Taiwan). Article 14. Shares which the Company issues to Domestic Investors for subscription in Renminbi shall be referred to as "Domestic-Invested Shares". Shares which the Company issues to Foreign Investors for subscription in foreign currencies shall be referred to as "Foreign-Invested Shares". Foreign-Invested Shares which are listed overseas are called "Overseas-Listed Foreign-Invested Shares". The aforementioned "foreign currencies" means the lawful currencies of countries or regions outside the PRC which are recognized by the State's foreign exchange authority and which can be used to pay the share purchase price to the Company. Domestic-Invested Shares issued by the Company shall be referred to as "A Shares". Overseas-Listed Foreign-Invested Shares issued by the Company and which are listed in Hong Kong shall be referred to as "H Shares". H Shares are shares that have been admitted for listing on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"), the par value of which is denominated in Renminbi and which are subscribed for and traded in Hong Kong dollars. H Shares can also be listed on a stock exchange in the United States in the form of American Depository Receipts. Article 15. Subject to the approval of the Company approval authority authorized by the State Council, ordinary shares issuable by the Company may not exceed a total of 26,764,705,882 shares, of which 20 billion ordinary shares, representing 74.7% of the total number, were issued to the promoter of the Company at the time when the Company was established. Article 16. H shares the Company issues in its initial public offering upon its incorporation shall not exceed 7,441,176,471 shares, of which incremental offering shall not exceed 6,764,705,882 shares and inventory offering shall not exceed 676,470,588. If the over-allotment option is not exercised, the share capital structure of the Company shall, following the increase in capital in the manner described above, comprise 25,882,352,941 ordinary shares, of which 19,411,764,706 shares, which represent 75% of the Company's share capital, will be held by the Group Company, the promoter; and 6,470,588,235 shares, which represent 25% of the Company's share capital, will be held by the holders of H Shares. 11 If not more than 15% of the over-allotment option is exercised, the share capital structure of the Company shall, following the increase in capital in the manner described above, comprise 26,764,705,882 ordinary shares, of which 19,323,529,412 shares, which represent 72.2% of the Company's share capital, will be held by the Group Company, the promoter; and 7,441,176,471 shares, which represent 27.8% of the Company's share capital, will be held by the holders of H Shares. Article 17. The Company's Board of Directors may take all the necessary actions for the issuance of Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares after proposals for the issuance of the same have been approved by the securities regulatory authority under the State Council. The Company may implement its proposal to issue Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares pursuant to the preceding paragraph within fifteen (15) months from the date of approval by the securities regulatory authority under the State Council. Article 18. When the total number of shares stated in the proposal for the issuance of shares include Overseas-Listed Foreign-Invested Shares and Domestic-Invested Shares, such shares shall be fully subscribed for in a single time at their respective offerings. If the shares cannot be fully subscribed for in a single time due to special circumstances, the shares may, subject to approval by the securities regulatory authority under the State Council, be issued in separate batches. Article 19. The registered capital of the Company shall be RMB20 billion. If the over-allotment option is exercised, the registered capital of the Company shall be adjusted accordingly, and such exercise shall be subject to the approval by the insurance regulatory authority of the PRC and be filed with the securities regulatory authority for its records. Article 20. The Company may, based on its operating and development needs, authorize the increase of its capital pursuant to the Company's Articles of Association. The Company may increase its capital in the following ways: (1) by offering new shares for subscription to unspecified investors; (2) by issuing new shares to its existing shareholders; (3) by allotting bonus shares to its existing shareholders; 12 (4) by other means as permitted by law and administrative regulation. After the Company's increase of share capital by means of the issuance of new shares has been approved in accordance with the provisions of the Company's Articles of Association, the issuance thereof shall be made in accordance with the procedures set out in the relevant laws and administrative regulations. Article 21. Unless otherwise stipulated in the relevant laws and administrative regulations, shares in the Company shall be freely transferable and are not subject to any lien. Chapter 4 Reduction of Capital and Repurchase of Shares Article 22. According to the provisions of the Company's Articles of Association, the Company may reduce its registered capital. Article 23. The Company must prepare a balance sheet and an inventory list of its assets when it reduces its registered capital. The Company shall notify its creditors within ten (10) days of the date of the Company's resolution for reduction of capital and shall publish an announcement in a newspaper at lease three (3) times within thirty (30) days of the date of such resolution. A creditor has the right within thirty (30) days of receipt of the notice from the Company or, in the case of creditor who does not receive such notice, within ninety (90) days of the date of the first public announcement, to require the Company to repay its debts or to provide a corresponding guarantee for such debt. The Company's registered capital must not, after the reduction in capital, be less than the minimum amount required by law. Article 24. The Company may, in accordance with the procedures set out in the Company's Articles of Association and upon the approval by the relevant State authority, repurchase its issued shares under the following circumstances: (1) cancellation of shares for the purpose of reducing its capital; (2) merging with another company that holds shares in the Company; (3) other circumstances permitted by law and administrative regulation. 13 Article 25. The Company may repurchase shares in any of the following ways, with the approval of the relevant State authority: (1) by making general offer for the repurchase of shares to all of its shareholders on a pro rata basis; (2) by repurchasing shares through public dealing on a stock exchange; (3) by repurchasing shares outside of the stock exchange by means of an off-market agreement. Article 26. The Company must obtain the prior approval of the shareholders at a general meeting (in the manner provided in the Company's Articles of Association) before it can repurchase shares outside of the stock exchange by means of an off-market agreement. The Company may, by obtaining the prior approval of the shareholders at a general meeting (in the same manner as above), release, vary or waive its rights under an agreement that has been so entered into. An agreement for the repurchase of shares referred to in the preceding paragraph includes (without limitation) an agreement to become liable to repurchase shares or an agreement to have the right to repurchase shares. The Company may not assign an agreement for the repurchase of its shares or any right contained in such an agreement. Article 27. Shares, which have been legally repurchased by the Company, shall be cancelled within the period prescribed by law and administrative regulation, and the Company shall apply to the original company registration authority for registration of the change in its registered capital and make a public announcement. The aggregate par value of the cancelled shares shall be deducted from the Company's registered capital. Article 28. Unless the Company has entered the course of liquidation, it shall comply with the following provisions in relation to a repurchase of its issued shares: (1) where the Company repurchases shares at par value, payment shall be made out of book surplus distributable profits of the Company or out of the proceeds of a new issue of shares made for that purpose; 14 (2) where the Company repurchases shares of the Company at a premium to its par value, payment up to the par value shall be made out of book surplus distributable profits of the Company or out of the proceeds of a new issue of shares made for that purpose. Payment of the portion in excess of the par value shall be effected as follows: (i) if the shares being repurchased were issued at par value, payment shall be made out of the book surplus of its distributable profits; (ii) if the shares being repurchased were issued at a premium to its par value, payment shall be made out of the book surplus of its distributable profits or out of the proceeds of a new issue of shares made for that purpose, provided that the amount paid out of the proceeds of the new issue shall not exceed the aggregate amount of the premiums received by the Company on the issue of the shares repurchased nor shall it exceed the book value of the Company's capital common reserve account (including the premiums on the new issue) at the time of the repurchase; (3) The Company shall make the following payment out of the Company's distributable profits: (i) payment for the acquisition of the right to repurchase its own shares; (ii) payment for the variation of any contract for the repurchase of its shares; (iii) payment for the release of its obligation(s) under any contract for the repurchase of shares; (4) After the Company's registered capital has been reduced by the aggregate par value of the cancelled shares in accordance with the relevant provisions, the amount deducted from the distributable profits of the Company for payment of the par value of shares which have been repurchased shall be transferred to the account of Company's capital common reserve. Chapter 5 Financial Assistance for Acquisition of Shares Article 29. The Company and its subsidiaries shall not, at any time, provide any form of financial assistance to a person who is acquiring or proposes to acquire shares in the Company. This includes any person who directly or indirectly incurs obligations as a result of acquiring shares in the Company (the "Obligor"). 15 The Company and its subsidiaries shall not, at any time, provide any form of financial assistance to the Obligor for the purposes of reducing or discharging the obligations assumed by such person. This Article shall not apply to the circumstances specified in Article 31 of this Chapter. Article 30. For the purpose of this Chapter, "financial assistance" includes (but is not limited to) the following: (1) gift; (2) guarantee (including the assumption of liabilities by the guarantor or the provision of assets by the guarantor to secure the performance of obligations by the Obligor), compensation (other than the compensation in respect of the Company's own fault), or release or waiver of any rights; (3) provision of loan or any other agreement under which the obligations of the Company are to be fulfilled before the obligations of another party, or the change in parties to, or the assignment of the rights under, such loan or agreement; (4) any other form of financial assistance given by the Company when the Company is insolvent or has no net assets or when its net assets would thereby be reduced to a material extent. For the purpose of this Chapter, "assumption of obligations" includes the assumption of obligations by way of contract or by way of arrangement (irrespective of whether such contract or arrangement is enforceable or not and irrespective of whether such obligation is to be borne solely by the Obligor or jointly with other persons) or by any other means which results in a change in the financial situation. Article 31. The following actions shall not be deemed to be activities prohibited by Article 29 of this Chapter: (1) the provision of financial assistance by the Company where the financial assistance is given in good faith in the interests of the Company, and the principal purpose of which is not for the acquisition of shares in the Company, or the giving of financial assistance is an incidental part of certain a plan of the Company; (2) the lawful distribution of the Company's assets by way of dividend; 16 (3) the distribution of share dividends; (4) a reduction of registered capital, a repurchase of shares of the Company or a reorganization of the share capital structure of the Company effected in accordance with the Company's Articles of Association; (5) the lending of money by the Company within its scope of business and in the ordinary course of its business, where the lending of money is part of the scope of business of the Company (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of the distributable profits); (6) contributions made by the Company to the employee share ownership schemes (provided that the net assets of the Company are not thereby reduced or that, to the extent that the assets are thereby reduced, the financial assistance is provided out of the distributable profits). Chapter 6 Share Certificates and Register of Shareholders Article 32. The share certificates of the Company shall be in registered form. The share certificates of the Company shall, in addition to the matters required by the Company Law and the Special Regulations, also contain other matters required to be stated therein by the stock exchange(s) on which the Company's shares are listed. Article 33. Share certificates of the Company shall be signed by the Chairman of the Company's Board of Directors. Where the stock exchange(s) on which the Company's shares are listed require other senior officer(s) of the Company to sign on the share certificates, the share certificates shall also be signed by such senior officer(s). The share certificates shall take effect after being sealed with the seal of the Company. The share certificates shall only be sealed with the Company's seal under the authorization of the Board of Directors. The signatures of the Chairman of the Board of Directors or other senior officer(s) may be printed in mechanical form. Article 34. The Company shall keep a register of shareholders which shall contain the following particulars: (1) the name (title), the address (residence), the occupation or nature of each shareholder; 17 (2) the class and quantity of shares held by each shareholder; (3) the amount paid up or agreed to be paid up for the shares held by each shareholder; (4) the share certificate number of the shares held by each shareholder; (5) the date on which each shareholder was entered in the register as a shareholder of the Company; (6) the date on which each shareholder ceases to be a shareholder. Unless there is evidence to the contrary, the register of shareholders shall be sufficient evidence of the shareholders' shareholdings in the Company. Article 35. The Company may, in accordance with mutual understanding and agreements made between the securities regulatory authority under the State Council and overseas securities regulatory authorities, maintain the register of shareholders of Overseas-Listed Foreign-Invested Shares overseas and appoint overseas agent(s) to manage such register of shareholders. The original register of shareholders for holders of H Shares shall be maintained in Hong Kong. A duplicate copy of the register of shareholders for the holders of Overseas-Listed Foreign-Invested Shares shall be maintained at the Company. The appointed overseas agent(s) shall ensure consistency between the original and the duplicate copy of the register of shareholders at all times. If there is any inconsistency between the original and the duplicate copy of the register of shareholders for the holders of Overseas-Listed Foreign-Invested Shares, the original register of shareholders shall prevail. Article 36. The Company shall have a complete register of shareholders, which shall include the following parts: (1) the register of shareholders which is maintained at the Company's residence (other than those share registers which are described in sub-paragraphs (2) and (3) of this Article); (2) the register of shareholders in respect of the holders of Overseas-Listed Foreign-Invested Shares of the Company which is maintained at the overseas stock exchange(s) on which the shares are listed; and 18 (3) the registers of shareholders which are maintained in such other places as the Board of Directors may consider necessary for the purpose of listing the Company's shares. Article 37. Different parts of the register of shareholders shall not overlap. No transfer of any shares registered in any part of the register shall, during the continuance of that registration, be registered in any other part of the register. Amendment or rectification of the register of shareholders shall be made in accordance with the laws of the place where the register of shareholders is maintained. Article 38. All Overseas-Listed Foreign-Invested Shares shall be transferred by a written instrument in a usual or common form or any other form that the Board of Directors may approve. The instrument of transfer of any share may be executed by hand without seal. Where the shareholder is a clearing house or a nominee of the clearing house recognized by the Hong Kong Law (the "Recognized Clearing House"), the share transfer instrument may be executed in mechanically-printed form. All Overseas-Listed Foreign-Invested Shares listed in Hong Kong which have been fully paid up, may be freely transferred in accordance with the Company's Articles of Association; provided, however, unless such transfer complies with the following requirements, the Board of Directors may refuse to recognize any instrument of transfer and will not need to provide any reason therefore: (1) a fee of HK$2.50 per instrument of transfer, or such higher amount as the Board of the Directors may from time to time require but not exceeding the amount permitted from time to time by the Listing Rules of Stock Exchange, shall have been paid up to the Company for registration for the instrument of transfer and other documents relating to or which will affect the right of ownership of the shares; (2) the instrument of transfer shall only relate to Overseas-Listed Foreign-Invested Shares listed in Hong Kong; (3) the stamp duty which is chargeable on the instrument of transfer shall have been paid; (4) the relevant share certificate(s) and any other certificates that the Board of Directors may require to evidence that the transferor has the right to transfer the shares shall have been provided; (5) if it is intended that the shares be transferred to joint owners, the maximum number of joint owners shall not be more than four (4); 19 (6) the Company shall not have any lien over the relevant shares. If the Company refuses to register any transfer of shares, the Company shall within two (2) months of the formal application for the transfer, provide the transferor and the transferee with a notice of refusal to register such transfer. The directors, supervisors, general manager, deputy general managers and other senior officers of the Company shall report the number of shares which they hold in the Company, and may not transfer such shares during their term of office. Article 39. No change may be made in the register of shareholders within thirty (30) days prior to the date of a shareholders' general meeting, or within five (5) days prior to the record date for the Company's distribution of dividends. Article 40. When the Company needs to determine the rights attached to the shares of the Company for the purposes of convening a shareholders' meeting, dividend distribution, liquidation, or for any other purpose, the Board of Directors shall decide on a date for the determination of rights attached to the shares of the Company. The shareholders of the Company shall be such persons who appear in the register of shareholders at the close of such date. Article 41. Any person aggrieved or claiming to be entitled to have his name (title) to be entered in or removed from the register of shareholders may apply to a court of competent jurisdiction for rectification of the register. Article 42. Any person who is a registered shareholder or claims to be entitled to have his name (title) to be entered in the register of the shareholders in respect of shares of the Company may, if his share certificate (the "original share certificate") relating to the shares is lost, apply to the Company for a replacement share certificate in respect of such shares (the "Relevant Shares"). An application by a holder of Domestic-Invested Shares, who has lost his share certificate, for a replacement share certificate shall be dealt with in accordance with Article 150 of the Company Law. An application by a holder of Oversea-Listed Foreign-Invested Shares, who has lost his share certificate, for a replacement share certificate may be dealt with in accordance with the law of the place where the original register of shareholders of holders of Oversea-Listed Foreign-Invested Shares is maintained, the rules of the stock exchange or other relevant regulations. 20 The issue of a replacement share certificate to a holder of H Shares, who has lost his share certificate, shall comply with the following requirements: (1) The applicant shall submit an application to the Company in a prescribed form accompanied by a notarial certificate or a statutory declaration stating the ground upon which the application is made and the circumstances and evidence of the loss, and declaring that no other person is entitled to have his name entered in the register of shareholders in respect of the Relevant Shares. (2) The Company must not have received any declaration made by any person other than the applicant declaring that his name shall be entered into the register of shareholders in respect of such shares before it may issue a replacement share certificate to the applicant. (3) The Company shall, if it intends to issue a replacement share certificate, publish a notice of its intention to do so at least once every thirty (30) days within a period of ninety (90) days in such newspaper as prescribed by the Board of Directors. (4) The Company shall, prior to publication of its intention to issue a replacement share certificate, deliver to the stock exchange on which its shares are listed, a copy of the notice to be published, and may publish the notice upon receipt of confirmation from such stock exchange that the notice has been exhibited in the premises of the stock exchange. Such notice shall be exhibited in the premises of the stock exchange for a period of ninety (90) days. In the case of an application which is made without the consent of the registered holder of the Relevant Shares, the Company shall deliver by mail to such registered shareholder a copy of the notice to be published. (5) If, by the expiration of the 90-day period referred to the paragraphs (3) and (4) of this Article, the Company has not received any challenge from any person in respect of the issuance of the replacement share certificate, it may issue a replacement share certificate to the applicant pursuant to his application. (6) Where the Company issues a replacement share certificate pursuant to this Article, it shall forthwith cancel the original share certificate and record the cancellation of the original share certificate and the issuance of a replacement share certificate in the register of shareholders accordingly. (7) All expenses relating to the cancellation of an original share certificate and the issuance of a replacement share certificate shall be borne by 21 the applicant, and the Company shall be entitled to refuse to take any action until reasonable security is provided by the applicant therefore. Article 43. Where the Company issues a replacement share certificate pursuant to the Company's Articles of Association, and a bona fide purchaser acquires or becomes the registered owner of such shares, his name (title) shall not be removed from the register of shareholders. Article 44. The Company shall not be liable for any damages sustained by any person by reason of the cancellation of the original share certificate or the issuance of the replacement share certificate unless the claimant can prove that the Company has acted in a deceitful manner. Chapter 7 Shareholders' Rights and Obligations Article 45. A shareholder of the Company is a person who lawfully holds shares in the Company and whose name (title) is entered in the register of shareholders. A shareholder shall enjoy rights and assume obligations according to the class and amount of shares held by him. Shareholders who hold shares of the same class shall enjoy the same rights and assume the same obligations. Article 46. The ordinary shareholders of the Company shall enjoy the following rights: (1) the right to receive dividends and other distributions in proportion to the number of shares held; (2) the right to attend or appoint a proxy to attend shareholders' general meetings and to vote thereat; (3) the right of supervisory management over the Company's business operations and the right to present proposals or to raise queries; (4) the right to transfer shares in accordance with law, administrative regulation, and provisions of the Company's Articles of Association; (5) the right to obtain relevant information in accordance with provisions of the Company's Articles of Association, including: 22 (I) the right to obtain a copy of the Company's Articles of Association, subject to payment of costs; (II) the right to inspect and copy, subject to payment of a reasonable fee: (i) all parts of the register of shareholders; (ii) personal particulars of directors, supervisors, general manager, deputy general manager and other senior officers of the Company, including: a. present and former name and alias; b. principal address (place of residence) c. nationality d. primary and all other part-tine occupations and duties; e. identification documents and numbers thereof; f. financial situation; (iii) report on the state of the Company's share capital; (iv) reports showing the aggregate par value, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of the last accounting year and the aggregate amount paid by the Company for this purpose; (v) minutes of shareholders' general meetings; (6) in the event of the termination or liquidation of the Company, the right to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; (7) other rights conferred by law, administrative regulation and the Company's Articles of Association. Article 47. The ordinary shareholders of the Company shall assume the following obligations: (1) to comply with the Company's Articles of Association; 23 (2) to pay subscription amounts according to the number of shares subscribed and the method of subscription; (3) other obligations imposed by law, administrative regulation and the Company's Articles of Association. Shareholders are not liable to make any further contribution to the share capital other than according to the terms that were agreed by the subscriber of the relevant shares at the time of subscription. Article 48. In addition to the obligations imposed by law and administrative regulation or the listing rules of the stock exchange on which the Company's shares are listed, a controlling shareholder (as defined in the following article) shall not exercise his voting rights in respect of the following matters in a manner prejudicial to the interests of all or part of the shareholders of the Company: (1) to relieve a director or supervisor of his duty to act honestly in the best interests of the Company; (2) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the Company's assets by any method, including (without limitation) opportunities which are beneficial to the Company; (3) to approve the expropriation by a director or supervisor (for his own benefit or for the benefit of another person) of the individual rights of other shareholders, including (without limitation) the rights to distributions and voting rights (save pursuant to a restructuring which has been submitted for approval by the shareholders in a general meeting in accordance with the Company's Articles of Association). Article 49. For the purpose of the foregoing Article, a "controlling shareholder" means a person who satisfies any one of the following conditions: (1) a person who, acting alone or in concert with others, has the power to elect more than half of the Board of Directors; (2) a person who, acting alone or in concert with others, has the power to control the exercise of 30% or more of the voting rights in the Company; (3) a person who, acting alone or in concert with others, holds 30% or more of the issued and outstanding shares of the Company; 24 (4) a person who, acting alone or in concert with others, has de facto control of the Company in any other way. Chapter 8 Shareholders' General Meetings Article 50. The shareholders' general meeting is the organ of authority of the Company, and shall exercise its functions and powers in accordance with law. Article 51. The shareholders' general meeting shall have the following functions and powers: (1) to decide on the Company's operational policies and investment plans; (2) to elect and replace directors and to decide on the matters relating to the remuneration of the directors; (3) to elect and replace supervisors who represent the shareholders and to decide on the matters relating the remuneration of the supervisors; (4) to examine and approve the Board of Directors' reports; (5) to examine and approve the Supervisory Board's reports; (6) to examine and approve the Company's proposed annual preliminary and financial budgets; (7) to examine and approve the Company's profit distribution plans and loss recovery plans; (8) to decide on the increase or reduction of the Company's registered capital; (9) to decide on matters such as merger, split, and liquidation of the Company; (10) to decide on the issuance of debentures by the Company; (11) to decide on the appointment, dismissal and non-reappointment of the accountants of the Company; (12) to amend the Company's Articles of Association; (13) to consider motions raised by shareholders who represent 5% or more of the voting shares of the Company; 25 (14) to decide on matters which, according to law, administrative regulation or the Company's Articles of Association, need to be approved by shareholders in general meetings; (15) matters which shareholders in a general meeting may authorize the Board of Directors to carry out on its behalf or which they may sub delegate to the Board of Directors. Article 52. The Company shall not, without the prior approval of shareholders in a general meeting, enter into any contract with any person (other than the directors, supervisors, general manager, deputy general manager, or other senior officers) pursuant to which such person shall be responsible for the management and administration of the whole or any substantial part of the Company's business. Article 53. Shareholders' general meetings shall be divided into annual meetings and special general meetings. Shareholders' general meetings shall be convened by the Board of Directors. Annual general meetings shall be held once every year and within six (6) months from the end of the preceding fiscal year. The Board of Directors shall convene a special general meeting within two (2) months of the occurrence of any one of the following events: (1) where the number of the directors is less than the number stipulated in the Company Law or two-thirds of the number specified by the Company's Articles of Association; (2) where the unrecovered losses of the Company amount to one-third of the total amount of its share capital; (3) where shareholder(s) holding 10% or more of the Company's issued and outstanding voting shares request(s) in writing for the convening of a special general meeting; (4) wherever the Board of Directors deems necessary or the Supervisory Board so requests. Article 54. When the Company convenes a shareholders' general meeting, written notice of the meeting shall be given not less than forty-five (45) days before the date of the meeting to notify all of the shareholders whose names appear in the share register of the matter to be considered and date and place of the meeting. A shareholder who intends to attend the meeting shall deliver to the Company his written reply 26 concerning his attendance at such meeting not less than twenty (20) days before the date of the meeting. Article 55. When the Company convenes the shareholders' annual general meeting, shareholders holding 5% or more of the total voting shares of the Company shall have the right to propose new motions in writing, and the Company shall place such motions on the agenda for such annual meeting if they are matters falling within the functions and powers of shareholders in general meetings. Article 56. The Company shall, based on the written replies which it receives from shareholders at least twenty (20) days before the date of the shareholders' general meeting, calculate the number of voting shares represented by the shareholders who intend to attend the meeting. If the number of voting shares represented by the shareholders who intend to attend the meeting amounts to more than one-half of the Company's total voting shares, the Company may hold the meeting; if not, the Company shall, within five (5) days, notify the shareholders by way of public announcement of the matters to be considered, and the date and place of the meeting, The Company may then hold the meeting after publication of such announcement. A shareholders' special meeting shall not decide on the matters not stated in the notice for the meeting. Article 57. A notice of a meeting of the shareholders of the Company must satisfy the following requirements: (1) be in writing; (2) specify the place, date and time of the meeting; (3) state the matters to be discussed at the meeting; (4) provide such information and explanations as are necessary for shareholders to make an informed decision on the proposals submitted. Without limiting the generality of the foregoing, when a proposal is made to amalgamate the Company with another, to repurchase the shares of the Company, to reorganize its share capital or to restructure the Company in any other way, the terms of the proposed transaction must be provided in detail together with the copies of the proposed agreement, if any, and the cause and effect of such proposal must be properly explained; 27 (5) contain disclosure of the nature and extent, if any, of the material interests of any director, supervisor, general manager, deputy general manager, or other senior officer in the proposed transaction and the effect which the proposed transaction will have on them in their capacity as shareholders in so far as it is different from the effect on the interests of shareholders of the same class; (6) contain the full text of any special resolution to be proposed at the meeting; (7) contain a conspicuous statement that a shareholder entitled to attend and vote at such meeting is entitled to appoint one (1) or more proxies to attend and vote at such meeting on his behalf, and that a proxy need not to be a shareholder; (8) specify the time and place for lodging proxy forms for the relevant meeting. Article 58. Notice of shareholders' general meetings shall be served on each shareholder (whether or not such shareholder is entitled to vote at the meeting), by personal delivery or prepaid mail to the address of the shareholder as shown in the register of shareholders. For the holders of Domestic-Invested Shares, notice of the meeting may also be issued by way of public announcement. The public announcement referred to in the preceding paragraph shall be published in one (1) or more national newspapers designated by the securities authority of the State Council within the interval of forty-five (45) days to fifty (50) days before the date of the meeting; after the publication of such announcement, the holders of Domestic-Invested Shares shall be deemed to have received the notice of the relevant shareholders' general meeting. Such public announcement shall be published in Chinese and English in accordance with Article 182. Article 59. The accidental omission to give notice of a meeting, or the failure to receive the notice of a meeting by any person entitled to receive such notice, shall not invalidate the meeting or the resolutions adopted thereat. Article 60. Any shareholder who is entitled to attend and vote at a general meeting of the Company shall be entitled to appoint one (1) or more persons (whether such person is a shareholder or not) as his proxy to attend and vote on his behalf, and a proxy so appointed shall be entitled to exercise the following rights pursuant to the authorizations from that shareholder: 28 (1) the shareholder's right to speak at the meeting; (2) the right to demand or join in demand for a poll; (3) the right to vote by hand or on a poll, but a proxy of a shareholder who has appointed more than one (1) proxy may only vote on a poll. Article 61. If shareholder shall appoint his proxy in writing, such instrument appointing the proxy shall be signed by the appointing shareholder or a person who is authorised in writing, or if the appointing shareholder is a legal entity, either affixed with legal person seal or signed by a director, an executive officer or a duly authorized person. The instrument appointing a proxy shall state the number of shares represented by the proxy and, if more than one (1) proxy has been appointed, the number of shares represented by each proxy. Article 62. The instrument appointing a voting proxy and, if such instrument is signed by a person under a power of attorney or other authority on behalf of the appointor, a certified copy of that power of attorney or other authority shall be deposited at the residence of the Company or at such other place as is specified for that purpose in the notice convening the meeting, not less than twenty-four (24) hours before the time for holding the meeting at which the proxy propose to vote or the time appointed for the passing of the resolution. Such instrument shall indicate the date of authorization. If the appointor is a legal person, its legal representative or such person as is authorized by resolution of its Board of Directors or other governing body may attend meetings of the shareholders of the Company as a representative of the appointor. If a shareholder is a recognized clearing house (or its nominee), it may, as it sees fit, appoint one (1) or more persons as its proxies to attend and vote at any shareholders' general meeting or class meeting. However, if more than one (1) person is appointed, the instrument of proxy shall specify the number and class of the shares relating to each such proxy. Such proxy may exercise the rights of such shareholder (or its nominee) on its behalf in the same manner as the individual shareholder of the Company. Article 63. Any form issued to a shareholder by the Board of Directors for use by such shareholder for the appointment of a proxy to attend and vote at the meetings of the Company shall be such as to enable the shareholder to freely instruct the proxy to vote for or against the motions, such instructions being given in respect of each individual matter to be voted at the meeting. Such a form shall contain a statement that in the 29 absence of specific instructions from the shareholder, the proxy may vote at his discretion. The Company has the right to request a proxy who attends a shareholders' general meeting to provide evidence of his or its identity. If a shareholder who is a legal person appoints its legal representative to attend a meeting on its behalf, the Company has the right to request such legal representative to produce evidence of his identity (excluding Recognized Clearing House) and a certified copy of the resolution of such shareholder's Board of Directors in respect of the appointment of the proxy or the power of attorney executed by such other organization which has the capacity to appoint the proxy. Article 64. A vote given in accordance with the terms of a proxy shall be valid, notwithstanding the death or loss of capacity of the appointor or revocation of the proxy or the authority under which the proxy was executed, or the transfer of the shares in respect of which the proxy is given, provided that the Company did not receive any written notice in respect of any such matters prior to the commencement of the relevant meeting. Article 65. Resolutions of shareholders' general meeting shall be divided into ordinary resolutions and special resolutions. A special resolution must be passed by votes representing more than one-half of the voting rights represented by the shareholders (including proxies) present at the meeting. An ordinary resolution must be passed by votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting. Article 66. A shareholder (including a proxy), when voting at a shareholders' general meeting, may exercise such voting rights as are attached to the number of voting shares which he represents. Each share shall have one (1) vote. Article 67. At any shareholders' general meeting, a resolution shall be decided on a show of hands unless a poll is demanded: (1) by the chairman of the meeting; 30 (2) by at least two (2) shareholders present in person or by proxy entitled to vote thereat; (3) by one (1) or more shareholders present in person or by proxy representing 10% or more of all shares carrying the right to vote at the meeting, before or after a vote is carried out by a show of hands. Unless a poll is demanded, a declaration by the chairman that a resolution has been passed on a show of hands and the recording of such in the minutes of meeting shall be conclusive evidence of the fact that such resolution has been passed. There is no need to provide evidence of the number or proportion of votes in favor of or against such resolution. The demand for a poll may be withdrawn by the person who demanded the same. Article 68. A poll demanded on the election of the chairman of the meeting, or on a question of the adjournment of the meeting, shall be taken forthwith. A poll demanded on any other question shall be taken as the chairman of the meeting directs, and any business other than that upon which a poll has been demanded may be proceeded with pending the taking of the poll. The result of the poll shall be deemed to be a resolution of the meeting at which the poll was demanded. Article 69. On a poll taken at a meeting, a shareholder (including a proxy) entitled to two (2) or more votes is not required to cast all his votes in the same way. Article 70. In the case of an equality of votes, whether on a show of hands or on a poll, the chairmen of the meeting shall have a casting vote. Article 71. The following matters shall be resolved by an ordinary resolution at a shareholders' general meeting: (1) work reports of the Board of Directors and the Supervisory Board; (2) profit distribution plans and loss recovery plans formulated by the Board of Directors; (3) removal of members of the Board of Directors and members of the Supervisory Board, their remuneration and manner of payment; 31 (4) preliminary and final annual budgets, balance sheets, profit accounts, and other financial statements of the Company; (5) matters other than those which are required by law, administrative regulation or the Company's Articles of Association to be adopted by special resolution. Article 72. The following matters shall be resolved by a special resolution at a shareholders' general meeting: (1) the increase or reduction in share capital and the issue of shares of any class, warrants and other similar securities; (2) the issue of debentures of the Company; (3) the division, merger, dissolution and liquidation of the Company; (4) the amendment of the Company's Articles of Association; (5) any other matter considered by the shareholders at general meetings, and resolved by way of an ordinary resolution, to be of a nature which may have a material impact on the Company and shall be adopted by a special resolution. Article 73. Shareholders who request the convening of an special general meeting or a class meeting shall comply with the following procedures: (1) Two (2) or more shareholders holding in aggregate 10% or more of the shares carrying the right to vote at the meeting sought to be held shall sign one (1) or more counterpart requisitions stating the object of the meeting and requiring the Board of Directors to convene a shareholders' extraordinary general meeting or a class meeting thereof. The Board of Directors shall proceed as soon as possible to convene the special meeting of shareholders or a class meeting thereof after receipt of such requisitions. The number of shareholders referred to above shall be calculated as of the date of the requisitions. (2) If the Board of Directors fails to issue a notice of such a meeting within thirty (30) days from the date of the receipt of the requisitions, the requisitionists may themselves convene such a meeting in a manner as similar as possible to the manner in which shareholders' meetings are convened by the Board of Directors within four (4) months from the date of the receipt of the requisitions by the Board of Directors. 32 The requisitionists shall be compensated by the Company for any reasonable expenses incurred by the requisitionists by reason of failure by the Board of Directors to duly convene a meeting, and any sum so compensated shall be set-off against sums owed by the Company to the defaulting directors. Article 74. The Chairman of the Board of Directors shall convene and chair each shareholders' general meeting. If the Chairman is unable to attend the meeting for any reason, the vice-chairman of the Board of Directors shall convene and chair the meeting. If both the Chairman and the vice-chairman of the Board of Directors are unable to attend the meeting, the Board of Directors may designate a director to convene and chair the meeting. If no chairman of the meeting is so designated, the attending shareholders shall elect one (1) to act as the chairman of the meeting. If for any reason, the shareholders shall fail to elect a chairman, then the shareholder (including a proxy) holding the largest number of the shares carrying the voting right thereat shall be the chairman of the meeting. Article 75. The chairman of the meeting shall be responsible for determining whether a resolution has been passed. The decision shall be final and conclusive and shall be announced at the meeting and recorded in the minute books. Article 76. If the chairman of the meeting has any doubt as to the result of a resolution which has been presented for at a shareholders' meeting, he may have the votes counted. If the chairman of the meeting has not counted the votes, any shareholder who is present in person or by proxy and who objects to the result announced by the chairman of the meeting may, immediately after the declaration of the result, demand that the votes be counted and the chairman of the meeting shall have the votes counted immediately. Article 77. If votes are counted at a shareholder's general meeting, the result of the count shall be recorded in the minute books. Article 78. Minutes shall be kept in respect of all resolutions passed at a shareholder's general meeting by the secretary of the meeting and signed by directors present at the meeting. The minutes, shareholders' attendance lists and proxy forms shall be kept at the Company's place of residence. 33 Article 79. Copies of the minutes of proceedings of any shareholders' meeting shall, during business hours of the Company, be open for inspection by any shareholder without charge. If a shareholder requests a copy of such minutes from the Company, the Company shall send a copy of such minutes to him within seven (7) days after receipt of reasonable fees therefor. Chapter 9 Special Procedures for Voting by A Class of Shareholders Article 80. Those shareholders who hold different classes of shares are class shareholders. Class shareholders shall enjoy rights and assume obligations in accordance with law, administrative regulation and the Company's Articles of Association. Article 81. Rights conferred on any class of shareholders ("class rights") may not be varied or abrogated save with the approval of a special resolution of shareholders in a general meeting, and by holders of shares of that class at a separate meeting conducted in accordance with Articles 83 to 87. Article 82. The following circumstances shall be deemed to be variation or abrogation of the rights attaching to a particular class of shares: (1) to increase or decrease the number of shares of that class, or to increase or decrease the number of shares of a class having voting or equity rights or privileges equal or superior to those of shares of that class; (2) to exchange all or part of the shares of that class for shares of another class or to exchange or to create a right to exchange all or part of the shares of another class for shares of that class; (3) to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of that class; (4) to reduce or remove preferential rights attached to shares of that class to receive dividends or to the distribution of assets in the event that the Company is liquidated; (5) to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of that class; 34 (6) to remove or reduce rights to receive payment payable by the Company in particular currencies attached to shares of that class; (7) to create a new class of shares having voting or equity rights or privileges equal or superior to those of the shares of that class; (8) to restrict the transfer or ownership of shares of that class or to increase the types of restrictions attaching thereto; (9) to allot and issue rights to subscribe for, or to convert the existing shares into, shares in the Company of that class or another class; (10) to increase the rights or privileges of shares of another class; (11) to restructure the Company in such a way so as to result in the disproportionate distribution of obligations between the various classes of shareholders; (12) to vary or abrogate the provisions of this Chapter. Article 83. Shareholders of the affected class, whether or not otherwise having the right to vote at shareholders' general meetings, shall have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 82, but interested shareholder(s) shall not be entitled to vote at such class meetings. "(An) interested shareholder(s)", as such term is used in the preceding paragraph, means: (1) in the case of a repurchase of shares by way of a general offer to all shareholders of the Company or by way of public dealing on a stock exchange pursuant to Article 25, a "controlling shareholder" within the meaning of Article 49; (2) in the case of a repurchase of shares by an off-market agreement pursuant to Article 25, a holder of the shares to which the proposed agreement relates; (3) in the case of a restructuring of the Company, a shareholder who assumes a relatively lower proportion of obligation than the obligations imposed on shareholders of that class under the proposed restructuring or who has an interest in the proposed restructuring different from the general interests of the shareholders of that class. 35 Article 84. Resolutions of a class of shareholders shall be passed by affirmative votes representing more than two-thirds of the voting rights of shareholders of that class presented at the relevant meeting who, according to Article 83, are entitled to vote thereat. Article 85. Written notice of a class meeting shall be given to all shareholders who are registered as holders of that class in the register of shareholders forty-five (45) days before the date of the class meeting. Such notice shall give such shareholders notice of the matters to be considered at such meeting and the date and place of the class meeting. A shareholder who intends to attend the class meeting shall deliver his written reply in respect thereof to the Company twenty (20) days before the date of the class meeting. If the shareholders who intend to attend such class meeting represent more than half of the total number of shares of that class which have the right to vote at such meeting, the Company may hold the class meeting; otherwise, the Company shall within five (5) days give the shareholders further notice of the matters to be considered and the date and place of the class meeting by way of public announcement. The Company may then hold the class meeting after such public announcement has been made. Article 86. Notice of class meetings need only be served on shareholders entitled to vote thereat. Class meetings shall be conducted in a manner which is as similar as possible to that of shareholders' general meetings. The provisions of the Company's Articles of Association relating to the manner for the conduct of shareholders' general meetings are also applicable to class meetings. Article 87. Apart from the holders of other classes of shares, the holders of the Domestic-Invested Shares and holders of Overseas-Listed Foreign-Invested Shares shall be deemed to be holders of different classes of shares. The special procedures for approval by a class of shareholders shall not apply in the following circumstances: (1) where the Company issues, upon the approval by special resolution of its shareholders in a general meeting, either separately or concurrently once every twelve (12) months, not more than 20% of each of its 36 existing issued Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares; or (2) where the Company's plan to issue Domestic-Invested Shares and Overseas-Listed Foreign-Invested Shares at the time of its establishment is carried out within fifteen (15) months from the date of approval of the securities authority of the State Council. Chapter 10 Board of Directors Article 88. The Company shall have a Board of Directors. The Board of Directors shall consist of five (5) to thirteen (13) directors. The Board of Directors shall have one (1) Chairman and one (1) Vice-chairman. Of the five (5) to thirteen (13) directors, there shall be at least two (2) directors being external directors (directors do not hold any position in the Company, the same below) and two (2) directors being independent (non-executive) directors. Article 89. Directors shall be elected at the shareholders' general meeting each for a term of three (3) years. At the expiry of a director's term, the term is renewable upon re-election. A written notice of the intention to propose a person for election as a director and a notice in writing by that person indicating his acceptance of such election shall be given to the Company not less than seven (7) days before the date of such shareholders' general meeting. The Chairman and the Vice-chairman shall be elected and may be removed by more than one-half of all of the members of the Board of Directors. The term of office of each of the Chairman and the Vice-chairman is three (3) years, which term is renewable upon re-election. Subject to compliance with all relevant laws and administrative regulations, the shareholders' general meeting may by ordinary resolution remove any director before the expiration of his term of office (however, the director's right to claim for damages which arises from his removal shall not be affected thereby). The directors shall not be required to hold shares of the Company. Article 90. The Board of Directors is accountable to the shareholders in general meeting and exercises the following functions and powers: 37 (1) to be responsible for the convening of the shareholders' general meeting and to report on its work to the shareholders in general meetings; (2) to implement the resolutions passed by the shareholders in general meetings; (3) to determine the Company's business plans and investment proposals; (4) to formulate the Company's preliminary and final annual financial budgets; (5) to formulate the Company's profit distribution proposal and loss recovery proposal; (6) to formulate proposals for the increase or reduction of the Company's registered capital and for the issuance of the Company's debentures; (7) to draw up plans for the merger, division or dissolution of the Company; (8) to decide on the Company's internal management structure; (9) to appoint or remove the Company's general manager and to appoint or remove the deputy general manager(s) and other senior officers (the secretary of the Board of Directors excluded) and, based on the recommendations of the general manager, to decide on their remuneration; (10) to formulate the Company's basic management system; (11) to formulate proposals for any amendment of the Company's Articles of Associations; (12) to exercise any other powers conferred by the shareholders in general meetings. Other than the Board of Directors' resolutions in respect of the matters specified in sub-paragraphs (6), (7) and (11) of this Article which shall be passed by the affirmative vote of more than two-thirds of all directors, the Board of Directors' resolutions in respect of all other matters may be passed by the affirmative vote of a simple majority of the directors. Article 91. The Board of Directors shall not, without the prior approval of shareholders in a general meeting, dispose or agree to dispose of any fixed assets of the Company where the aggregate of the amount or value of the consideration for the proposed 38 disposition, and the amount or value of the consideration for any such disposition of any fixed assets of the Company that has been completed in the period of four (4) months immediately preceding the proposed disposition, exceeds 33% of the value of the Company's fixed assets as shown in the latest balance sheet which was approved at a shareholders' general meeting. For the purposes of this Article, "disposition" includes an act involving the transfer of an interest in assets but does not include the usage of fixed assets for the provision of security. The validity of a disposition by the Company shall not be affected by any breach of the first paragraph of this Article. Article 92. The Chairman of the Board of Directors shall exercise the following powers: (1) to preside over shareholders' general meetings and to convene and preside over meetings of the Board of Directors; (2) to check on the implementation of resolutions passed by the Board of Directors at directors' meetings; (3) to sign the securities certificates issued by the Company; (4) to exercise other powers conferred by the Board of Directors. When the Chairman is unable to exercise his powers, such powers shall be exercised by the Vice-chairman who has been designated by the Chairman to exercise such powers on his behalf. Article 93. Meetings of the Board of Directors shall be held at least twice each year, and shall be convened by the Chairman of the Board of Directors. All of the directors shall be notified of the meeting at least ten (10) days beforehand. Where there is an urgent matter, a special meeting of the Board of Directors may be held if it is so requested by more than one-third of the directors, the Chairman of the Board of Directors or the Company's general manager. Article 94. Notice of meetings and special meetings of the Board of Directors shall be delivered in person, by facsimile, by express delivery service or by registered mail. Such notice shall be delivered at least ten (10) days before the meeting. Notice of interim meetings of the Board of Directors may be delivered less than ten (10) days before the meeting. 39 Article 95. Notice of a meeting shall be deemed to have been given to any director who attends the meeting without objecting to, before or at its commencement, any lack of notice. Article 96. Any regular or special meeting of the Board of Directors may be held by way of telephone conference or similar communication equipment so long as all directors participating in the meeting can clearly hear and communicate with each other. All such directors shall be deemed to be present in person at the meeting. Article 97. Meetings of the Board of Directors shall be held only if more than half of the directors (including any alternative director appointed pursuant to Article 98 of the Company's Articles of Association) are present. Each director shall have one (1) vote. Unless otherwise provided for in the Company's Articles of Association, a resolution of the Board of Directors must be passed by the majority of the directors of the Company. No board's resolution concerning any connected party transaction will become effective without the signatures of the independent (non-executive) directors. Where there is an equality of votes cast both for and against a resolution, the Chairman of the Board of Directors shall have a casting vote. If a director is interested in a matter to be discussed at a Board of Directors' meeting, such director shall excuse himself from such meeting, and shall not have any voting rights in respect thereof and shall not be counted as part of the quorum of such Board of Directors' meeting. Article 98. Directors shall attend the meetings of the Board of Directors in person. Where a director is unable to attend a meeting for any reason, he may appoint another director by a written power of attorney to attend the meeting on his behalf. The power of attorney shall set out the scope of the authorization. A director appointed as a representative of another director to attend the meeting shall exercise the rights of a director within the scope of authority conferred by the appointing director. Where a director is unable to attend a meeting of the Board of Directors, and has not appointed a representative to attend the meeting on his behalf, he shall be deemed to have waived his right to vote at the meeting. 40 Article 99. In respect of any matter to be determined by the Board of Directors at a special meeting of the Board of Directors, where the Board of Directors has already sent out in writing the draft resolution to be decided at such meeting and the number of directors who have signed to approve such proposals satisfies the requirements set out in Article 97, a valid resolution shall be deemed to be passed, and no Board of Directors' meeting is required to be held. Article 100. The Board of Directors shall keep minutes of resolutions passed at meetings of the Board of Directors. The minutes shall be signed by both the directors present at the meeting and the person who recorded the minutes. The directors shall be liable for the resolutions of the Board of Directors. If a resolution of the Board of Directors violates the law, administrative regulation or the Company's Articles of Association, and the Company suffers serious losses as a result thereof, the directors who participated in the passing of such resolution shall compensate the Company therefor. However, if it can be proven that a director expressly objected to the resolution when the resolution was voted on, and that such objection was recorded in the minutes of the meeting, such director shall be released from such liability. Chapter 11 Secretary of the Board of Directors Article 101. The Company shall have one (1) secretary of the Board of Directors. The secretary shall be a senior officer of the Company. Article 102. The secretary of the Company's Board of Directors shall be a natural person who has the requisite professional knowledge and experience, and shall be appointed by the Board of Directors. His primary responsibilities are to ensure that: (1) the Company has complete organizational documents and records; (2) the Company prepares and delivers, in accordance with law, the reports and documents required by competent authorities entitled thereto; (3) the Company's registers of shareholders are properly maintained, and that persons entitled to receive the Company's records and documents are furnished therewith without delay. 41 Article 103. A director or other senior officer of the Company may also act as the secretary of the Board of Directors. An accountant of the accounting firm retained by the Company shall not act as the secretary of the Board of Directors. Where the office of secretary is held concurrently by a director, and an act is required to be conducted by a director and a secretary separately, the person who holds the offices of director and secretary may not perform such act in a dual capacity. Chapter 12 Committees under the Board of the Directors Article 104. The Company's board of the directors shall have four (4) standing committees, namely, the Audit Committee, the Risk Control Committee, the Management Training and Compensation Committee and the Strategy Committee. Article 105. The Audit Committee shall be composed of three (3) to five (5) directors, the Risk Control Committee three (3) to seven (7) directors, the Management Training and Compensation Committee three (3) to seven (7) directors, and the Strategy Committee three (3) to seven (7) directors. Chapter 13 General Manager Article 106. The Company shall have one (1) general manager, five (5) deputy general managers, and one (1) chief actuary. The general manager shall be nominated by the Chairman of the Board of Directors, and shall be appointed or dismissed by the Board of Directors. Deputy general managers and other senior officers shall be nominated by the general manager, and shall be appointed or dismissed by the board of the directors. A member of the Board of Directors may act concurrently as the general manager, deputy general managers or other senior officers. Article 107. The general manager shall be accountable to the Board of Directors and shall exercise the following functions and powers: (1) to be in charge of the Company's production, operation and management, and to organize the implementation of the resolutions of the Board of Directors; (2) to organize the implementation of the Company's annual business plan and investment proposals; 42 (3) to draft plans for the establishment of the Company's internal management structure; (4) to draft the Company's basic management system; (5) to formulate basic rules and regulations for the Company; (6) to propose the appointment or dismissal by the Board of Directors of the Company's deputy general manager(s), and other senior officers (except the secretary of the Board of Directors); (7) to appoint or dismiss management personnel other than those required to be appointed or dismissed by the Board of Directors; (8) other powers conferred by the Company's Articles of Association or the Board of Directors. Article 108. The general manager shall attend meetings of the Board of Directors. A general manager who is not a director shall not have any voting rights at board meetings. Article 109. The general manager and deputy general managers and chief financial officer, in performing their functions and powers, shall act honestly and diligently and in accordance with law, administrative regulation and the Company's Articles of Association. Chapter 14 Supervisory Board Article 110. The Company shall have a Supervisory Board. Article 111. The Supervisory Board shall be composed of three (3) to seven (7) supervisors. One of the members of the Supervisory Board shall act as the chairman. Each supervisor shall serve for a term of three (3) years, which term is renewable upon re-election and re-appointment. The election or removal of the chairman of the Supervisory Board shall be determined by two-thirds or more of the members of the Supervisory Board. The chairman shall serve for a term of three (3) years, which term is renewable upon re-election and re-appointment. 43 Article 112. The Supervisory Board shall be comprised of at least two (2) supervisors representing the shareholders, who shall be elected or removed by the shareholders in general meetings, and at least one (1) supervisors representing the employees of the Company, who shall be elected or removed through democratic procedure thereby. Article 113. The directors, general manager, deputy general managers and chief financial officer of the Company shall not act concurrently as supervisors. Article 114. Meetings of the Supervisory Board shall be held at least once every year, and shall be convened by the chairman of the Supervisory Board. Article 115. The Supervisory Board shall be accountable to the shareholders in a general meeting, and shall exercise the following functions and powers in accordance with law: (1) to review the Company's financial position; (2) to supervise the directors, general manager, deputy general managers, and other senior officers to ensure that they do not act in contravention of any law, regulation or the Company's Articles of Association; (3) to demand any director, general manager, deputy general manager, or any other senior officer who acts in a manner which is harmful to the Company's interest to rectify such behavior; (4) to check the financial information, such as the financial report, business report and plans for distribution of profits to be submitted by the Board of Directors to the shareholders' general meetings, and to authorize in the Company's name, public certified accountants and licensed auditors to assist in the re-examination of such information, should any doubt arise in respect thereof; (5) to propose to convene a shareholders' special general meeting; (6) to represent the Company in negotiations with, or in bringing actions against, a director; (7) other functions and powers specified in the Company's Articles of association. 44 Supervisors shall attend meetings of the Board of Directors. Article 116. Meetings of the Supervisory Board shall be held only if three (3) or more supervisors are present. Resolutions of the Supervisory Board shall be passed by the affirmative vote of more than two-thirds of all of its members. Article 117. All reasonable fees incurred in the employment of professionals (such as lawyers, certified public accountants or practicing auditors) which are required by the Supervisory Board in the exercise of its functions and powers shall be borne by the Company. Article 118. A supervisor shall carry out his duties honestly and faithfully in accordance with law, administrative regulation and the Company's Articles of Association. Chapter 15 The Qualifications and Duties of the Directors, Supervisors, General Manager, Deputy General Managers and Other Senior Officers of the Company Article 119. A person may not serve as a director, supervisor, general manager, deputy general manager and any other senior officer of the Company if any of the following circumstances apply: (1) the person does not have or has limited capacity for civil conduct; (2) the person has been sentenced for corruption, bribery, infringement of property or misappropriation of property or other crimes which destroy the social economic order, where less than a term of five (5) years has lapsed since the sentence was served, or the person has been deprived of his political rights and not more than five (5) years have lapsed since the sentence was served; (3) the person is a former director, factory manager or manager of a company or enterprise which has been dissolved or put into liquidation as a result of mismanagement and was personally liable for the winding up of such company or enterprise, where less than three (3) years have elapsed since the date of completion of the insolvent liquidation of the Company or enterprise; 45 (4) the person is a former legal representative of a company or enterprise the business license of which was revoked due to violation of law and is personally liable therefor, where less than three (3) years have elapsed since the date of the revocation of the business license; (5) the person has a relatively large amount of debts which have become overdue; (6) the person is currently under investigation by judicial organs for violation of criminal law; (7) the person, according to laws and administrative regulations, cannot act as a leader of an enterprise; (8) the person is other than a natural person; (9) the person has been convicted by the competent authority for violation of relevant securities regulations and such conviction involves a finding that such person has acted fraudulently or dishonestly, where not more than five (5) years have lapsed form the date of such conviction. Article 120. The validity of an act carried out by a director, general manager, deputy general manager or other senior officer of the Company on its behalf, as against a bona fide third party, shall not be affected by any irregularity in his office, election or any defect in his qualification. Article 121. In addition to the obligations imposed by laws, administrative regulations or the listing rules of the stock exchange on which shares of the Company are listed, each of the Company's directors, supervisors, general manager, deputy general managers and other senior officers owes a duty to each shareholder, in the exercise of the functions and powers of the Company entrusted to him: (1) not to cause the Company to exceed the scope of business stipulated in its business license; (2) to act honestly and in the best interests of the Company; (3) not to expropriate the Company's property in any way, including (without limitation) usurpation of opportunities which benefit the Company; (4) Not to expropriate the individual rights of shareholders, including (without limitation) rights to distributions and voting rights, save and 46 except pursuant to a restructuring of the Company which has been submitted to the shareholders for approval in accordance with the Company's Articles of Association. Article 122. Each of the Company's directors, supervisors, general manager, deputy general managers and other senior officers owes a duty, in the exercise of his powers and in the discharge of his duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Article 123. Each of the Company's directors, supervisors, general manager, deputy general managers and other senior officers shall exercise his power or perform his duties in accordance with fiduciary principles; and shall not put himself in a position where his duty and his interest may conflict. These principles include (without limitation): (1) to act honestly in the best interest of the Company; (2) to act within the scope of its powers and not to exceed such powers; (3) to exercise his proportional decision power in person without being subject to the manipulations of other persons, and not to transfer such power to other persons unless permitted by law or administrative regulation or approved by the shareholders with full knowledge at the general meeting; (4) to treat shareholders of the same class with equality, and different classes with fairness; (5) not to enter into contracts or conduct transactions or make arrangements with the Company unless otherwise provided by the Company's Articles of Association or approved by the shareholders with full knowledge at the general meeting; (6) not to employ the Company's assets in any way so as to pursue interests for himself unless approved by the shareholders with full knowledge at the general meeting; (7) not to accept any bribery or other illegal income by using his powers and position, and seize the assets of the Company in any manner, including (but not limited to) opportunities beneficial to the Company; (8) not to accept commissions relating to the transactions of the Company, without the approval of the shareholders with full knowledge at the general meeting; 47 (9) to obey the Company's Articles of Association, perform his duties honestly and faithfully, protect the Company's interests, and not to pursue his personal gain by taking advantage of his powers and positions at the Company; (10) not to compete with the Company in any way unless approved by the shareholders with full knowledge at the general meeting; (11) not to misappropriate the funds of the Company or lend the funds of the Company to other persons, open accounts in his own or another individual's name for deposit of the Company's assets, or use Company's assets as security for the debts of the shareholders of the Company or other individuals; (12) not to divulge the confidential information relating to the Company received during his term of office, unless approved by the shareholders with full knowledge at the general meeting; and not to use such information unless for the purpose of the Company's interests; however, to be allowed to disclose such information to a court of law or other governing authorities under the following circumstances: (i) as prescribed by law; (ii) as required for the purpose of public interest; (iii) as required for the purpose of such director's, supervisor's, general manager's, deputy general manager's or other senior officers' own interests. Article 124. Directors, supervisors, general manager, deputy general managers and other senior officers of the Company shall not direct the following persons or organizations ("Associates") to engage in activities prohibited for directors, supervisors, general manager, deputy general managers and other senior officers of the Company: (1) spouses or underage children of directors, supervisors, general manager, deputy general managers or other senior officers of the Company; (2) trustors of directors, supervisors, general manager, deputy general managers or other senior officers of the Company or of such persons as described in sub-paragraph (1) of this Article; (3) partners of directors, supervisors, general manager, deputy general managers or other senior officers of the Company or of such persons as described in sub-paragraph (1) or sub-paragraph (2) of this Article; 48 (4) company (companies) which a director, supervisor, general manager, deputy general manager or any other senior officer of the Company has de facto single control over or joint control over with such persons as described in sub-paragraph (1), sub-paragraph (2) or sub-paragraph (3) of this Article or other directors, supervisors, general manager, deputy general managers or other senior officers of the Company; (5) directors, supervisors, general manager, deputy general managers and other senior officers of the Company (companies) referred to by sub-paragraph (4) of this Article. Article 125. The fiduciary duty of a director, supervisor, general manager, deputy general manager and any other senior officer of the Company may not necessarily cease upon the conclusion of his term, their obligations to keep confidential the business secrets of the Company shall survive the conclusion of his term. The duration of the other obligations and duties shall be determined in accordance with the principle of fairness, taking into account of the lapse between the time when he leaves the office and the occurrence of the relevant event, and the situation and the circumstances and terms under which his relation with the Company was ended. Article 126. The shareholders with full knowledge of the relevant circumstances may at the general meeting relieve a director, supervisor, general manager, deputy general manager and any other senior officer of the Company of his liability as a result of his violation of any specific duty, save as by Article 48 of the Company's Articles of Association. Article 127. A director, supervisor, general manager, deputy general manager and any other senior officer of the Company who directly or indirectly has material interests in contracts, transactions, or arrangements that are being planned or have already been concluded by the Company (save the contracts of employment between the directors, supervisors, general manager, deputy general managers or other senior officers and the Company), shall, as soon as possible, disclose to the Board of Directors the nature and extent of his interests, regardless of whether or not the matters at hand require the approval of the Board of Directors. Unless the interested directors, supervisors, general manager, deputy general managers or other senior officers of the Company have made such disclosure to the Board of Directors as required by the preceding paragraph of this Article, and the relevant matter has been approved by the Board of Directors at the board's meeting where such directors, supervisors, general manager, deputy general managers or other senior officers have not been counted as part of the quorum and voted thereat, the 49 Company shall be entitled to cancel such contracts, transactions, or arrangements, except as to any other party which is a bona fide party without knowledge of the violation of duties on the part of such directors, supervisors, general manager, deputy general managers and other senior officers. Where the Associates of the directors, supervisors, general manager, deputy general managers and other senior officers of the Company have interests in such contracts, transactions or arrangements, such directors, supervisors, general manager, deputy general managers and other senior officers shall also be deemed to be interested. Article 128. If, prior to the Company's initial consideration of such contracts, transactions, or arrangements referred to by the preceding Article, a director, supervisor, general manager, deputy general manager or any other senior officer of the Company has delivered a written notice to the Board of Directors, which contains the statement that he has interests in the contracts, transactions, or arrangements to be concluded by the Company in the future, such director, supervisor, general manager, deputy general manager or other senior officer shall be deemed to have made the disclosure stipulated by the preceding Article in respect of the statement contained in the notice. Article 129. The Company shall not, in any manner, perform tax duties for its directors, supervisors, general manager, deputy general managers and other senior officers. Article 130. The Company shall not directly or indirectly make a loan to or provide a guarantee in connection with the making of a loan to a director, supervisor, general manager, deputy general manager, and other senior officer of the Company or of the Company's holding company or any of their respective associates. The foregoing shall not apply to the following circumstances: (1) the provision by the Company of a loan or guarantee in connection with the making of a loan to its subsidiaries; (2) the provision by the Company of a loan or guarantee in connection with the making of a loan or making any other funds available to any of its director, supervisor, general manager, deputy general manager and other senior officer to meet expenditures incurred or to be incurred by him for the purpose of the Company or for the purpose of enabling him to perform his duties properly in accordance with a service contract approved by the shareholders in a general meeting; 50 (3) if the ordinary course of the business of the Company includes the lending of money or the giving of guarantees, the Company may make a loan to or provide a guarantee in connection with the making of a loan to the relevant directors, supervisors, general manager, deputy general managers and other senior officers or their respective associates, provided that they are on normal commercial terms. Article 131. Any person who receives funds from a loan which has been made by the Company acting in breach of the preceding Article shall, irrespective of the terms of the loan, forthwith repay such funds. Article 132. A guarantee for the repayment of a loan which has been provided by the Company in breach of the preceding Article 130(1) shall not be enforceable against the Company, save in respect of the following circumstances: (1) the guarantee was provided in connection with a loan which was made to an associate of any of the directors, supervisors, general manager, deputy general managers and other senior officers or of the Company's holding company and the lender of such funds did not know of the relevant circumstances at the time of the loan; or (2) the collateral which has been provided by the Company has already been lawfully disposed of by the lender to a bona fide purchaser. Article 133. For the purpose of the foregoing provisions of this Chapter, a "guarantee" includes an undertaking or property provided to secure the obligator's performance of his obligations. Article 134. In addition to the rights and remedies provided by law and administrative regulations when a director, supervisor, general manager, deputy general manager or other senior officer of the Company breaches the duties which he owes to the Company, the Company shall be entitled: (1) to demand such director, supervisor, general manager, deputy general manager or other senior officer compensate for the losses sustained by it as a result of such breach; (2) to rescind any contract or transaction which has been entered into between the Company and such director, supervisor, general manager, deputy general manager or other senior officer or between the 51 Company and a third party, where such party knew or should have known that such director, supervisor, general manager, deputy general manager or other senior officer representing the Company was in breach of his duty owed to the Company; (3) to demand such director, supervisor, general manager, deputy general manager or other senior officer account for the profits made as result of the breach of his duty; (4) to recover any money which shall have been received by the Company but were received by such director, supervisor, general manager, deputy general manager or other senior officer instead, including (without limitation) any commissions; and (5) to demand repayment of interest earned or which may have been earned by such director, supervisor, general manager, deputy general manager or other senior officer on moneys which shall have been received by the Company. Article 135. The Company shall, with the prior approval of the shareholders' general meeting, enter into a contract in writing with a director or supervisor wherein his emoluments are stipulated. The aforesaid emoluments may include: (1) emoluments in respect of his service as director, supervisor or senior officer of the Company; (2) emoluments in respect of his service as director, supervisor or senior officer of any subsidiary of the Company; (3) emoluments in respect of the provision of other services in connection with the management of the affairs of the Company and any of its subsidiaries; (4) payment by way of compensation for loss of office or as consideration for or in connection with his retirement from office. No proceedings may be brought by a director or supervisor against the Company for anything due to him in respect of the matters mentioned in this Article except pursuant to any contract described above. Article 136. Contracts concerning the emoluments between the Company and its directors or supervisors shall provide that in the event that the Company is to be acquired by others, the Company's directors and supervisors shall, subject to the prior approval of shareholders in a general meeting, have the right to receive compensation or other 52 payment in respect of his loss of office or retirement. For the purposes of this paragraph, the acquisition of the Company includes any of the following: (1) a tender offer made by any person to all the shareholders; (2) an offer made by any person with a view to become a "controlling shareholder" within the meaning of Article 49. If the relevant director or supervisor does not comply with this Article, any sum so received by him shall belong to those persons who have sold their shares as a result of such offer. The expenses incurred in distributing such sum on a pro rata basis amongst such persons shall be borne by the relevant director or supervisor and shall not be paid out of such sum. Chapter 16 Financial and Accounting Systems and Profit Distribution Article 137. The Company shall establish its financial and accounting systems in accordance with law, administrative regulation and PRC accounting principles formulated by the finance regulatory department of the State Council. Article 138. At the end of each fiscal year, the Company shall prepare a financial report which shall be examined and verified in the manner prescribed by law. Article 139. The Board of Directors of the Company shall present to the shareholders, at every annual general meeting, such financial reports which the relevant laws administrative regulation and directives promulgated by competent regional and central governmental authorities require the Company to prepare. Article 140. The Company's financial reports shall be made available for shareholders' inspection at the Company twenty (20) days before the date of every shareholders' annual general meeting. Each shareholder shall be entitled to obtain a copy of the financial reports referred to in this Chapter. The Company shall deliver to each shareholder of Overseas-Listed Foreign-Invested Shares by prepaid mail at the address registered in the register of shareholders such reports, together with copies of the Board of Directors report, not later than twenty-one (21) days before the date of every annual general meeting of the shareholders. 53 Article 141. The financial statements of the Company shall, in addition to being prepared in accordance with PRC accounting principles and regulations, be prepared in accordance with either international accounting principles, or those of the place outside the PRC where the Company's shares are listed. If there is any material difference between the financial statements prepared in accordance with the two accounting principles, such difference shall be stated in the financial statements. In distributing its after-tax profits, the lower of the two amounts shown in the financial statements shall be adopted. Article 142. Any interim results or financial information published or disclosed by the Company must also be prepared and presented in accordance with PRC accounting principles and regulations, and also in accordance with either international accounting principles or those of the place overseas where the Company's shares are listed. Article 143. The Company shall publish its financial reports twice every fiscal year. The interim financial report shall be published within sixty (60) days after the expiration of the first six (6) months of each fiscal year and the annual financial report shall be published within one hundred and twenty (120) days after the expiration of each fiscal year. Article 144. The Company shall not keep financial accounts other than those required by law. Article 145. The Company's after-tax profit shall be allocated in accordance with the following order: (1) compensation of losses; (2) allocation of ten percent of its after-tax profits to the statutory common reserve fund; (3) allocation of five percent to ten percent of the after-tax profits to the statutory common welfare fund; (4) allocation to the discretionary common reserve fund as approved by resolution of the shareholders' general meeting; (5) payment of dividends in respect of ordinary shares. 54 The Company shall not allocate dividends or carry out other allocations in the form of bonuses, before the Company has compensated for its losses and made allocations to the statutory common reserve fund and the statutory common welfare fund. Article 146. The capital common reserve fund includes the following items: (1) any premium above the proceeds from share issuances at face value; (2) any other income designated for the capital common reserve fund by regulation of the finance regulatory department of the State Council. Article 147. The common reserve fund of the Company shall be applied for the following purposes only: (1) to cover losses; (2) to expand the Company's operation; (3) to convert the common reserve fund into capital in order to increase its capital. The Company may convert its common reserve fund into capital with the approval of shareholders in a general meeting. When such conversion takes place, the Company shall either distribute new shares in proportion to the existing shareholders' of shares, or increase the par value of each share, provided, however, that when the statutory common reserve fund is converted to capital, the balance of the statutory common reserve fund may not fall below 25% of the registered capital. Article 148. The Company's statutory common welfare fund shall be used for the collective welfare of the Company's employees. Article 149. The Company, based on its business development needs and in accordance with the requirements of the insurance regulatory authority in respect of such matters as reserves and solvency, shall formulate the annual dividend distribution policy each year, which shall be carried out with the approval of the shareholders at the annual general meeting and in accordance with the provisions of relevant law and administrative regulations. Subject to the proposal of the Board of Directors and the approval of the shareholders at a general meeting, the Company may distribute interim dividends and special dividends. 55 The Company's dividend shall not bear interest, save in the case that the Company fails to distribute the dividends to the shareholders on the day when dividend was due to have been distributed. Article 150. The Company may distribute dividends in the form of: (1) cash; or (2) shares. Article 151. The Company shall calculate, declare and pay dividends and other amounts which are payable to holders of Domestic-Invested Shares in Renminbi. The Company shall calculate and declare dividends and other payments which are payable to holders of Overseas-Listed Foreign-Invested Shares in Renminbi, and shall pay such amounts in the local currency of the place in which such Overseas-Listed Foreign-Invested Shares are listed (if such shares are listed in more than one place, then the currency of the principal place in which such shares are listed as determined by the Board of Directors). Article 152. The Company shall pay dividends and other amounts to holders of Foreign-Invested Shares in accordance with the relevant foreign exchange control regulations of the PRC. If there is no applicable regulation, the applicable exchange rate shall be the average closing rate for the relevant foreign currency announced by the Peoples' Bank of China during the week prior to the announcement of payment of dividend and other amounts. Article 153. The Company shall appoint receiving agents for the holders of the Overseas-Listed Foreign-Invested Shares. Such receiving agents shall receive dividends on behave of such holders which have been declared by the Company and all other amounts payable to such shareholders. The receiving agents appointed by the Company shall meet the relevant requirements of the laws of the place or the relevant regulations of the stock exchange where the Company's shares are listed. The receiving agents appointed for holders of Overseas-Listed Foreign-Invested Shares listed in Hong Kong shall each be a company registered as a trust company under the Trustee Ordinance of Hong Kong. 56 Chapter 17 Appointment of Auditors Article 154. The Company shall engage an independent accountancy firm which is qualified under the relevant State regulations to audit the Company's annual report and review the Company's other financial reports. The first auditor may be engaged before the first annual general meeting by the inaugural meeting of the Company. The auditor so appointed shall hold the office until the conclusion of the first annual general meeting. If the inaugural meeting does not exercise the powers under the preceding paragraph, those powers shall be exercised by the Board of Directors. Article 155. The auditors engaged by the Company shall hold office from the conclusion of the annual general meeting of shareholders at which they were appointed until the conclusion of the next annual general meeting of shareholders. Article 156. The auditors engaged by the Company shall enjoy the following rights: (1) a right to inspect the books, records and vouchers of the Company at any time, the right to require the directors, general manager, deputy general managers and other senior officers of the Company to supply relevant information and explanations; (2) a right to require the Company to take all reasonable steps to obtain from its subsidiaries such information and explanations as are necessary for the discharge of its duties; (3) a right to attend shareholders' general meetings and to receive all notices of, and other communications relating to, any shareholders' general meeting which any shareholder is entitled to receive, and to speak at any shareholders' general meeting in relation to matters concerning its role as the Company's accountancy firm. Article 157. If there is a vacancy in the position of auditor of the Company, the Board of Directors may engage an accountancy firm to fill such vacancy before the convening of the shareholders' general meeting. Any other accountancy firm which has been engaged by the Company may continue to act during the period during which a vacancy exists. 57 Article 158. The shareholders in a general meeting may by ordinary resolution remove the Company's auditor before the expiration of its term of office, irrespective of the provisions in the contract between the Company and the auditor. However, the accountancy firm's right to claim for damages which arises form its removal shall not be affected thereby. Article 159. The remuneration of an accountancy firm or the manner in which such firm is to be remunerated shall be determined by the shareholders in a general meeting. The remuneration of an accountancy firm engaged by the Board of Directors shall be determined by the Board of Directors. Article 160. The Company's engagement, removal or discontinuance of engagement of an accountancy firm shall be resolved by the shareholders in a general meeting. Such resolution shall be filed with the securities authority of the State Council. Where a resolution at a general meeting of shareholders is passed to appoint as auditor a person other than an incumbent auditor, to fill a casual vacancy in the office of auditor, to reappoint as auditor a retiring auditor who was appointed by the Board of Directors to fill a casual vacancy or to remove an auditor before the expiration of its term of office, the following provisions shall apply: (1) A copy of the appointment or removal proposal shall be sent (before notice of meeting is given to the shareholders) to the firm proposed to be appointed or proposing to leave its post or the firm which has left its post in the relevant fiscal year. For the purpose of this Article, "leaving" includes leaving by removal, resignation and retirement. (2) If the auditor leaving its post makes representations in writing and requests the Company to give the shareholders notice of such representation, the Company shall (unless the representations have been received too late) take the following measures: (i) In any notice of the resolution given to shareholders, state the fact of the representations having been made; and (ii) Attach a copy of the representations to the notice and deliver it to the shareholders in the manner stipulated in the Company's Articles of Association. 58 (3) If the Company fails to send out the auditor's representations in the manner set out in sub-paragraph (2) above, such auditor may (in addition to his right to be heard) require that the representations be read out at the shareholders' general meeting. (4) An auditor which is leaving its post shall be entitled to attend the following shareholders' general meetings: (i) The general meeting at which its term of office would otherwise have expired; (ii) The general meeting at which it is proposed to fill the vacancy caused by its removal; and (iii) The general meeting which convened as a result of its resignation, and to receive all notices of, and other communications relating to, any such meeting, and to speak at any such meeting which it attends on any part of the business of the meeting which concerns it as former auditor of the Company. Article 161. Prior notice shall be given to the accountancy firm if the Company decides to remove such accountancy firm or not to renew the appointment thereof. Such accountancy firm shall be entitled to make representations at the shareholders' general meeting. Where the accountancy firm resigns from its position as the Company's auditors, it shall make clear to the shareholders in a general meeting whether there has been any impropriety on the part of the Company. An accountancy firm may resign its office by depositing at the Company's legal address a resignation notice which shall become effective on the date of such deposit or on such later date as may be stipulated in such notice. Such notice shall contain the following statements: (1) A statement to the effect that there are no circumstances connected with its resignation which it believes should be brought to the notice of the shareholders or creditors of the Company; or (2) A statement of any such circumstances. Where a notice is deposited under the preceding sub-paragraph, the Company shall within fourteen (14) days send a copy of the notice to the relevant governing authority. If the notice contains a statement under the preceding two sub-paragraphs, a copy of such statement shall be placed at the Company for shareholders' inspection. The Company shall also send a copy of such statement by prepaid mail to every shareholder of Overseas-Listed Foreign-Invested Shares at the address registered in the register of shareholders. 59 Where the auditor's notice of resignation contains a statement in respect of the above, it may require the Board of Directors to convene a shareholders' extraordinary general meeting for the purpose of receiving an explanation of the circumstances connected with its resignation. Chapter 18 Insurance Article 162. Any insurance to be purchased by the Company shall be decided at a meeting of the Board of Directors in accordance with the relevant insurance laws in China. Chapter 19 Labor and Personnel Management System Article 163. The Company may at its discretion employ and dismiss employees based on the business development needs of the Company and in accordance with the requirements of the laws and administrative regulations of the State. Article 164. The Company may formulate its labor and payroll systems and payment methods in accordance with the relevant laws and regulations of the State, the Company's Articles of Association and the economical benefits of the Company. Article 165. The Company shall endeavor to improve its employee benefits and to continually improve the working environment and living standards of its employees. Article 166. The Company shall provide medical, retirement and unemployment insurance for its employees and put in place a labor insurance system, in accordance with the relevant laws and regulations of the State. Chapter 20 Trade Unions Article 167. The Company's employees may form trade unions and carry on trade union activities to protect their legal rights. The Company shall provide the necessary conditions for such activities. 60 Chapter 21 Merger and Division of the Company Article 168. In the event of the merger or division of the Company, a plan shall be presented by the Company's Board of Directors and shall be approved in accordance with the procedures stipulated in the Company's Articles of Association. The Company shall then go through the relevant approval process. A shareholder who objects to the plan of merger or division shall have the right to demand the Company or the shareholders who consent to the plan of merger of division to acquire such dissenting shareholders' shares at a fair price. The contents of the resolution of merger or division of the Company shall constitute special documents which shall be available for inspection by the shareholders of the Company. Such special documents shall be sent by mail to holders of Overseas-Listed Foreign-Invested Shares to the address registered in the register of shareholders. Article 169. The merger of the Company may take the form of either merger by absorption or merger by the establishment of a new company. In the event of a merger, the merging parties shall execute a merger agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within ten (10) days of the date of the Company's merger resolution and shall publish a public notice in a newspaper at least three (3) times within thirty (30) days of the date of the Company's merger resolution. After merger, any rights in relation to debtors and any indebtedness of each of the merged parties shall be assumed by the Company which survives the merger or the newly established company. Article 170. Where there is a division of the Company, its assets shall be divided up accordingly. In the event of division of the Company, the parties to such division shall execute a division agreement and prepare a balance sheet and an inventory of assets. The Company shall notify its creditors within then (10) days of the date of the Company's division resolution and shall publish a public notice in a newspaper at least three (3) times within thirty (30) days of the date of the Company's division resolution. Debts of the Company prior to the division shall be assumed by the Company or companies which exist after the division in accordance with the agreement of the parties. 61 Article 171. The Company shall, in accordance with law, apply for change in its registration with the Company registration authority where a change in any item in its registration arises as a result of any merger or division. Where the Company is dissolved, the Company shall apply for cancellation of its registration in accordance with law. Where a new company is established, the Company shall apply for registration thereof in accordance with law. Chapter 22 Dissolution and Liquidation Article 172. The Company shall be dissolved and liquidated upon the occurrence of any of the following events: (1) A resolution for dissolution is passed by shareholders at a general meeting; (2) Dissolution is necessary due to a merger or division of the Company; (3) The Company is legally declared insolvent due to its failure to repay debts as they become due; and (4) The Company is ordered to close down because of a violation of laws or administrative regulations. Article 173. A liquidation committee shall be set up within fifteen (15) days of the Company being dissolved pursuant to sub-paragraph (1) of the preceding Article. The composition of the liquidation committee of the Company shall be determined by an ordinary resolution of shareholders in a general meeting. Where the Company is dissolved under sub-paragraph (3) of the preceding Article, the People's Court shall in accordance with the provisions of relevant laws co-ordinate with the insurance regulatory authority, the shareholders, relevant organizations and relevant professional personnel to establish a liquidation committee to carry out the liquidation. Where the Company is dissolved under sub-paragraph (4) of the preceding article, the insurance regulatory authority shall co-ordinate with the shareholders, relevant organizations and professional personnel to establish a liquidation committee to carry out the liquidation. Where the Company is dissolved or declared insolvent in accordance with law, the life insurance contracts and reserves held thereby shall be transferred to other insurance companies with life insurance business operation. 62 Article 174. Where the Board of Directors proposes to liquidate the Company for any reason other than the Company's declaration of its own insolvency, the Board shall include a statement in its notice convening a shareholders' general meeting to consider the proposal to the effect that, after making full inquiry into the affairs of the Company, the Board of Directors is of the opinion that the Company will be able to pay its debts in full within twelve (12) months from the commencement of the liquidation. Upon the passing of the resolution by the shareholders in a general meeting for the liquidation of the Company, all functions and powers of the Board of Directors shall cease. The liquidation committee shall act in accordance with the instructions of the shareholders' general meeting to make a report at least once every year to the shareholders' general meeting on the committee's income and expenses, the business of the Company and the progress of the liquidation; and to present a final report to the shareholders' general meeting on completion of the liquidation. Article 175. The liquidation committee shall, within ten (10) days of its establishment, send notices to creditors and shall, within sixty (60) days of its establishment, publish a public announcement at a newspaper at least three (3) times. A creditor shall, within thirty (30) days of receipt of the notice, or for creditors who have not personally received such notice, within ninety (90) days of the date of the first public announcement, claim its rights to the liquidation committee. In claiming its rights, the creditor shall provide evidential material in respect thereof. The liquidation committee shall register the creditor's rights. Article 176. During the liquidation period, the liquidation committee shall exercise the following functions and powers: (1) to sort out the Company's assets and prepare a balance sheet and an inventory of assets respectively; (2) to notify the creditors or to publish public announcements; (3) to dispose of and liquidate any unfinished businesses of the Company; (4) to pay all outstanding taxes; (5) to settle claims and debts; 63 (6) to deal with the surplus assets remaining after the Company's debts have been repaid; (7) to represent the Company in any civil proceedings. Article 177. After it has sorted out the Company's assets and after it has prepared the balance sheet and an inventory of assets, the liquidation committee shall formulate a liquidation plan and present it to a shareholders' general meeting or to the relevant governing authority for confirmation. The Company's assets shall be distributed in accordance with law or regulation. If there is no applicable law, such distribution shall be carried out in accordance with a fair and reasonable procedure determined by the liquidation committee. Any surplus assets of the Company remaining after its debts have been repaid in accordance with the provisions of the preceding paragraph shall be distributed to its shareholders according to the class of shares and the proportion of shares held. During the liquidation period, the Company shall not commence any new business activities. Article 178. In the event of dissolution, if after putting the Company's assets in order and preparing a balance sheet and an inventory of assets in connection with the liquidation of the Company, the liquidation committee discovers that the Company's assets are insufficient to repay the Company's debts in full, the liquidation committee shall immediately apply to the People's Court for a declaration of insolvency. After a Company is declared insolvent by a ruling of the People's Court, the liquidation committee shall transfer all matters arising from the liquidation to the People's Court. Article 179. Following the completion of the liquidation, the liquidation committee shall prepare a liquidation report, a statement of income and expenses received and made during the liquidation period and a financial report, which shall be verified by a Chinese registered accountant and submitted to the shareholders' general meeting or the insurance regulatory authority for confirmation. The liquidation committee shall, within thirty (30) days after such confirmation, submit the documents referred to in the preceding paragraph to the Company registration authority and apply for cancellation of registration of the 64 Company, and publish a public announcement relating to the termination of the Company. Chapter 23 Procedures for Amendment of the Company's Articles of Association Article 180. The Company may amend its Articles of Association in accordance with the requirements of law, administrative regulations and the Company's Articles of Association. Article 181. The Company's Articles of Association shall be amended in the following manner: (1) The Directors shall propose the manner in which the Company's Articles of Association shall be amended; (2) The foregoing proposal shall be furnished to the shareholders in writing and a shareholders' meeting shall be convened; (3) The amendments shall be approved by votes representing more than two-thirds of the voting rights represented by the shareholders present at the meeting. Article 182. The amendment of the Company's Articles of Association in respect of the following matters shall be submitted to the insurance regulatory authority for approval, and once approved, to the company registration authority for change in registration, followed by public announcement: (1) a change in the Company's name; (2) a change in the Company's scope of business; (3) an increase or reduction of the Company's registered capital; (4) a change of the Company's share class in whole or in part; (5) an addition of new share class; (6) an addition or cancellation of convertible debentures; and (7) other matters. Amendments of the Company's Articles of Association which involve the contents of the Mandatory Provisions shall become effective upon receipt of the 65 approvals from the securities authority of the State Council and the companies approving department authorized by the State Council. If there is any change relating to the registered particulars of the Company, application shall be made for change in registration in accordance with law. Chapter 24 Dispute Resolution Article 183. The Company shall abide by the following principles for dispute resolution: (1) Any disputes or claims arising between holders of the Overseas-Listed Foreign-Invested Shares and the Company; holders of the Overseas-Listed Foreign-Invested and the Company's directors, supervisors, general manager, deputy general managers, or other senior officers; or holders of the Overseas-Listed Foreign-Invested Shares and holders of Domestic-Invested Shares, in respect of any rights or obligations arising from these Articles of Association, the Company Law or any rights or obligations conferred or imposed by the Company Law and special regulations (including other relevant laws) or any other relevant laws and administrative regulations concerning the affairs of the Company shall be submitted for arbitration. When a dispute or claim of rights referred to in the preceding paragraph is submitted for arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, shall, where such person is the Company, the Company's shareholders, directors, supervisors, general manager, deputy general managers, or other senior officers of the Company, comply with the arbitration. Disputes in respect of the definition of shareholders and disputes in relation to the register of shareholders need not be resolved by arbitration. (2) A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission in accordance with its Rules or the Hong Kong International Arbitration Center in accordance with its Securities Arbitration Rules. Once a claimant submits a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. If a claimant elects for arbitration to be carried out at Hong Kong International Arbitration Center, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the 66 Securities Arbitration Rules of the Hong Kong International Arbitration Center. (3) If any disputes or claims of rights are settled by way of arbitration in accordance with sub-paragraph (1) of this Article, the laws of the PRC govern, save as otherwise provided in law and administrative regulations. (4) The award of an arbitral body shall be final and conclusive and binding on all parties. Chapter 25 Notices Article 184. Unless otherwise provided, the Company shall, where it is making a public announcement in the prescribed or approved manner, issue or deliver any notice or announcement in at least one (1) national newspaper which has been appointed by the securities authority of the State Council and, when possible, publish such notice or announcement in English and in Chinese on the same day in a major Chinese and a major English newspaper in Hong Kong, respectively. Article 185. Unless otherwise provided in the Articles of Association, notices, information or written statements issued by the Company to holders of Overseas-Listed Foreign-Invested shares shall be personally delivered to the registered address of each of such shareholders, or sent by mail to each of such shareholders. Notices to be issued to holders of Domestic-invested shares shall be released in any one or more newspapers designated by the securities authority of the State Council. All holders of Domestic-invested shares shall be deemed to have received such notices once they are published. Article 186. All notices which are to be sent by mail shall be clearly addressed, postage pre-paid, and shall be put in envelopes before being posted by mail. Such letters of notice shall be deemed to have been received by shareholders five (5) days after the date of dispatch. Article 187. Any notices, document, information or written statements from the shareholders or directors to the Company shall be delivered personally or sent by registered mail to the legal address of the Company. 67 Article 188. Shareholders or directors of the Company who want to prove that certain notices, documents, information or written statements have been sent to the Company shall provide evidential materials showing that such notices, documents, information or written statements have been sent to the Company by normal methods within designated times, and that the mailing address is correct and the postage is fully paid. Chapter 26 Supplementary Article 189. In these Articles of Association, references to "accountancy firm" shall have the same meaning as "auditors". Article 190. The Company's Articles of Association are written in both Chinese and English. Both texts shall be equally valid. If there is any discrepancy between the two versions, the Chinese version of the Articles of Association shall prevail. Article 191. The Company's Board of Directors shall have the power to interpret the Company's Articles of Association. 68 EX-4.2 4 dex42.txt FORM OF DEPOSIT AGREEMENT, INCLUDING FORM OF AMERICAN DEPOSITARY RECEIPT Exhibit 4.2 CHINA LIFE INSURANCE COMPANY LIMITED AND JPMORGAN CHASE BANK, As Depositary AND HOLDERS OF AMERICAN DEPOSITARY RECEIPTS ------------- Deposit Agreement Dated as of [DATE], 2003 TABLE OF CONTENTS Page ---- PARTIES 4 RECITALS 4 Section 1. Certain Definitions (a) ADR Register 4 (b) ADRs; Direct Registration ADRs 4 (c) ADS 4 (d) Custodian 4 (e) Deliver, execute, issue et al. 4 (f) Delivery Order 4 (g) Deposited Securities 4 (h) Direct Registration System 4 (i) Holder 5 (j) Securities Act of 1933 5 (k) Securities Exchange Act of 1934 5 (l) Shares 5 (m) Transfer Office 5 (n) Withdrawal Order 5 Section 2. ADRs 5 Section 3. Deposit of Shares 5 Section 4. Issue of ADRs 6 Section 5. Distributions on Deposited Securities 6 Section 6. Withdrawal of Deposited Securities 6 Section 7. Substitution of ADRs 7 Section 8. Cancellation and Destruction of ADRs 7 Section 9. The Custodian 7 Section 10. Co-Registrars and Co-Transfer Agents 7 Section 11. Lists of Holders. 7 Section 12. Depositary's Agents 7 Section 13. Successor Depositary 8 Section 14. Reports 8 Section 15. Additional Shares 8 Section 16. Indemnification 8 Section 17. Notices 9 Section 18. Miscellaneous 9 Section 19. Consent to Jurisdiction 10 TESTIMONIUM 12 SIGNATURES 12 - 2 - Page ---- EXHIBIT A --------- FORM OF FACE OF ADR A-1 - ------------------- Introductory Paragraph A-1 (1) Issuance of ADRs A-1 (2) Withdrawal of Deposited Securities A-2 (3) Transfers of ADRs A-2 (4) Certain Limitations A-3 (5) Taxes A-3 (6) Disclosure of Interests; Limitations on Ownership A-4 (7) Charges of Depositary A-5 (8) Available Information A-5 (9) Execution A-6 Signature of Depositary A-6 Address of Depositary's Office A-6 FORM OF REVERSE OF ADR A-7 - ---------------------- (10) Distributions on Deposited Securities A-7 (11) Record Dates A-7 (12) Voting of Deposited Securities A-8 (13) Changes Affecting Deposited Securities A-8 (14) Exoneration A-8 (15) Resignation and Removal of Depositary; the Custodian A-9 (16) Amendment A-9 (17) Termination A-10 - 3 - DEPOSIT AGREEMENT dated as of [DATE], 2003 (the "Deposit Agreement") among CHINA LIFE INSURANCE COMPANY LIMITED and its successors (the "Company"), JPMORGAN CHASE BANK, as depositary hereunder (the "Depositary"), and all holders from time to time of American Depositary Receipts issued hereunder ("ADRs") evidencing American Depositary Shares ("ADSs") representing deposited Shares (defined below). The parties hereto agree as follows: 1. Certain Definitions. (a) "ADR Register" is defined in paragraph (3) of the form of ADR. (b) "ADRs" mean the American Depositary Receipts executed and delivered hereunder. ADRs may be either in physical certificated form or Direct Registration ADRs. ADRs in physical certificated form, and the terms and conditions governing the Direct Registration ADRs (as hereinafter defined), shall be substantially in the form of Exhibit A annexed hereto (the "form of ADR"). The term "Direct Registration ADR" means an ADR, the ownership of which is recorded on the Direct Registration System. References to "ADRs" shall include certificated ADRs and Direct Registration ADRs, unless the context otherwise requires. The form of ADR is hereby incorporated herein and made a part hereof; the provisions of the form of ADR shall be binding upon the parties hereto. (c) Subject to paragraph (13) of the form of ADR, each "ADS" evidenced by an ADR represents the right to receive fifty Shares and a pro rata share in any other Deposited Securities. (d) "Custodian" means the agent or agents of the Depositary (singly or collectively, as the context requires) and any additional or substitute Custodian appointed pursuant to Section 9. (e) The terms "deliver", "execute", "issue", "register", "surrender", "transfer" or "cancel", when used with respect to Direct Registration ADRs, shall refer to an entry or entries or an electronic transfer or transfers in the Direct Registration System, and, when used with respect to ADRs in physical certificated form, shall refer to the physical delivery, execution, issuance, registration, surrender, transfer or cancellation of certificates representing the ADRs. (f) "Delivery Order" is defined in Section 3. (g) "Deposited Securities" as of any time means all Shares at such time deposited under this Deposit Agreement and any and all other Shares, securities, property and cash at such time held by the Depositary or the Custodian in respect or in lieu of such deposited Shares and other Shares, securities, property and cash. (h) "Direct Registration System" means the system for the uncertificated registration of ownership of securities established by The Depository Trust Company ("DTC") and utilized by the Depositary pursuant to which the Depositary may record the ownership of ADRs without the issuance of a certificate, which ownership shall be evidenced by periodic statements issued by the Depositary to the Holders entitled thereto. For purposes hereof, the 4 Direct Registration System shall include access to the Profile Modification System maintained by DTC which provides for automated transfer of ownership between DTC and the Depositary. (i) "Holder" means the person or persons in whose name an ADR is registered on the ADR Register. (j) "Securities Act of 1933" means the United States Securities Act of 1933, as from time to time amended. (k) "Securities Exchange Act of 1934" means the United States Securities Exchange Act of 1934, as from time to time amended. (l) "Shares" mean the overseas listed foreign-invested shares in registered form of the Company, or interim certificates representing such Shares, and shall include the rights to receive Shares specified in paragraph (1) of the form of ADR. (m) "Transfer Office" is defined in paragraph (3) of the form of ADR. (n) "Withdrawal Order" is defined in Section 6. 2. ADRs. (a) ADRs in certificated form shall be engraved, printed or otherwise reproduced at the discretion of the Depositary in accordance with its customary practices in its American depositary receipt business, or at the request of the Company typewritten and photocopied on plain or safety paper, and shall be substantially in the form set forth in the form of ADR, with such changes as may be required by the Depositary or the Company to comply with their obligations hereunder, any applicable law, regulation or usage or to indicate any special limitations or restrictions to which any particular ADRs are subject. ADRs may be issued in denominations of any number of ADSs. ADRs in certificated form shall be executed by the Depositary by the manual or facsimile signature of a duly authorized officer of the Depositary. ADRs in certificated form bearing the facsimile signature of anyone who was at the time of execution a duly authorized officer of the Depositary shall bind the Depositary, notwithstanding that such officer has ceased to hold such office prior to the delivery of such ADRs. (b) Direct Registration ADRs. Notwithstanding anything in this Deposit Agreement or in the form of ADR to the contrary, ADSs shall be evidenced by Direct Registration ADRs, unless certificated ADRs are specifically requested by the Holder. (c) Holders shall be bound by the terms and conditions of this Deposit Agreement and of the form of ADR, regardless of whether their ADRs are Direct Registration ADRs or certificated ADRs. 3. Deposit of Shares. In connection with the deposit of Shares hereunder, the Depositary or the Custodian may require the following in form satisfactory to it: (a) a written order directing the Depositary to issue to, or upon the written order of, the person or persons designated in such order a Direct Registration ADR or ADRs evidencing the number of ADSs representing such deposited Shares (a "Delivery Order"); (b) proper endorsements or 5 duly executed instruments of transfer in respect of such deposited Shares; (c) instruments assigning to the Custodian or its nominee any distribution on or in respect of such deposited Shares or indemnity therefor; and (d) proxies entitling the Custodian to vote such deposited Shares. As soon as practicable after the Custodian receives Deposited Securities pursuant to any such deposit or pursuant to paragraph (10) or (13) of the form of ADR, the Custodian shall present such Deposited Securities for registration of transfer into the name of the Custodian or its nominee, to the extent such registration is practicable, at the cost and expense of the person making such deposit (or for whose benefit such deposit is made) and shall obtain evidence satisfactory to it of such registration. Deposited Securities shall be held by the Custodian for the account and to the order of the Depositary at such place or places and in such manner as the Depositary shall determine. Deposited Securities may be delivered by the Custodian to any person only under the circumstances expressly contemplated in this Deposit Agreement. To the extent that the provisions of or governing the Shares make delivery of certificates therefor impracticable, Shares may be deposited hereunder by such delivery thereof as the Depositary or the Custodian may reasonably accept, including, without limitation, by causing them to be credited to an account maintained by the Custodian for such purpose with the Company or an accredited intermediary, such as a bank, acting as a registrar for the Shares, together with delivery of the documents, payments and Delivery Order referred to herein to the Custodian or the Depositary. 4. Issue of ADRs. After any such deposit of Shares, the Custodian shall notify the Depositary of such deposit and of the information contained in any related Delivery Order by letter, first class airmail postage prepaid, or, at the request, risk and expense of the person making the deposit, by cable, telex or facsimile transmission. After receiving such notice from the Custodian, the Depositary, subject to this Deposit Agreement, shall properly issue at the Transfer Office, to or upon the order of any person named in such notice, an ADR or ADRs registered as requested and evidencing the aggregate ADSs to which such person is entitled. 5. Distributions on Deposited Securities. To the extent that the Depositary determines in its discretion that any distribution pursuant to paragraph (10) of the form of ADR is not practicable with respect to any Holder, the Depositary may make such distribution as it so deems practicable, including the distribution of foreign currency, securities or property (or appropriate documents evidencing the right to receive foreign currency, securities or property) or the retention thereof as Deposited Securities with respect to such Holder's ADRs (without liability for interest thereon or the investment thereof). 6. Withdrawal of Deposited Securities. In connection with any surrender of an ADR for withdrawal of the Deposited Securities represented by the ADSs evidenced thereby, the Depositary may require proper endorsement in blank of such ADR (or duly executed instruments of transfer thereof in blank) and the Holder's written order directing the Depositary to cause the Deposited Securities represented by the ADSs evidenced by such ADR to be withdrawn and delivered to, or upon the written order of, any person designated in such order (a "Withdrawal Order"). Directions from the Depositary to the Custodian to deliver Deposited Securities shall be given by letter, first class airmail postage prepaid, or, at the request, risk and expense of the Holder, by cable, telex or facsimile transmission. Delivery of Deposited Securities may be made by the delivery of certificates (which, if required by law shall be properly endorsed or accompanied by properly executed instruments 6 of transfer or, if such certificates may be registered, registered in the name of such Holder or as ordered by such Holder in any Withdrawal Order) or by such other means as the Depositary may deem practicable, including, without limitation, by transfer of record ownership thereof to an account designated in the Withdrawal Order maintained either by the Company or an accredited intermediary, such as a bank, acting as a registrar for the Deposited Securities. 7. Substitution of ADRs. The Depositary shall execute and deliver a new Direct Registration ADR in exchange and substitution for any mutilated certificated ADR upon cancellation thereof or in lieu of and in substitution for such destroyed, lost or stolen certificated ADR, unless the Depositary has notice that such ADR has been acquired by a bona fide purchaser, upon the Holder thereof filing with the Depositary a request for such execution and delivery and a sufficient indemnity bond and satisfying any other reasonable requirements imposed by the Depositary. 8. Cancellation and Destruction of ADRs. All ADRs surrendered to the Depositary shall be cancelled by the Depositary. The Depositary is authorized to destroy ADRs in certificated form so cancelled in accordance with its customary practices. 9. The Custodian. Any Custodian in acting hereunder shall be subject to the directions of the Depositary and shall be responsible solely to it. The Depositary may from time to time appoint one or more agents to act for it as Custodian hereunder. Each Custodian so appointed (other than JPMorgan Chase Bank) shall give written notice to the Company and the Depositary accepting such appointment and agreeing to be bound by the applicable terms hereof. Any Custodian may resign from its duties hereunder by at least 30 days written notice to the Depositary. The Depositary may discharge any Custodian at any time upon notice to the Custodian being discharged. Any Custodian ceasing to act hereunder as Custodian shall deliver, upon the instruction of the Depositary, all Deposited Securities held by it to a Custodian continuing to act. 10. Co-Registrars and Co-Transfer Agents. The Depositary may appoint and remove (i) co-registrars to register ADRs and transfers, combinations and split-ups of ADRs and to countersign ADRs in accordance with the terms of any such appointment and (ii) co-transfer agents for the purpose of effecting transfers, combinations and split-ups of ADRs at designated transfer offices in addition to the Transfer Office on behalf of the Depositary. Each co-registrar or co-transfer agent (other than JPMorgan Chase Bank) shall give notice in writing to the Company and the Depositary accepting such appointment and agreeing to be bound by the applicable terms of this Deposit Agreement. 11. Lists of Holders. The Company shall have the right to inspect transfer records of the Depositary and its agents and the ADR Register, take copies thereof and require the Depositary and its agents to supply copies of such portions of such records as the Company may request. The Depositary or its agent shall furnish to the Company promptly upon the written request of the Company, a list of the names, addresses and holdings of ADSs by all Holders as of a date within seven days of the Depositary's receipt of such request. 12. Depositary's Agents. The Depositary may perform its obligations under this Deposit Agreement through any agent appointed by it, provided that the Depositary shall notify the Company of such appointment and shall remain responsible for the performance of 7 such obligations as if no agent were appointed. 13. Successor Depositary. The Depositary may at any time resign as Depositary hereunder by written notice of its election so to do delivered to the Company. The Depositary may at any time be removed by the Company by written notice of such removal. Notwithstanding anything to the contrary contained herein, in case at any time the Depositary acting hereunder shall resign or be removed, it shall continue to act as Depositary for the purpose of terminating this Deposit Agreement pursuant to paragraph (17) of the form of ADR. Any bank or trust company into or with which the Depositary may be merged or consolidated, or to which the Depositary shall transfer substantially all its American depositary receipt business, shall be the successor of the Depositary without the execution or filing of any document or any further act. 14. Reports. On or before the first date on which the Company makes any communication available to holders of Deposited Securities or any securities regulatory authority or stock exchange, by publication or otherwise, the Company shall transmit to the Depositary a copy thereof in English or with an English translation or summary. The Company has delivered to the Depositary, the Custodian and any Transfer Office, a copy of all provisions of or governing the Shares and any other Deposited Securities issued by the Company or any affiliate of the Company and, promptly upon any change thereto, the Company shall deliver to the Depositary, the Custodian and any Transfer Office, a copy (in English or with an English translation) of such provisions as so changed. The Depositary and its agents may rely upon the Company's delivery thereof for all purposes of this Deposit Agreement. 15. Additional Shares. Neither the Company nor any company controlling, controlled by or under common control with the Company shall issue additional Shares, rights to subscribe for Shares, securities convertible into or exchangeable for Shares or rights to subscribe for any such securities or shall deposit any Shares under this Deposit Agreement, except under circumstances complying in all respects with the Securities Act of 1933. The Depositary will use reasonable efforts to comply with written instructions of the Company not to accept for deposit hereunder any Shares identified in such instructions at such times and under such circumstances as may reasonably be specified in such instructions in order to facilitate the Company's compliance with securities laws in the United States. 16. Indemnification. The Company shall indemnify, defend and save harmless each of the Depositary and its agents against any loss, liability or expense (including reasonable fees and expenses of counsel) which may arise out of acts performed or omitted, in accordance with the provisions of this Deposit Agreement and of the ADRs, as the same may be amended, modified or supplemented from time to time in accordance herewith (i) by either the Depositary or its agents or their respective directors, employees, agents and affiliates, except, subject to the penultimate paragraph of this Section 16, for any liability or expense directly arising out of the negligence or bad faith of such person, or (ii) by the Company or any of its directors, employees, agents or affiliates. The indemnities set forth in the preceding paragraph shall apply to any liability or expense which may arise out of any misstatement or alleged misstatement or omission or alleged omission in any registration statement, proxy statement, prospectus (or placement 8 memorandum), or preliminary prospectus (or preliminary placement memorandum) relating to the offer or sale of ADSs, except to the extent any such liability or expense arises out of (i) information relating to the Depositary or its agents (other than the Company), as applicable, furnished in writing by the Depositary and not changed or altered by the Company expressly for use in any of the foregoing documents or (ii) if such information is provided, the failure to state a material fact necessary to make the information provided not misleading. Except as provided in the next succeeding paragraph, the Depositary shall indemnify, defend and save harmless the Company against any loss, liability or expense (including reasonable fees and expenses of counsel) incurred by the Company in respect of this Deposit Agreement to the extent such loss, liability or expense is due to the negligence or bad faith of the Depositary and its agents appointed and acting hereunder. Notwithstanding any other provision of this Deposit Agreement or the form of ADR to the contrary, neither the Company nor the Depositary, nor any of their agents, shall be liable to the other for any indirect, special, punitive or consequential damages (collectively "Special Damages") except (i) to the extent such Special Damages arise from the gross negligence or willful misconduct of the party from whom indemnification is sought or (ii) to the extent Special Damages arise from or out of a claim brought by a third party (including, without limitation, Holders) against the Depositary or its agents, except to the extent such Special Damages arise out of the fraud, gross negligence or willful misconduct of the party seeking indemnification hereunder. The obligations set forth in this Section 16 shall survive the termination of this Deposit Agreement and the succession or substitution of any indemnified person. 17. Notices. Notice to any Holder shall be deemed given when first mailed, first class postage prepaid, to the address of such Holder on the ADR Register or received by such Holder. Notice to the Depositary or the Company shall be deemed given when first received by it at the address or facsimile transmission number set forth in (a) or (b), respectively, or at such other address or facsimile transmission number as either may specify to the other by written notice: (a) JPMorgan Chase Bank Four New York Plaza New York, New York 10004 Attention: ADR Administration Fax: (212) 623-0079 (b) China Life Insurance Company Limited 16 Chaowai Avenue Chaoyang District Beijing 100020, China Attention: [CONTACT PERSON] Fax: [FACSIMILE] 18. Miscellaneous. This Deposit Agreement is for the exclusive benefit of the Company, the Depositary, the Holders, and their respective successors hereunder, and shall 9 not give any legal or equitable right, remedy or claim whatsoever to any other person. The Holders and owners of ADRs from time to time shall be parties to this Deposit Agreement and shall be bound by all of the provisions hereof. If any such provision is invalid, illegal or unenforceable in any respect, the remaining provisions shall in no way be affected thereby. This Deposit Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one instrument. 19. Consent to Jurisdiction. The Company hereby (i) designates and appoints CT Corporation System, 111 Eighth Avenue, New York, New York 10019, in the State of New York, as the Company's authorized agent upon which process may be served in any suit, action or proceeding arising out of or based upon this Deposit Agreement or the transactions contemplated hereby, and (ii) agrees that the service of process upon said authorized agent shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding. The Company agrees to deliver, upon the execution and delivery of this Deposit Agreement, a written acceptance by such agent of its appointment as such agent. The Company further agrees to take any and all action, including the filing of any and all documents and instruments, that may be necessary to continue such appointment in full force and effect for so long as any ADSs or ADRs remain outstanding or this Deposit Agreement remains in force. The Company also irrevocably agrees that any legal suit, action or proceeding against the Company brought by the Depositary or any Holder, arising out of or based upon this Deposit Agreement or the transactions contemplated hereby, may be instituted in any state or federal court in New York, New York, and, with respect to any legal suit, action or proceeding involving the Depositary or its agents, irrevocably waives any objection which it may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submits to the non-exclusive jurisdiction of such courts in any such suit, action or proceeding. The Company expressly consents to the non-exclusive jurisdiction of any such court in respect of any such action, and waives any other requirements of or objections to personal jurisdiction with respect thereto. If, for any reason, the agent named above or its successor shall no longer serve as agent of the Company to receive service of process in New York, the Company shall promptly appoint a successor acceptable to the Depositary, so as to serve and will promptly advise the Depositary thereof. In the event the Company fails to continue such designation and appointment in full force and effect, the Company hereby waives personal service of process upon it and consents that any such service of process may be made by certified or registered mail, return receipt requested, directed to the Company at its address last specified for notices hereunder, and service so made shall be deemed completed five (5) days after the same shall have been so mailed. Notwithstanding the foregoing, any action based on this Agreement may be instituted by the Depositary or any Holder in any competent court in The People's Republic of China. To the extent that the Company or any of its properties, assets or revenues may have or may hereafter be entitled to, or have attributed to it, any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving of any relief in any respect thereof, from setoff or counterclaim, from the jurisdiction of any court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution or judgment, or from execution of judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, in any jurisdiction in which proceedings may at any time be commenced, with respect to its 10 obligations, liabilities or other matter under or arising out of or in connection with the Shares or Deposited Securities, the ADSs, the ADRs or this Agreement, the Company, to the fullest extent permitted by law, hereby irrevocably and unconditionally waives, and agrees not to plead or claim, any such immunity and consents to such relief and enforcement. 11 IN WITNESS WHEREOF, CHINA LIFE INSURANCE COMPANY LIMITED and JPMORGAN CHASE BANK have duly executed this Deposit Agreement as of the day and year first above set forth and all holders of ADRs shall become parties hereto upon acceptance by them of ADRs issued in accordance with the terms hereof. CHINA LIFE INSURANCE COMPANY LIMITED By: --------------------------------- Name: Title: JPMORGAN CHASE BANK By: --------------------------------- Name: Title: Vice President 12 EXHIBIT A ANNEXED TO AND INCORPORATED IN DEPOSIT AGREEMENT --------------------- [FORM OF FACE OF ADR] No. of ADSs: Number Each ADS represents . Shares CUSIP: AMERICAN DEPOSITARY RECEIPT evidencing AMERICAN DEPOSITARY SHARES representing CLASS H ORDINARY SHARES of CHINA LIFE INSURANCE COMPANY LIMITED (Incorporated under the laws of The People's Republic of China) JPMORGAN CHASE BANK, a New York corporation, as depositary hereunder (the "Depositary"), hereby certifies that is the registered owner (a "Holder") of American Depositary Shares ("ADSs"), each (subject to paragraph (13)) representing . overseas listed foreign-invested shares, or H shares (including the rights to receive Shares described in paragraph (1), "Shares" and, together with any other securities, cash or property from time to time held by the Depositary in respect or in lieu of deposited Shares, the "Deposited Securities"), of China Life Insurance Company Limited, a corporation organized under the laws of The People's Republic of China (the "Company"), deposited under the Deposit Agreement dated as of [DATE] , 2003 (as amended from time to time, the "Deposit Agreement") among the Company, the Depositary and all Holders from time to time of American Depositary Receipts issued thereunder ("ADRs"), each of whom by accepting an ADR becomes a party thereto. The Deposit Agreement and this ADR (which includes the provisions set forth on the reverse hereof) shall be governed by and construed in accordance with the laws of the State of New York. (1) Issuance of ADRs. This ADR is one of the ADRs issued under the Deposit A-1 Agreement. Subject to paragraph (4), the Depositary may so issue ADRs for delivery at the Transfer Office (defined in paragraph (3)) only against deposit with the Custodian of: (a) Shares in form satisfactory to the Custodian; (b) rights to receive Shares from the Company or any registrar, transfer agent, clearing agent or other entity recording Share ownership or transactions; or, (c) other rights to receive Shares (until such Shares are actually deposited pursuant to (a) or (b) above, "Pre-released ADRs") only if (i) Pre-released ADRs are fully collateralized (marked to market daily) with cash or U.S. government securities held by the Depositary for the benefit of Holders (but such collateral shall not constitute "Deposited Securities"), (ii) each recipient of Pre-released ADRs agrees in writing with the Depositary that such recipient (a) owns such Shares, (b) assigns all beneficial right, title and interest therein to the Depositary, (c) holds such Shares for the account of the Depositary and (d) will deliver such Shares to the Custodian as soon as practicable and promptly upon demand therefor and (iii) all Pre-released ADRs evidence not more than 30% of all ADSs (excluding those evidenced by Pre-released ADRs), provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The Depositary may retain for its own account any earnings on collateral for Pre-released ADRs and its charges for issuance thereof. At the request, risk and expense of the person depositing Shares, the Depositary may accept deposits for forwarding to the Custodian and may deliver ADRs at a place other than its office. Every person depositing Shares under the Deposit Agreement represents and warrants that such Shares are validly issued and outstanding, fully paid, nonassessable and free of pre-emptive rights, that the person making such deposit is duly authorized so to do and that such Shares (A) are not "restricted securities" as such term is defined in Rule 144 under the Securities Act of 1933 unless at the time of deposit they may be freely transferred in accordance with Rule 144(k) and may otherwise be offered and sold freely in the United States or (B) have been registered under the Securities Act of 1933. Such representations and warranties shall survive the deposit of Shares and issuance of ADRs. The Depositary will not knowingly accept for deposit under the Deposit Agreement any Shares required to be registered under the Securities Act of 1933 and not so registered; the Depositary may refuse to accept for such deposit any Shares identified by the Company in order to facilitate the Company's compliance with such Act. (2) Withdrawal of Deposited Securities. Subject to paragraphs (4) and (5), upon surrender of (i) a certificated ADR in form satisfactory to the Depositary at the Transfer Office or (ii) proper instructions and documentation in the case of a Direct Registration ADR, the Holder hereof is entitled to delivery at the Custodian's office of the Deposited Securities at the time represented by the ADSs evidenced by this ADR. At the request, risk and expense of the Holder hereof, the Depositary may deliver such Deposited Securities at such other place as may have been requested by the Holder. Notwithstanding any other provision of the Deposit Agreement or this ADR, the withdrawal of Deposited Securities may be restricted only for the reasons set forth in General Instruction I.A.(1) of Form F-6 (as such instructions may be amended from time to time) under the Securities Act of 1933. (3) Transfers of ADRs. The Depositary or its agent will keep, at a designated transfer office in the Borough of Manhattan, The City of New York (the "Transfer Office"), (a) a register (the "ADR Register") for the registration, registration of transfer, combination and split-up of ADRs, and, in the case of Direct Registration ADRs, shall include the Direct Registration System, which at all reasonable times will be open for inspection by Holders and the Company for the purpose of communicating with Holders in the interest of the business A-2 of the Company or a matter relating to the Deposit Agreement and (b) facilities for the delivery and receipt of ADRs. The term ADR Register includes the Direct Registration System. Title to this ADR (and to the Deposited Securities represented by the ADSs evidenced hereby), when properly endorsed (in the case of ADRs in certificated form) or upon delivery to the Depositary of proper instruments of transfer, is transferable by delivery with the same effect as in the case of negotiable instruments under the laws of the State of New York; provided that the Depositary, notwithstanding any notice to the contrary, may treat the person in whose name this ADR is registered on the ADR Register as the absolute owner hereof for all purposes. Subject to paragraphs (4) and (5), this ADR is transferable on the ADR Register and may be split into other ADRs or combined with other ADRs into one ADR, evidencing the same number of ADSs evidenced by this ADR, by the Holder hereof or by duly authorized attorney upon surrender of this ADR at the Transfer Office properly endorsed (in the case of ADRs in certificated form) or upon delivery to the Depositary of proper instruments of transfer and duly stamped as may be required by applicable law; provided that the Depositary may close the ADR Register at any time or from time to time when deemed expedient by it or requested by the Company. At the request of a Holder, the Depositary shall, for the purpose of substituting a certificated ADR with a Direct Registration ADR, or vice versa, execute and deliver a certificated ADR or a Direct Registration ADR, as the case may be, for any authorized number of ADSs requested, evidencing the same aggregate number of ADSs as those evidenced by the certificated ADR or Direct Registration ADR, as the case may be, substituted. (4) Certain Limitations. Prior to the issue, registration, registration of transfer, split-up or combination of any ADR, the delivery of any distribution in respect thereof, or, subject to the last sentence of paragraph (2), the withdrawal of any Deposited Securities, and from time to time in the case of clause (b)(ii) of this paragraph (4), the Company, the Depositary or the Custodian may require: (a) payment with respect thereto of (i) any stock transfer or other tax or other governmental charge, (ii) any stock transfer or registration fees in effect for the registration of transfers of Shares or other Deposited Securities upon any applicable register and (iii) any applicable charges as provided in paragraph (7) of this ADR; (b) the production of proof satisfactory to it of (i) the identity and genuineness of any signature and (ii) such other information, including without limitation, information as to citizenship, residence, exchange control approval, beneficial ownership of any securities, compliance with applicable law, regulations, provisions of or governing Deposited Securities and terms of the Deposit Agreement and this ADR, as it may deem necessary or proper; and (c) compliance with such regulations as the Depositary may establish consistent with the Deposit Agreement. The issuance of ADRs, the acceptance of deposits of Shares, the registration, registration of transfer, split-up or combination of ADRs or, subject to the last sentence of paragraph (2), the withdrawal of Deposited Securities may be suspended, generally or in particular instances, when the ADR Register or any register for Deposited Securities is closed or when any such action is deemed advisable by the Depositary or the Company. (5) Taxes. If any tax or other governmental charge shall become payable by or on behalf of the Custodian or the Depositary with respect to this ADR, any Deposited Securities represented by the ADSs evidenced hereby or any distribution thereon, such tax or other governmental charge shall be paid by the Holder hereof to the Depositary. The Depositary A-3 may refuse to effect any registration, registration of transfer, split-up or combination hereof or, subject to the last sentence of paragraph (2), any withdrawal of such Deposited Securities until such payment is made. The Depositary may also deduct from any distributions on or in respect of Deposited Securities, or may sell by public or private sale for the account of the Holder hereof any part or all of such Deposited Securities (after attempting by reasonable means to notify the Holder hereof prior to such sale), and may apply such deduction or the proceeds of any such sale in payment of such tax or other governmental charge, the Holder hereof remaining liable for any deficiency, and shall reduce the number of ADSs evidenced hereby to reflect any such sales of Shares. In connection with any distribution to Holders, the Company will remit to the appropriate governmental authority or agency all amounts (if any) required to be withheld and owing to such authority or agency by the Company; and the Depositary and the Custodian will remit to the appropriate governmental authority or agency all amounts (if any) required to be withheld and owing to such authority or agency by the Depositary or the Custodian. If the Depositary determines that any distribution in property other than cash (including Shares or rights) on Deposited Securities is subject to any tax that the Depositary or the Custodian is obligated to withhold, the Depositary may dispose of all or a portion of such property in such amounts and in such manner as the Depositary deems necessary and practicable to pay such taxes, by public or private sale, and the Depositary shall distribute the net proceeds of any such sale or the balance of any such property after deduction of such taxes to the Holders entitled thereto. (6) Disclosure of Interests; Limitations on Ownership. To the extent that the provisions of or governing any Deposited Securities may require disclosure of or impose limits on beneficial or other ownership of Deposited Securities, other Shares and other securities and may provide for blocking transfer, voting or other rights to enforce such disclosure or limits, Holders and all persons holding ADRs agree to comply with all such disclosure requirements and ownership limitations and to cooperate with the Depositary in the Depositary's compliance with any Company instructions in respect thereof. Holders and holders of interests in ADSs will be subject to the provisions of the Hong Kong Securities and Futures Ordinance (the "Ordinance") and any other regulations of Hong Kong relating to disclosure of interests in Shares. For the purpose of this paragraph, "interest" shall have the meaning set forth in the Ordinance. Under the Ordinance, a Holder or holder of an interest in ADSs may have a duty to notify the Company and the Stock Exchange of Hong Kong Limited if such Holder or holder becomes aware that its interest in Shares (including its interest in Shares represented by ADSs) equals or exceeds 10% of the outstanding share capital of the Company. Such Holder or holder of an interest in ADSs may be required to further notify the Company and the Hong Kong Stock Exchange Limited of certain changes in such Holder or beneficial owner's interest in the Shares after the first notification. Under the Ordinance, the Company is obligated to make inquiries if the Company knows or reasonably believes certain shareholders' interest in Shares (including their respective interest in Shares represented by ADSs) exceeds 10% of the then-outstanding share capital of the Company. The Depositary agrees that it shall use reasonable efforts to comply with written instructions received from the Company requesting that the Depositary forward any such requests for information relating to certain shareholders' interest in ADSs to Holders and to forward to the Company any responses to such requests received by the Depositary provided that nothing herein shall be interpreted as obligating the Depositary to provide or obtain any such information not provided to the A-4 Depositary by such Holders. No Holder may individually or with its nominees or other persons acting in concert beneficially own more than 10% of the outstanding share capital of the Company without the prior approval of the China Insurance Regulatory Commission. (7) Charges of Depositary. The Depositary may charge each person to whom ADSs are issued against deposits of Shares, including deposits in respect of Share Distributions, Rights and Other Distributions (as such terms are defined in paragraph (10)), and each person surrendering ADSs for withdrawal of Deposited Securities, U.S. $5.00 for each 100 ADSs (or portion thereof) delivered or surrendered. The Depositary may sell (by public or private sale) sufficient securities and property received in respect of Share Distributions, Rights and Other Distributions prior to such deposit to pay such charge. The following additional charges shall be incurred by the Holders, by any party depositing or withdrawing Shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the ADRs or the Deposited Securities or a distribution of ADRs pursuant to paragraph (10)), whichever is applicable (i) a fee of $.02 or less per ADS (or portion thereof) for any Cash distribution made pursuant to the Deposit Agreement, (ii) to the extent not prohibited by the rules of any stock exchange or interdealer quotation system upon which the ADSs are traded, a fee of $1.50 per ADR or ADRs for transfers made pursuant to paragraph (3) hereof, (iii) a fee for the distribution of securities pursuant to paragraph (10) hereof, such fee being in an amount equal to the fee for the execution and delivery of ADSs referred to above which would have been charged as a result of the deposit of such securities (for purposes of this paragraph (7) treating all such securities as if they were Shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the Depositary to Holders entitled thereto, or (iv) such fees and expenses as are incurred by the Depositary (including without limitation expenses incurred on behalf of Holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of Deposited Securities or otherwise in connection with the Depositary's or its Custodian's compliance with applicable law, rule or regulation. The Company will pay all other charges and expenses of the Depositary and any agent of the Depositary (except the Custodian) pursuant to agreements from time to time between the Company and the Depositary, except (i) stock transfer or other taxes and other governmental charges (which are payable by Holders or persons depositing Shares), (ii) cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing, or Holders delivering Shares, ADRs or Deposited Securities (which are payable by such persons or Holders), (iii) transfer or registration fees for the registration of transfer of Deposited Securities on any applicable register in connection with the deposit or withdrawal of Deposited Securities (which are payable by persons depositing Shares or Holders withdrawing Deposited Securities; there are no such fees in respect of the Shares as of the date of the Deposit Agreement), and (iv) expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency). These charges may be changed in the manner indicated in paragraph (16). (8) Available Information. The Deposit Agreement, the provisions of or governing Deposited Securities and any written communications from the Company, which are both received by the Custodian or its nominee as a holder of Deposited Securities and made generally available to the holders of Deposited Securities, are available for inspection by Holders at the offices of the Depositary and the Custodian and at the Transfer Office. The A-5 Depositary will distribute copies of such communications (or English translations or summaries thereof) to Holders when furnished by the Company. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 and accordingly files certain reports with the United States Securities and Exchange Commission (the "Commission"). Such reports and other information may be inspected and copied at public reference facilities maintained by the Commission located at the date hereof at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. (9) Execution. This ADR shall not be valid for any purpose unless executed by the Depositary by the manual or facsimile signature of a duly authorized officer of the Depositary. Dated: JPMORGAN CHASE BANK, as Depositary By --------------------------------- Authorized Officer The Depositary's office is located at 4 New York Plaza, New York, New York 10004. A-6 [FORM OF REVERSE OF ADR] (10) Distributions on Deposited Securities. Subject to paragraphs (4) and (5), to the extent practicable, the Depositary will distribute to each Holder entitled thereto on the record date set by the Depositary therefor at such Holder's address shown on the ADR Register, in proportion to the number of Deposited Securities (on which the following distributions on Deposited Securities are received by the Custodian) represented by ADSs evidenced by such Holder's ADRs: (a) Cash. Any U.S. dollars available to the Depositary resulting from a cash dividend or other cash distribution or the net proceeds of sales of any other distribution or portion thereof authorized in this paragraph (10) ("Cash"), on an averaged or other practicable basis, subject to (i) appropriate adjustments for taxes withheld, (ii) such distribution being impermissible or impracticable with respect to certain Holders, and (iii) deduction of the Depositary's expenses in (1) converting any foreign currency to U.S. dollars by sale or in such other manner as the Depositary may determine to the extent that it determines that such conversion may be made on a reasonable basis, (2) transferring foreign currency or U.S. dollars to the United States by such means as the Depositary may determine to the extent that it determines that such transfer may be made on a reasonable basis, (3) obtaining any approval or license of any governmental authority required for such conversion or transfer, which is obtainable at a reasonable cost and within a reasonable time and (4) making any sale by public or private means in any commercially reasonable manner. (b) Shares. (i) Additional ADRs evidencing whole ADSs representing any Shares available to the Depositary resulting from a dividend or free distribution on Deposited Securities consisting of Shares (a "Share Distribution") and (ii) U.S. dollars available to it resulting from the net proceeds of sales of Shares received in a Share Distribution, which Shares would give rise to fractional ADSs if additional ADRs were issued therefor, as in the case of Cash. (c) Rights. (i) Warrants or other instruments in the discretion of the Depositary representing rights to acquire additional ADRs in respect of any rights to subscribe for additional Shares or rights of any nature available to the Depositary as a result of a distribution on Deposited Securities ("Rights"), to the extent that the Company timely furnishes to the Depositary evidence satisfactory to the Depositary that the Depositary may lawfully distribute the same (the Company has no obligation to so furnish such evidence), or (ii) to the extent the Company does not so furnish such evidence and sales of Rights are practicable, any U.S. dollars available to the Depositary from the net proceeds of sales of Rights as in the case of Cash, or (iii) to the extent the Company does not so furnish such evidence and such sales cannot practicably be accomplished by reason of the nontransferability of the Rights, limited their short duration or otherwise, nothing (and any Rights may lapse). (d) Other Distributions. (i) Securities or property available to the Depositary resulting from any distribution on Deposited Securities other than Cash, Share Distributions and Rights ("Other Distributions"), by any means that the Depositary may deem equitable and practicable, or (ii) to the extent the Depositary deems distribution of such securities or property not to be equitable and practicable, any U.S. dollars available to the Depositary from the net proceeds of sales of Other Distributions as in the case of Cash. Such U.S. dollars available will be distributed by checks drawn on a bank in the United States for whole dollars and cents. Fractional cents will be withheld without liability and dealt with by the Depositary in accordance with its then current practices. (11) Record Dates. The Depositary may, after consultation with the Company if A-7 practicable, fix a record date (which shall be as near as practicable to any corresponding record date set by the Company) for the determination of the Holders who shall be entitled to receive any distribution on or in respect of Deposited Securities, to give instructions for the exercise of any voting rights, to receive any notice or to act in respect of other matters and only such Holders shall be so entitled. (12) Voting of Deposited Securities. As soon as practicable after receipt from the Company of notice of any meeting or solicitation of consents or proxies of holders of Shares or other Deposited Securities, the Depositary shall distribute to Holders a notice stating (a) such information as is contained in such notice and any solicitation materials, (b) that each Holder on the record date set by the Depositary therefor, subject to any applicable provision of Hong Kong or People's Republic of China law, will be entitled to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the Deposited Securities represented by the ADSs evidenced by such Holder's ADRs and (c) the manner in which such instructions may be given, including instructions to give a discretionary proxy to a person designated by the Company. Upon receipt of instructions of a Holder on such record date in the manner and on or before the date established by the Depositary for such purpose, the Depositary shall endeavor insofar as practicable and permitted under the provisions of or governing Deposited Securities to vote or cause to be voted the Deposited Securities represented by the ADSs evidenced by such Holder's ADRs in accordance with such instructions. The Depositary will not itself exercise any voting discretion in respect of any Deposited Securities. (13) Changes Affecting Deposited Securities. Subject to paragraphs (4) and (5), the Depositary may, in its discretion, amend this ADR or distribute additional or amended ADRs (with or without calling this ADR for exchange) or cash, securities or property on the record date set by the Depositary therefor to reflect any change in par value, split-up, consolidation, cancellation or other reclassification of Deposited Securities, any Share Distribution or Other Distribution not distributed to Holders or any cash, securities or property available to the Depositary in respect of Deposited Securities from (and the Depositary is hereby authorized to surrender any Deposited Securities to any person and to sell by public or private sale any property received in connection with) any recapitalization, reorganization, merger, consolidation, liquidation, receivership, bankruptcy or sale of all or substantially all the assets of the Company, and to the extent the Depositary does not so amend this ADR or make a distribution to Holders to reflect any of the foregoing, or the net proceeds thereof, whatever cash, securities or property results from any of the foregoing shall constitute Deposited Securities and each ADS evidenced by this ADR shall automatically represent its pro rata interest in the Deposited Securities as then constituted. (14) Exoneration. The Depositary, the Company, their agents and each of them shall: (a) incur no liability (i) if any present or future law, regulation of the United States, Hong Kong, the People's Republic of China or any other country, or of any governmental or regulatory authority or stock exchange, the provisions of or governing any Deposited Securities, act of God, war or other circumstance beyond its control shall prevent, delay or subject to any civil or criminal penalty any act which the Deposit Agreement or this ADR provides shall be done or performed by it, or (ii) by reason of any exercise or failure to exercise any discretion given it in the Deposit Agreement or this ADR; (b) assume no liability except to perform its obligations to the extent they are specifically set forth in this A-8 ADR and the Deposit Agreement without gross negligence or bad faith; (c) in the case of the Depositary and its agents, be under no obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or this ADR; (d) in the case of the Company and its agents hereunder be under no obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or this ADR, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense (including fees and disbursements of counsel) and liability be furnished as often as may be required; or (e) not be liable for any action or inaction by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, or any other person believed by it to be competent to give such advice or information. The Depositary, its agents and the Company may rely and shall be protected in acting upon any written notice, request, direction or other document believed by them to be genuine and to have been signed or presented by the proper party or parties. The Depositary and its agents will not be responsible for any failure to carry out any instructions to vote any of the Deposited Securities, for the manner in which any such vote is cast or for the effect of any such vote. The Depositary and its agents may own and deal in any class of securities of the Company and its affiliates and in ADRs. Notwithstanding anything to the contrary set forth in the Deposit Agreement or an ADR, the Depositary and its agents may fully respond to any and all demands or requests for information maintained by or on its behalf in connection with the Deposit Agreement, any Holder or Holders, any ADR or ADRs or otherwise related hereto to the extent such information is requested or required by or pursuant to any lawful authority, including without limitation laws, rules, regulations, administrative or judicial process, banking, securities or other regulators. The Company has agreed to indemnify the Depositary and its agents under certain circumstances and the Depositary has agreed to indemnify the Company under certain circumstances. Neither the Company nor the Depositary nor any of their respective agents shall be liable to Holders or beneficial owners of interests in ADSs for any indirect, special, punitive or consequential damages. No disclaimer of liability under the Securities Act of 1933 is intended by any provision hereof. (15) Resignation and Removal of Depositary; the Custodian. The Depositary may resign as Depositary by written notice of its election to do so delivered to the Company, or be removed as Depositary by the Company by written notice of such removal delivered to the Depositary. The Depositary may appoint substitute or additional Custodians and the term "Custodian" refers to each Custodian or all Custodians as the context requires. (16) Amendment. Subject to the last sentence of paragraph (2), the ADRs and the Deposit Agreement may be amended by the Company and the Depositary, provided that any amendment that imposes or increases any fees or charges (other than stock transfer or other taxes and other governmental charges, transfer or registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or that shall otherwise prejudice any substantial existing right of Holders, shall become effective 30 days after notice of such amendment shall have been given to the Holders. Every Holder of an ADR at the time any amendment to the Deposit Agreement so becomes effective shall be deemed, by continuing to hold such ADR, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Holder of any ADR to surrender such ADR and receive the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. Any A-9 amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the ADSs to be registered on Form F-6 under the Securities Act of 1933 or (b) the ADSs or Shares to be traded solely in electronic book-entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to prejudice any substantial rights of Holders. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require amendment or supplement of the Deposit Agreement or the form of ADR to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and the ADR at any time in accordance with such changed rules. Such amendment or supplement to the Deposit Agreement in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance. (17) Termination. Upon the resignation or removal of the Depositary pursuant to the Deposit Agreement, the Depositary may, and shall at the written direction of the Company, terminate the Deposit Agreement and this ADR by mailing notice of such termination to the Holders at least 30 days prior to the date fixed in such notice for such termination. After the date so fixed for termination, the Depositary and its agents will perform no further acts under the Deposit Agreement and this ADR, except to receive and hold (or sell) distributions on Deposited Securities and deliver Deposited Securities being withdrawn. As soon as practicable after the expiration of six months from the date so fixed for termination, the Depositary shall sell the Deposited Securities and shall thereafter (as long as it may lawfully do so) hold in a segregated account the net proceeds of such sales, together with any other cash then held by it under the Deposit Agreement, without liability for interest, in trust for the prorata benefit of the Holders of ADRs not theretofore surrendered. After making such sale, the Depositary shall be discharged from all obligations in respect of the Deposit Agreement and this ADR, except to account for such net proceeds and other cash. After the date so fixed for termination, the Company shall be discharged from all obligations under the Deposit Agreement except for its obligations to the Depositary and its agents. A-10 EX-10.1 5 dex101.txt RESTRUCTURING AGREEMENT Exhibit 10.1 ENGLISH TRANSLATION OF CHINESE LANGUAGE ORIGINAL Restructuring Agreement between China Life Insurance (Group) Company and China Life Insurance Company Limited TABLE OF CONTENTS 1. Definitions...............................................................4 2. Effectiveness of the Restructuring........................................6 3. Representations and Warranties............................................8 4. Implementation of the Restructuring.......................................9 5. Taxation.................................................................13 6. Indemnities..............................................................14 7. Non-Competition..........................................................16 8. Applicable Laws and Resolution of Disputes...............................17 9. Supplemental Provisions..................................................17 APPENDIX I Further Representation and Warranties Given by Party A......................21 II Financial Report...........................................................36 III Injected Assets...........................................................37 IV Legal Proceedings..........................................................39 V Restructuring Documents.....................................................41 VI Valuation Report...........................................................42 VII Electronic Document.......................................................43 VIII Reinsurance Contracts....................................................44 IX List of Assets and Liabilities Transferred to Party B......................45 2 This agreement (the "Agreement") is entered into on September 30, 2003 in Beijing, People's Republic of China (the PRC) by and between the following two parties: Party A: China Life Insurance (Group) Company (Legal Person Enterprise Business License No.: 1000001002372), a wholly state-owned company established and existing under the laws of the PRC, whose address is at No. 5 Guang Ying Yuan Xi Qu, Xicheng District, Beijing, PRC. Party B: China Life Insurance Company Limited (Legal Person Enterprise Business License No.: 1000001003796), a joint stock limited company established and existing under the laws of the PRC, whose address is at China Life Building, No.16 Chao Yang Men Wai Avenue, Chaoyang District, Beijing, PRC. Whereas: 1. Party A has obtained State Council's approval to promote and establish Party B. Party B plans to make a public offering abroad, including the offering to overseas investors of overseas-listed foreign-invested shares (hereinafter referred to as H Shares) to be listed on the Stock Exchange of Hong Kong Limited (hereinafter referred to as HKSE), and American Depository Shares (hereinafter referred to as ADS) to be listed on the New York Stock Exchange (hereinafter collectively referred to as Overseas Offering). Party A plans to conduct a restructuring pursuant to this Agreement. 2. Party A has transferred to Party B, after appropriate valuation, the insurance business related to the New Policies as set forth in Clause 1.1 of this Agreement, and its related assets, liabilities, equity, and operating assets required for principle business, and has established Party B on June 30, 2003 as the sole promoter of Party B. 3. As at the date hereof, Party A owns 100% of the shareholding in Party B. Upon the completion of the Overseas Offering, Party A shall become the controlling shareholder of Party B. 4. In order to ensure the implementation of the contents and purposes of the restructuring, Party A and Party B have agreed to make appropriate arrangements for the restructuring and matters relating to the restructuring in accordance with the terms and conditions set forth herein. IT IS HEREBY AGREED AS FOLLOWS: 3 1. Definitions 1.1. Unless the context otherwise requires, the following expressions have the following meanings in this Agreement/1/: Appraiser means China Financial and Accounting Consulting Co. Ltd. China means People's Republic of China (for the purpose of this Agreement, not including the Hong Kong Special Administrative Area, Maucau Special Administrative Area and Taiwan Province). Controlling Shareholder means, in the context of this Agreement, the person who satisfies any of the following conditions: (1) a person who, acting alone or in concert with others, has the power to elect a majority of the board of directors in a company; (2) a person who, acting alone or in concert with others, has the power to control the exercise of 30% or more of the voting rights in a company; (3) a person who, acting alone or in concert with others, holds 30% or more of the issued shares of a company; or (4) a person who, acting alone or in concert with others, has de facto control of a company in any other way. Effective Date of the Restructuring means the Establishment Date of Party B. Establishment Date of Party B means June 30, 2003 (the date on which Party B was registered with the State Administrative Bureau for Industry and Commerce of the PRC, and obtained the Legal Person Enterprise Business License). Financial Reports means (i) the pro forma financial reports of the year of 2000, 2001 and the period from January 1, 2003 to June 30, 2003; and (ii) pro forma profit reports of the year of 2000, 2001 and 2002 of Party B, in each case which are prepared by Party A in accordance with the Enterprises' Accountant System of the PRC, and are audited by Pricewaterhouse-Coopers Accountants Firm Co. Ltd. (as attached to this Agreement as Appendix II). Injected Assets means the injected assets set out in Appendix III hereto. - ---------- /1/ Translator's Note: The order of the terms defined hereunder have been re-arranged to English alphabetical order for the convenience of English readers. 4 New Policies mean the long-term and short-term insurance policies as well as riders supplemental to policies that Party A entered into according to the following definitions: A. long-term insurance policies: policies issued by Party A on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999 and having a term of more than one year (not including one year) from the date of issuance, and a. policies that are recorded as a long-term insurance policy as of June 30, 2003 in the actuarial database contained in Appendix VII hereto, or b. policies having terms of group supplemental medical plans (fund type). B. short-term insurance policies: main policies issued on or after June 10, 1999, having a term of one year or less from the date of issuance. C. riders supplemental to policies: all riders supplemental to the policies described in A and B above. Non-transferred Policies mean all the policies that are directly, or through reinsurance, underwritten by Party A (whether primary policies or riders supplemental to the policies) which are still being performed, or otherwise can be reinstated, excluding Transferred Policies. Party A means China Life Insurance (Group) Company and its subsidiaries (other than Party B), branches and other branch offices. Party A shall include the assets and business of Party A, unless the context otherwise requires. Party B means China Life Insurance Company Limited and its subsidiaries, branches and other branch offices. Party B shall include the assets and business of Party B, unless the context otherwise requires. Prospectus means any prospectus to be published by Party B in connection with the initial public offering of H shares and ADS. Relevant Period means the period between the Valuation Date and the Establishment Date of Party B (both dates included). 5 Restructuring means the restructuring as referred to in the hereof, described Recital in the Restructuring Plan and implemented in accordance with the terms and conditions set out herein. Restructuring Documents mean the Restructuring Plan and the restructuring approval documents set out in Appendix V hereto. Restructuring Plan means the restructuring plan set out in Appendix V. RMB means the lawful currency of China denominated in yuan. Transferred Contracts mean the contracts defined by Clause 2 of Appendix III hereto. Transferred Policies mean the New Policies and the reinsurance policies set out in Appendix VIII hereof. Valuation Date means June 30, 2002. Valuation Report means the Asset Valuation Report of the Joint Stock Company promoted and established by China Life Insurance Company prepared by the Appraiser in connection with the establishment of Party B and approved by the Ministry of Finance of the PRC on June 24, 2003, with June 30, 2002 being the Valuation Date. The Valuation Report is enclosed as Appendix VI hereto. 1.2. In this Agreement, unless otherwise provided: 1.2.1. Clauses or Appendices are the clauses and appendices of this Agreement; and 1.2.2. This Agreement shall be construed as the agreement may be extended, amended, altered or supplemented from time to time. 2. Effectiveness of the Restructuring 2.1. Party A confirms that the Restructuring has been approved by relevant authorities Chinese as of the Establishment Date of Party B. All relevant approval documents are set out in Appendix V hereto. Both Parties agree that the Restructuring shall officially come into effect upon the Effective Date of the Restructuring. 2.2. Both Parties agree to implement the Restructuring in accordance with the relevant provisions of the Restructuring Plan and this Agreement. 2.3. Party A and Party B agree that upon the Effective Date of the Restructuring (including the date itself), Party B shall enjoy the ownership of the assets, credits, rights and interests under the Injected 6 Assets (including the Transferred Policies), and assume the liabilities, responsibilities and obligations under the Injected Assets (including the Transferred Policies) disclosed by the Financial Reports, unless otherwise provided for herein. Party B shall assume no obligations and responsibilities, and enjoy no rights relating to other assets (including the Non-transferred Policies), rights, interests, liabilities, responsibilities and obligations (including potential liabilities and obligations) and related businesses retained by Party A pursuant to the Restructuring Plan, the Financial Reports and this Agreement. Party A shall continue to enjoy the relevant rights and assume the relevant responsibilities and obligations relating to its retained rights, interests, liabilities, responsibilities and obligations (including potential liabilities, responsibilities and obligations) under the assets retained by it (including Non-transferred Policies) and related businesses, unless otherwise provided by Clause 6.1.8 hereof. 2.4. According to the Tentative Regulations on State-Owned Capital Administration and Financial Management in the Course of Enterprises' Restructuring issued by the Ministry of Finance, an increase in the net assets resulting from the profits generated from the Injected Assets during the period between the Valuation Date and the Establishment Date of Party B shall be owned by Party A, or with the approval of Party A, shall become the exclusive state-owned capital common reserve of Party B, to be converted into state-owned shares held by Party A upon any future annual increase of shares. Party A shall compensate Party B for a decrease in the net assets due to losses incurred during the period between the Valuation Date and the Establishment Date of Party B. In accordance with the Restructuring Plan, Party A shall enjoy (or bear) the increase (or decrease) in net assets resulting from profits (or losses) of the Injected Assets during the period between the Valuation Date and the Establishment Date of Party B. 2.5. Party A confirms that the Injected Assets have been valuated by the Appraiser (which valuation is recorded in the Valuation Report), and approved by the relevant Chinese governing authorities; the net Injected Assets, pursuant to statutory conversion ratio, have been converted into 20 billion shares, each of which has a par value of RMB 1 yuan; and the aforesaid shares have been issued to Party A upon the Establishment Date of Party B, and approved by the relevant authority to be used as registered capital of Party B. Thus, Party B has paid up to Party A the consideration of the Injected Assets. As a result, Party A has no claim to any other consideration in relation to the Injected Assets from Party B. 2.6. Party A confirms that in accordance with the Restructuring Plan and Pu Hua Yong Dao Yan Zi [2003] No.93 Capital Verification Report 7 produced by PricewaterhouseCoopers Accounting Firm Co. Ltd on June 27, 2003, the net assets under the Injected Assets injected to Party B by Party A on the Establishment Date of Party B amounts to RMB 29.608 billion. 2.7. Injected Assets have been transferred and delivered in status quo to Party B on the Establishment Date of Party B legally and effectively, unless otherwise provided by Clause 4 hereof, Implementation of the Restructuring. 3. Representations and Warranties 3.1. Party A presents to Party B such representations and warranties as provided in Appendix I and this Clause that as of the Effective Date of the Restructuring and the date of this Agreement: 3.1.1. Party A has injected the Injected Assets into Party B in accordance with the laws of the PRC, unless otherwise provided in Clause 4 hereof, Implementation of the Restructuring hereof; 3.1.2. Any material approval, permission, authorization, consent, confirmation, exemption, registration, filing or record from a third party, which is required to be obtained or completed for the injection of the Injected Assets into Party B by Party A have been obtained or completed, and are effective as at the Establishment Date of Party B, unless otherwise provided for herein; 3.1.3. On the Effective Date of the Restructuring and the date of this Agreement, Party B has no material liabilities or contingent liabilities other than those disclosed by the Financial Reports under the item of the Injected Assets and those (including contingent liabilities) arising from the normal operation of the Injected Assets during the Relevant Period; 3.1.4. Party A has committed no action that is in material breach of laws or regulations and which may possibly lead to any material financial loss of Party B; 3.1.5. Party A has committed no action that infringes upon a third party's patent right, copy right, know-how, design, domain name, trademark, goodwill or any other intellectual properties protected by laws, and which may possibly lead to any material financial loss of Party B. 8 3.1.6. Unless otherwise set forth in Appendix IV hereof, there is no ongoing, pending or threatened material and/or important lawsuit, arbitration, claim or any other legal proceeding against Party A (as plaintiff, defendant or in any other capacity), or in connection with the business of Party B or the Injected Assets, and which may have a material adverse effect on Party B's business operations and/or the Injected Assets; nor any claim which may have a material adverse effect on Party B's business operation and/or the Injected Assets, or any fact which may lead to any such claim; 3.1.7. The representations and warranties made by Party A in this Clause and the further representations and warranties made by Party A in Appendix I hereof are true, accurate and complete and contain no misleading elements, unless otherwise disclosed in writing by Party A to Party B prior to the execution of this Agreement. 3.1.8. The disclosures in writing by Party A to Party B in respect of the Injected Assets are true, accurate and complete, and there is no other circumstances that may possibly lead to a material adverse effect on the Injected Assets. 3.2. Party A agrees, pursuant to Clause 6 hereof, to compensate Party B against the losses, expenses and expenditures (including but not limited to legal fees) suffered by Party B as a result of breach by Party A of the representations and warranties contained herein. 3.3. The representations and warranties contained herein shall survive after the completion of the Restructuring. 4. Implementation of the Restructuring 4.1. Both parties agree to use their best efforts to take any necessary steps (including but not limited to the signing of, or procuring the signing by other persons of, any related documents; applying for and acquiring any related approval, consent, license, authorization, confirmation or exemption in order to help Party B obtain all the licenses and certificates necessary for the operations of Party B or Injected Assets; and handling all procedures related to registrations or filings in accordance with relevant proceedings) in order to ensure that the Restructuring shall be fully implemented in accordance with this Agreement, the Restructuring Documents and the Financial Reports. Both Parties shall, on the basis of equality, fairness and reasonableness, through friendly negotiation, properly settle the matters necessary for the implementation of the Restructuring but not 9 prescribed in this Agreement, the Restructuring Documents and the Financial Reports. 4.2. During the Relevant Period, (i) Party A shall, in its ordinary course of operations, operate, manage, employ and maintain the Injected Assets and the newly generated insurance business assets during such period in accordance with its usual practice; (ii) starting from the Effective Date of the Restructuring, Party B shall enjoy the ownership of the assets, credits, rights and interests under the assets of such newly generated insurance business; (iii) if the Injected Assets are reduced as a result of Party A's operations, Party A shall supplement them in full. 4.3. Without prejudice to Clauses 3.1.5, 3.1.6, 3.1.7 and 3.1.8, Party B shall participate as a party in any lawsuit or arbitration relating to the Injected Assets that arise after the Effective Date of the Restructuring, and enjoy the relevant rights and assume the relevant obligations thereunder. Upon Party B's request, Party A shall render prompt assistance to Party B, including but not limited to furnishing all the documents Party B requires, and signing or procuring others to sign related documents so that Party B may effectively become the party to such lawsuit or arbitration and exercise the rights such a party shall have. 4.4. Party A shall continue to bear all liabilities and obligations unless otherwise provided for as Party B's liabilities and obligations under or pursuant to this Agreement. Party A undertakes herein that Party B shall not sustain any loss or assume any liability as a result of aforesaid liabilities and obligations borne by Party A. Party A shall bear, promptly and sufficiently, the legal expenses; including retainers, judiciary fee, travel expenses and other related expenses should Party B be involved in any lawsuits, arbitrations or legal proceedings as a result of such liabilities and obligations. Party A undertakes to provide Party B with guaranties or any other security Party B needs to secure Party B's rights against any impairment, if the assets of Party B are withheld, subject to lien or imperiled by the aforementioned liabilities and obligations; furthermore, Party A undertakes to bear all the losses and related expenses arising from any aforementioned charge or lien, whether reasonable or not. Party A undertakes to pay up all such expenses within 7 days of the receipt of Party B's bill of losses and expenses. 4.5. Where any third party's authorization, approval, consent, permission, confirmation or exemption is required for the transfer of any assets, interests or liabilities under the Injected Assets to Party B, and the aforesaid procedures are not completed as at the Establishment Date of Party B, Party A shall, as required by Party B, continue to hold and manage the aforesaid assets, interests and liabilities in the interest of 10 Party B until the aforesaid assets, interests and liabilities can be injected legally, effectively and fully into Party B pursuant to the provisions of this Agreement, except for the requirements of Clause 4.1 above. 4.6. Both parties agree that Party B shall be the insurer with respect to all policies issued by Party A during the period from June 30, 2003 to the date when Party B commenced issuing policies in its own name. Any rights, interests, profits, obligations, losses or claims of an insurer thereunder shall be enjoyed or assumed by Party B. 4.7. During the period provided by Clause 4.5 where Party A continues to hold and manage the assets, interests, and liabilities under the Injected Assets as required by and in the interest of Party B, any rights, interests, profits and all obligations, losses and claims arising from or in connection with aforementioned assets, equity, and liabilities shall be enjoyed or borne by Party B (not including any obligations, damages and claims as a result of Party A's failure to perform its obligations under Clause 4.5). 4.8. In the process of the implementation of the Restructuring, if there is any ambiguity in the separation of assets and liabilities, the specifics in respect of the separation of assets and liabilities provided in the Restructuring Plan and the Financial Reports shall be conclusive or, if necessary, reference may be made to the calculation formula for adjusting the assets and liabilities as well as other relevant documentation applied when preparing the Restructuring Plan and the Financial Reports. 4.9. Party A and Party B undertake to each other that if one party receives the other party's accounts receivable after the Restructuring becomes effective, such accounts receivable shall be reimbursed by the receiving party to the other party within 7 days of receipt and confirmation of the accounts receivable. 4.10. Party A shall deliver to Party B all materials that are related to the business arising from Transferred Polices and other Transferred Contracts, including original documents, copies, computer discs, business records, financial and accounting records, business data, statistics, training manuals and all relevant technology records, technology information, technology data, technology blueprints, technology handbooks, technology books, research and development project materials, as well as all software that are related to the business of Party B (whether they are recorded in a written form or saved in a computer or in any other way). 11 4.11. For the purpose of cross-checking accounts, both parties agree that they shall make three computer disks in respect of the data compiled as of June 30, 2003 from the database contained in Appendix VII hereof, with one for each party and the 3rd one kept with the company's PRC legal counsel for inspection. 4.12. Pursuant to the Policy Management Agreement and the Asset Management Agreement separately entered into by both parties, Party B shall provide Party A with the services under the said agreements. 4.13. Pursuant to the Property Leasing Agreement separately entered into by both parties, Party A shall lease to Party B the properties under the said agreement. 4.14. Pursuant to Trademark License Agreement separately entered into by both parties, Party A shall grant Party B the right to use the trademarks under the said agreement. 4.15. The interest, moratoria interest and other expenses arising from the liabilities prior to the Effective Date of the Restructuring arising under the Injected Assets shall be borne by Party A. Party A shall fully indemnify Party B against any losses sustained by Party B as a result of the aforementioned interest, moratoria interest and other expenses. 4.16. Unless otherwise provided by applicable laws, Party B shall have no obligations to any employee who was employed by Party A prior to the Establishment Date of Party B for the payment of salary, welfare, allowances and any other rights and interests, including but not limited to one time housing allowance and extra allowances other than social pension plan after retirement, accrued during the employment with Party A and pursuant to any law, contract, judgment, decision or any binding document. If any aforesaid employee files a claim in respect of the rights and interests mentioned above against Part B, Part A shall fully indemnify Party B against the losses sustained by Party B as a result of such claim. 4.17. Unless otherwise provided by applicable laws, Party B shall have no obligation whatsoever to any person who had been employed by Party A on or prior to the Establishment Date of Party B but is not employed by Party B, including but not limited to those who were employed by Party A on or prior to the Establishment Date of Party B but have been laid off or have retired, both officially and unofficially, prior to the date of this Agreement. If any aforementioned employee files a claim based on his or her employment by Party A against Part B, Part A shall fully indemnify Party B against the losses sustained by Party B as a result of such claim to the effect as if such claim had never been filed. 12 5. Taxation 5.1. For the purpose of this Clause 5, the term tax means all the taxes or their related payments levied by the State, local tax authorities or the State or local governments, including but not limited to income tax, value-added tax, business tax, consumption tax, deed tax, tariff, stamp duty, and: 5.1.1. Taxes to be levied on, or payments to be collected, as a result of subcontracting or similar arrangements with relevant authorities; 5.1.2. Any tax to be further levied, irrespective of whether additional taxes or further levies arise from the fact that the tax already levied or paid was inadequate, or the deduction or exemption granted or enjoyed relating the tax levied or paid is inappropriate or is illegally obtained; 5.1.3. Any fine, overdue fine or other amount payable in respect of any tax. 5.2. Without prejudice to Clause 6.2 of this Agreement, Party A shall bear: 5.2.1. All taxes arising from or in connection with the Injected Assets before the Effective Date of the Restructuring, irrespective of whether such taxes are collected or paid before or on or after the Effective Date of the Restructuring, to the extent not already accounted for or specified in the Financial Reports; 5.2.2. All taxes arising from or in connection with the assets, interests and liabilities and their related businesses retained by Party A pursuant to the provisions of the Restructuring Documents, Financial Reports and this Agreement. 5.3. Party A agrees that Party B shall not bear the enterprise income tax arising from the added value resulting from the valuation of the Injected Assets, and that enterprise income tax arising from added value resulting from the valuation of the Injected Assets and all other taxes shall be borne by Party A. 5.4. Pursuant to Clause 5.2 and 5.3 hereof, Party B shall bear all taxes arising from or in connection with the ownership, management or operation of the Injected Assets on or after the Effective Date of the Restructuring. 5.5. Unless otherwise provided herein, all taxes arising from or in connection with the injection of the Injected Assets into Party B by 13 Party A in accordance with the Restructuring Documents, the Financial Reports and this Agreement shall be respectively borne by Party A and Party B in accordance with applicable laws. 6. Indemnities 6.1. Party A hereby undertakes to indemnify Party B completely, sufficiently, timely, effectively and in full from and against any losses incurred as a result of: 6.1.1. Any claim, lawsuit, arbitration, loss, compensation, payment, cost, expense and expenditure (including but not limited to professional service fees and expenses) (collectively referred to as the Claims; and the Claims in the following clauses shall have the same meaning) in connection with the taxes specified in Clause 5.2 hereof; 6.1.2. Taxes not borne by Party B in Clause 5.3 hereof and any Claims in connection with such taxes; 6.1.3. Taxes not borne by Party A in Clause 5.5 and any Claims in connection with such taxes; 6.1.4. Any challenge, interference or Claim by any third party with respect to the lease of Party A's properties by Party B under the Property Leasing Agreement; 6.1.5. Any Claims arising from the Injected Assets against Party B prior to the Effective Date of the Restructuring, save as those for which reserves have been made in the Financial Reports; 6.1.6. On or after the Effective Date of the Restructuring, any Claims made against Party B arising from or in connection with any negligence or misconduct by Party A in connection with Party A's performance of any contract in accordance with Clause 4.5 hereof; 6.1.7. On or after the Effective Date of the Restructuring, any Claims or losses incurred by Party B in its capacity as the insurer of insurance policies in accordance with Clause 4.6 hereof. 6.1.8. On or after the Effective Date of the Restructuring, any payment of Claims and related expenses by Party B, at the request of any policy holder, in performing any obligation under an insurance policy that is not recorded in the actuarial database contained in Appendix VII hereof, but is otherwise proved by sufficient evidence to be a policy Party A entered 14 into on or after June 10, 1999, having a term of more than one year (not including one year) and having its terms approved by or filed with the CIRC on or after June 10, 1999; 6.1.9. On or after the Effective Date of the Restructuring, any losses and Claims Party B suffered as a result of disputes in connection with Party A's being the insurer of policies pursuant to Clause 6.1.8; 6.1.10. Any Claims arising from or in connection with the contingent liabilities that are disclosed by the Financial Reports but for which the reserve are not provided for or the provision of the reserve is not sufficient, and which have subsequently have become the liabilities of Party B for any reason on or after the Effective Date of the Restructuring; 6.1.11. Prior to, on or after the Effective Date of the Restructuring, (i) Any Claims against Party B arising from or in connection with any breach by Party A of the provisions of the Financial Reports, the Restructuring Documents and this Agreement to inject the Injected Assets into Party B; (ii) Any Claims against Party B arising from or in connection with the assets, interests and liabilities retained by Party A pursuant to the provisions of the Financial Reports, the Restructuring Documents and this Agreement; (iii) Any Claims against Party B arising from or in connection with the injection of the Injected Assets into Party B by Party A; and (iv) Any Claims against Party B arising from any breach by Party A of any provisions hereof (including but not limited to Clause 3 hereof and Party A's further representations and warranties in Appendix I). 15 6.2. Party A undertakes to indemnify Party B in full against any Claims incurred by Party B arising in other capacity in any ongoing, pending or threatened arbitration or lawsuit, including but not limited to those disclosed in this Agreement, that involves Party A, as plaintiff, defendant or in any other capacity, with respect to the Injected Assets. 6.3. Party B undertakes to indemnify Party A against any Claims arising from any breach by Party B of any provisions hereof. 6.4. The indemnities mentioned in Clause 6.1, 6.2, 6.3 include, but not limited to, all payments, costs or expenses arising from or in connection with the settlement of any Claims or the enforcement of the judgments, rulings or arbitration awards on such Claims. 6.5. Party A or Party B shall be entitled to take appropriate steps to fully control the claim procedures with respect to any Claim by third party. Party A or Party B shall make any Claims in writing to the other Party pursuant to the provisions hereof, and shall summit a specific description about the facts and circumstances relating to such Claims. 7. Non-Competition Party A undertakes to deal with all matters relating to horizontal competition in accordance with the terms of the Non-competition Agreement entered into separately by both parties. 16 8. Applicable Laws and Resolution of Disputes 8.1. The effectiveness, interpretation and performance of this Agreement shall be governed by the laws of the PRC. 8.2. Any disputes arising from or in connection with the performance and interpretation of this Agreement shall be first resolved through friendly negotiation between both parties. 8.3. In the case no resolution can be reached by both parties within 30 days after the commencement of negotiation, such dispute shall be submitted to China International Economic and Trade Arbitration Commission (CIETAC) for arbitration in accordance with the then effective arbitration rules. The arbitral award shall be final and conclusively binding upon both parties. 9. Supplemental Provisions 9.1. Any amendment of this Agreement and its appendices shall only be made in the form of a written agreement, signed by both parties and approved by appropriate legal person actions taken by both parties. 9.2. This Agreement and the appendices thereof shall be deemed to represent the entire agreement concerning the transactions mentioned herein, and shall supercede any verbal or written agreements, contracts, understandings or correspondence concluded previously concerning such transactions. The titles of clauses herein are set out only for the convenience of reading, and are of no legal effect. 9.3. The illegality, invalidity or unenforceability of any one clause shall not affect the validity and enforceability of the other clauses of this Agreement. 9.4. Unless otherwise provided, either Party's failure to exercise or postponement of the exercise of its rights, authorities or privileges under this Agreement shall not be regarded as the waiver of such rights, authorities and privileges; and any single or partial exercise of such rights, authorities and privileges shall not exclude the exercise of any other rights, authorities and privileges. 9.5. Public Announcement Unless otherwise provided by applicable laws or the requirements of HKSE, U.S. Securities and Exchange Commission, New York Stock Exchange or other regulatory authorities, a Party shall not release or permit any person to release any announcement related to the subject matter of this Agreement or any incidental matters in connection with 17 this Agreement without prior written consent of the other Party (such consent not to be unreasonably denied or withheld). 9.6. Non-Assignment A Party shall not assign all or part of the rights, interests, liabilities or obligations under this Agreement in any way without prior written consent of the other Party. 9.7. Notices Any notice or correspondence provided by or relating to this Agreement shall be made in a written form, delivered in person or by ways of facsimile or registered letter. Unless otherwise specified to the other Party by additional notice, such notices shall be delivered to the following addresses. Any notice or correspondence under this Agreement, if mailed by way of registered letter, shall be deemed to be delivered on the 7th business day following the date of postmark; if delivered by way of facsimile, shall be deemed to be delivered on the 1st business day from the date of the successful dispatch; if delivered in person, shall be deemed to be delivered on the date of submission. Party A: China Life Insurance (Group) Company Address: No. 5 Guan Ying Yuan Xi Qu, Xicheng District, Beijing Fax: 010 6611 1567 Tel: 010 6611 4433 Party B: China Life Insurance Company Limited Address: China Life Building, No.16 Chao Yang Men Wai Avenue, Chaoyang District, Beijing Fax: 010-8565 2232 Tel: 010-8565 9999 Each Party shall promptly inform the other Party in written notice in accordance with this Clause of any changes in the contact details. 18 9.8. This Agreement shall be executed in Chinese. 9.9. This Agreement shall be executed in 4 originals, and each Party shall hold two originals respectively, each of which shall have the same legal effect. 9.10. The appendices of this Agreement shall constitute an integral part hereof, and are equally binding as if they have been incorporated herein. 9.11. Unless otherwise provided for herein, Party A and Party B shall be responsible for their respective costs and expenses incurred during the negotiation, preparation and implementation of this Agreement. 9.12. This Agreement shall come into effect upon the signing and sealing by the authorized representatives of both parties, and the effective date shall apply retroactively the date of the issuance of Party B's enterprise legal person business license. Both Parties have procured their respective authorized representatives to sign on this Agreement on the date set forth at the beginning of this Agreement. 19 Party A: Party B: China Life Insurance (Group) Company China Life Insurance Company Limited (Seal) (Seal) Legal Representative/ Legal Representative/ Authorized Representative (Signature) Authorized Representative (Signature) Appendix I Further Representations and Warranties Given by Party A Being the sole promoter of Party B, in respect of the validity of Party B's establishment, Party B's organizational structure and all respects of the Injected Assets as at the Effective Date of the Restructuring, as at the Establishment Date of Party B and as at the execution date of this Agreement, Party A hereby further presents to Party B representations, warranties and undertakings as follows: 21 1. Legal Capacity and Authority of Both Party A and Party B 1.1. Both Party A and Party B are companies with the status and capacity of independent legal persons validity incorporated and in existence pursuant to the laws of China. 1.2. Pursuant to the laws and regulations of China, the articles of association of both Party A and Party B and/or other organizational documents, Party A and Party B are entitled to execute, and have legally and effectively executed, this Agreement, other agreements and contracts to which Party A and Party B are the parties in connection with the Restructuring. Both Parties shall be entitled to enjoy and perform all rights and obligations specified in such agreements and contracts. 1.3. In accordance with the laws of China, Party B shall have the right to operate the Injected Assets following the Effective Date of the Restructuring. 2. Share Capital 2.1. Party A guarantees that no one but Party A owns the share options and preemptive rights arising from or in connection with the share capital of Party B as at the Establishment Date of Party B; and that no mortgage, lien, guarantee or other third party's claims related to the share capital of Party B (collectively hereafter referred to as third party's claims) have been created; and that no agreement has been made or created for all the aforementioned items; and no agreements or other arrangements that require or may require Party B to issue additional equity interests beyond those issued currently exist; and that no persons having entitlement, or claiming to have entitlement, to the same have made any claims or demands thereof. 2.2. Until the Effective Date of the Restructuring (including the date itself), there shall not exist any valid agreements involved in the issuance, allotment, or assignment related to the share or equity interests or loan capital of Party B at present or in future, nor any rights granted to anyone in respect of the demand to issue, allot, or assign any share or equity interests or loan capital of Party B (including any share option or preemptive right or assignment and transfer), whether conditional or unconditional. 3. Accounts and Business 3.1. Accounts The Financial Report of Party B: 22 3.1.1. complies with the PRC Accounting System for Enterprises, on the assumption that Party B has been existing since January 1, 2000 and the Restructuring has been completed; 3.1.2. sets out, in accordance with the PRC Accounting System for Enterprises, the equity interests, assets and liabilities for each of the relevant dates, and profits during relevant financial periods, as required by such Accounting System, giving a complete, true, fair and accurate view as to its business conditions in all material respects; 3.1.3. illustrates (as the case may be) the full provisions or reserves for all the outstanding liabilities, capital commitments and well contingent liabilities of Party B at the date set out in the Financial Report; 3.1.4. makes (as the case may be) provisions or reserves for all taxes levied on or payable by Party B for the period ended on the date set out in the Financial Report in accordance with all the principles set forth in the notes of the Financial Report; 3.1.5. gives a fair and accurate view to the capital, assets, liabilities of Party B as at the Valuation Date and profits of Party B for the relevant financial period ended on such date in all material respects; 3.1.6. is not affected by any irregular or unusual items; 3.1.7. gives a fair view as to the financial position of Party B at the Valuation Date in all material respects; 3.1.8. makes disclosure of all assets and liabilities of Party B as at the date specified in the Financial Report. 3.2. Depreciation of Fixed Assets Party B has made provisions or reserves for the depreciation of fixed assets in accordance with PRC Accounting System for Enterprises. 3.3. Accounting Books and Records At the Establishment Date of Party B, all the accounts, account books, ledger accounts, financial records and other records of Party B: 3.3.1. are owned by Party B; 3.3.2. have been comprehensively, properly and accurately kept and completed; 23 3.3.3. have excluded material errors or differences of any kind; and 3.3.4. give a true, fair and accurate view to its financial, contractual and business transaction position. 3.4. From the Valuation Date to the Effective Date of the Restructuring 3.4.1. Party A has operated the business injected into Party B under a normal, consistent and incessant condition; 3.4.2. No material adverse changes have taken place in any business to be injected into Party B by Party A. 3.5. Filed Documents 3.5.1. All application forms, detailed information, resolutions and documents of Party B, which, in accordance with any laws, regulations and/or legislation applicable to Party B relating to the incorporation, placement and issue of shares, equity interests, bonds and other securities, distributed dividends of Party B and the acts of Party B, shall be filed with any governmental authority anywhere in the world, have been filed for record appropriately and accurately in compliance with any laws, regulations and/or legislation applicable to Party B; 3.5.2. All mortgages granted to or created by Party B (if any) have been registered pursuant to the relevant laws or regulations applicable to Party B. 3.6. Documents Owned All the title documents related to Party B's assets, all executed agreements with Party B as a party and all original copies of other documents which are owned or shall be owned by Party B are so owned by Party B. 3.7. Investigations Unless otherwise disclosed in the Prospectus, there is no material investigation or inquiry, unresolved or in progress, relating to the affairs of Party B initiated by any government or other organization. 24 4. Taxation 4.1. Accounts Full provisions or reserves for all taxes (including deferred taxes) which would be levied on or payable by Party B for the period ended at the Valuation Date have been made in the Financial Report. 4.2. Administration 4.2.1. All tax returns, computations and payments which shall be submitted by Party B for any taxation purpose have been carried out pursuant to the required terms and within the required period, and are accurate and do not involve any material disputes with any taxation authority; 4.2.2. Party A has not taken any action which may lead to material changes in, severe violation of or interference with any material arrangement or agreement entered into between Party A and any taxation authority in any way; 4.2.3. Party A has complied with, in all respects, all applicable laws, regulations, rules, decrees, courts' orders or verdicts with regard to taxation, and has kept, and passed on the records of aforesaid laws, regulations, rules, decrees, courts' orders or verdicts to Party B; 4.2.4. All tax returns in respect of Party B's tax liability referred to in Clause 4.2.1 above for the purpose of annual assessment have been properly and timely submitted to the taxation authorities in accordance with any applicable laws, regulations, rules, decrees, or courts' orders or verdicts and all accounts submitted to the taxation authorities have met all requirements therewith. 4.3. Tax Requests, Liability and Exemption Party A has disclosed to Party B all detailed materials in connection with all material tax-related matters (including but not limited to the taxes related to the Injected Assets). Party A and Party B shall exercise the rights and interests arising thereunder pursuant to the principles provided in Clause 5, which are set out or contained in the aforementioned material and are owned but not yet exercised by Party A. 4.4. Non-arm's Length Transaction 4.4.1. Party A has never recommended that Party B acquire, agree to acquire any assets, accept or agree to accept any service or 25 facility at prices higher than the market price or not determined on a fair and reasonable basis; 4.4.2. Party A has never recommended that Party B sell, agree to sell any assets or accept or agree to accept any service or facility at prices lower than the market price or not determined on a fair and reasonable basis; and 4.4.3. Party A has never recommended that Party B participate in any transaction priced inconsistently with the price actually paid or received by Party B for taxation purposes. 4.5. This Agreement The execution and performance of this Agreement and any other agreements under the Restructuring shall not cause Party B to be deemed to, in respect of tax, have realized taxable profit or other monetary item. 5. Finance 5.1. Capital Commitment Party B has made no material capital commitment except those disclosed in the Financial Report. Since the Valuation Date, Party A has not caused Party B to make any material capital expenditure, or incur any material capital expenditure or agree to sell or alter any material capital assets or any related interests. 5.2. Dividend and Distribution During the period between the Establishment Date of Party B and the date of effectiveness of this Agreement, Party B has neither paid nor declared any dividend, nor made any other distribution deemed to be made in cash or in kind, nor made any distribution of any interest, other income, interests or rights derived from any share or equity interests of Party B. 5.3. Bank and Other Loans Unless otherwise disclosed in the Financial Report, 5.3.1. The total amount of loans incurred by Party B does not exceed the loan limitation provided by its Articles of Association and/or any laws, regulations, rules, decrees, or courts' orders or verdicts, or any limitation on borrowing provided by any binding bonds, contracts or documents. 26 5.3.2. Party B has neither issued, nor agreed on the creation or issue of borrowed capital. 5.3.3. Since the Effective Date of the Restructuring, Party B has neither repaid nor been liable for any material debt or liability outstanding but not yet due, and no event leading to the aforesaid situations has occurred. 5.3.4. Prior to the date of this Agreement, Party B has not received any notices, formal or informal, from any creditors requesting repayment of debts or the mandatory disposal of any of Party B's assets held by the creditors. No event that may lead to the aforesaid notice has occurred. 5.3.5. No material mortgage, lien or guaranty, interests or claims related to all or part of Injected Assets has been created, nor has any agreement, arrangement or undertaking causing or leading to the occurrence of the aforementioned matters, has been entered into except for those created for Party B for the purpose of securing financing from banks on normal commercial terms and pursuant to principles of fairness. 5.4. Liabilities Unless otherwise disclosed in the Financial Report, prior to the date of this Agreement, Party A has not exercised or claimed to exercise any lien, claims, other interests or any liabilities related to any fixed assets of the Injected Assets; and there is no dispute related directly or indirectly to such fixed assets. 5.5. Working Capital Party B has sufficient working capital and may continue to operate its business according to its existing form and its current scale of operations within 12 months after the Effective Date of the Restructuring, and may carry out, proceed and complete all orders, projects and contract obligations binding on Party B pursuant to their existing terms and conditions. 5.6. Continuous Financing With regard to any loans, acceptance credits, overdraft, loans or other financing (all of the above referred to as Financings in this clause) unpaid or may be secured by Party B, 27 5.6.1. there have been neither a breach of nor failure to comply with any provision specified in any document related to the Financings; 5.6.2. the relevant right holders have not taken any action or threatened to take any action for early repayment; 5.6.3. there have been no material adverse change that may impact on the continuous securing of the Financing, or give rise to any adverse changes to the terms and conditions thereof; and 5.6.4. the Restructuring and public listing of Party B or the Restructuring and/or any other matters contained in such listing shall not lead to the suspension of such Financings or the acceleration of the due date thereof. 6. Business Operation 6.1. The effects of Restructuring and Overseas Offering 6.1.1. After prudent and thorough inquires, Party A believes that, to the best of its knowledge and there is no reasonable ground for it to believe otherwise, there is no information indicating that the Restructuring or Overseas Offering of Party B or the execution of this Agreement or any other matters covered by the Restructuring, Overseas Offering of Party B or this Agreement will lead to any of the following events: (i) any major client of Party B will stop or be entitled to stop or possibly substantially reduce current business with Party B; and (ii) there will be material changes in the management staff of Party B or in the Injected Assets. 6.1.2. Unless otherwise provided by this Agreement, the Restructuring or Overseas Offering of Party B or this Agreement or any other matters covered by the Restructuring, the Overseas Offering of Party B or this Agreement will not lead to: (i) contradiction with any term, condition or provision of any agreement or deed to which Party B is a contracting party, or with any provision of the articles of association and/or any law, regulation, legislation, decree or order 28 applicable to Party B, or with any liability, lease, contractual liability, judgment, ruling, injunction, legislation or other limitation or responsibility in any category or form which is binding on or restricting any assets of Party B, or lead to breach of contract, or constitute the non-performance of any obligations; (ii) the exemption of anyone from its obligations to Party B, or authorization of anyone to determine such obligations or to determine any right or interest enjoyed by Party B; (iii) the creation, imposition or formation of any liability in any form over any asset of Party B; and (iv) the acceleration of the due date of any of the existing liability of Party B which makes the repayment thereunder immediate, or the possible acceleration of such due date which shall make the repayment thereunder immediate. 6.2. Business Operation 6.2.1. In all respects, Party B shall operate the business and handle the relevant affairs in accordance with its articles of association and/or any applicable law, regulation, legislation, decree and any other documents to which Party B is currently a contracting party; 6.2.2. Party B is entitled and fully qualified to operate the business in the present jurisdiction where its business operations are located; and 6.2.3. Party B has not carried out any activity, or entered into any contract, or exercised any right which is beyond its power, not authorized or invalid, and all the documents to which Party B is a principal party or the party obligated to perform have been duly affixed with seals and retained by Party B. 6.3. Compliance with Laws and Regulations Party B and its relevant administrative staff, agents and employees (during their execution of duties) have committed no act which may violate any law, regulation, rules or order that may cause Party B to 29 suffer or incur any material fines, punishment, lawsuit or other liabilities. 6.4. Power of Attorney and Authority Unless otherwise provided herein and required in the ordinary business of Party B, neither Party A nor Party B has authorized, implicitly or explicitly, any person to enter into any contract or undertaking on behalf of Party B, or has granted any person any other agency right or power. 6.5. Permits, Licenses, Letter of Consent 6.5.1. Unless otherwise provided herein, Party A has assisted Party B to obtain, or will obtain before the Overseas Offering from all relevant government agencies, all permits, licenses and letters of consent necessary for Party B to carry out its business in a legal and proper manner, and such permits, licenses and letters of consent are valid (or will be valid, as the case may be) and will remain in effect; 6.5.2. Party B has not violated any terms or conditions provided in any such permits, licenses or letters of consent, nor are there any factors sufficient to affect the continued effectiveness of any such permits, licenses and letters of consent. 6.6. Continually Effective Contracts 6.6.1. Unless disclosed to be otherwise in the Prospectus, Party B has never been a party to any contract, transaction, arrangement or responsibility of an irregular or abnormal nature. 6.6.2. Detailed and accurate information regarding Party A as one of the parties to the material contracts, transactions, arrangements or responsibilities related to the Injected Assets has been disclosed to Party B on the date of this Agreement. (i) All such contracts, transactions, arrangements and undertakings are valid, have not been revoked or cancelled, and will not be terminated or adversely affected due to the Restructuring, the Overseas Offering of Party B, the execution of this Agreement or any other circumstances. Party A has conducted thorough and prudent inquiries into such circumstances, and has formally informed Party B of all the terms, agreements and conditions contained in such 30 contracts, transactions, arrangements and undertakings which must be communicated to Party B, and the file archives of such contracts, transactions, arrangements and undertakings have been transferred to Party B; and (ii) Neither Party A nor Party B has received notice of the breach of any such contract, transaction, arrangement or undertakings from the other parties to such contracts, transactions, arrangements or undertakings, and there is no dispute related to the performance of obligations between Party B and any third party. 6.7. Breaches of Contract 6.7.1. Party A has not been in violation of any material agreement to which it is a party; and 6.7.2. Party A will not bear any material liabilities resulting from any representations or warranties (implicit or explicit) made by Party A or any other matters. 6.8. All Contracts Made on an Arm's-Length Basis Party A has not participated in any contract or arrangement not made on a fully arm's-length basis, and its profits and financial position during the three-year period prior to the Effective Date of the Restructuring have not suffered any material adverse effect due to any contracts or arrangements not made on a fully arm's-length basis. After thorough and prudent inquiry by Party A, there is no finding that the profits or financial position of Party B might be affected by such contracts or arrangements not made on an arm's-length basis. 7. Employment of the Staff 7.1. Employees and the Period of Employment Unless otherwise set forth in this Agreement, Party B has never entered into any agreement or other arrangements, regardless of whether bound by law or not, with any trade union or any organization which represents any of its employees. 7.2. Normal Remuneration Party B is not liable to pay, nor has it paid in the past, to any officer or employee of Party B any amounts other than by normal salary, remuneration, bonuses, wages or other welfare benefits. 31 7.3. Labor Disputes Party B or any of its employees has not been involved in any labor dispute which may cause Party B to be subject to a material adverse effect and, to the knowledge of Party B, its directors and Party A or the facts which could be known after making reasonable inquiries, there is no indication that Party B has been involved in any such dispute or that any such dispute may be expected to arise due to any provisions of this Agreement, the Restructuring, or documents executed for the purpose of the Overseas Offering; or any matters anticipated to arise in connection with the same. 8. Assets 8.1. Ownership 8.1.1. Prior to the Effective Date of the Restructuring, Party A enjoys the lawful ownership of the Injected Assets, and is entitled to assign them to Party B. 8.1.2. Party B shall be the owner of the Injected Assets and enjoy the valid ownership of or right to use such Injected Asset as the case may be on the Establishment Date; 8.1.3. Unless otherwise provided for herein and disclosed in the Financial Report, Party A has never created or agreed to create, or transferred or agreed to transfer, any charge, mortgage, lien, bonds or any other security interests or other property interests over any assets indicated in the Financial Report or acquired since the date of the Financial Report in connection with the Injected Assets, and unless otherwise disclosed in the Financial Report, such assets have never been used in connection with in any financing lease. 8.2. Adequacy of Assets for Business Operations 8.2.1. Party B's assets are sufficient to effectively and fully operate any business related to the Injected Assets; 8.2.2. The staff transferred to Party B pursuant to the Restructuring Plan are sufficient for Party B to effectively operate the business related to the Injected Assets in the existing manner. 8.3. Insurance 8.3.1. All insurance policies of Party B are valid, policy and there are no acts or omissions that may cause any insurance to come invalid or possibly lead to any increase in premium. 32 8.3.2. No insurance policy of Party B is subject to any limitation containing special or irregular terms, and Party B is not required to pay any amount in addition to the normal premium. 8.3.3. In regard to the aforementioned policies, Party B has neither lodged nor may possibly lodge any claims, and there is no situation that could give rise to any such claims. 8.4. Trade Secrets and Intellectual Property 8.4.1. Party A has never (except in the normal course of business and usual business) disclosed or allowed the disclosure if promised or arranged to disclose to any person know-how, trade secrets, confidential information or the customers list of Party B; 8.4.2. In regard to all the intellectual property licensed by Party B (including but not limited to the intellectual property specified in the Prospectus and this Agreement) such intellectual property: (i) is valid and enforceable; (ii) has been licensed to Party B pursuant to an effective license, and with no charge, mortgage, or (unless otherwise disclosed in the Prospectus) other third party interests thereon; (iii) does not violate any other agreements or infringe on any third person's intellectual property in a manner that may materially affect the operations of Party B; and (iv) is not the subject of any current lawsuit, dispute or other legal preceding that may materially threaten or affect the ownership, right of use or validity of such intellectual property. 8.4.3. There has been no omission by Party A of any material matters that may cause the aforesaid permits or certificates granted to Party B to be terminated or constitute a breach of the terms of such permits or certificates; 8.4.4. Party A has not entered into any agreement which may restrict the application or disclosure of such as aforementioned proprietary know-how, business secrets, confidential information or client or supplier lists of Party B. 33 8.5. Land Use Right In regard to the land use right injected into Party B by Party A in the form of an equity investment, aside from the disclosure thereof in the Prospectus, Party A undertakes that it has properly obtained the legal right to use such land and is entitled to inject such right into Party B in the form of an equity investment. In respect of the land which is injected into Party B in the form of an equity investment for which Party A has not yet obtained the certificate of land use right, Party A undertakes to obtain such certificate and inject such land into Party B within the shortest period of time reasonably practical following the Establishment Date of Party B. If Party B suffers any loss as a result of claims brought regarding the right to use such land, including but not limited to all related claims, lawsuits, arbitration, losses, compensation, payment, costs, expenses and expenditures, Party A shall compensate Party B in full. 8.6. Buildings In regard to the property injected into Party B by Party A in the form of an equity investment, Party A undertakes that it has properly obtained the ownership certificate for such property and is entitled to inject such property into Party B in the form of equity investment. Provided that Party B suffers losses as a result of claims brought regarding the ownership of such property, including but not limited to all related claims, lawsuits, arbitration, losses, compensation, payments, costs, expenses and expenditures, Party A shall compensate Party B in full. In regard to any properties which are injected into Party B in the form of an equity investment for which Party A has not obtained the ownership certificate therefor, and any of the properties leased to Party B by Party A pursuant to the Property Leasing Agreement separately entered into by both parties but for which the ownership certificate has not been obtained, Party A undertakes: 8.6.1. to obtain the ownership certificate for such property and inject such property into Party B within the shortest period of time reasonably practical following the Establishment Date of Party B; 8.6.2. to assume all fees, expenses, claims arising as a result of or related to handling the aforesaid matters described in Clause 8.6.1, and to compensate Party B in full for any losses and liabilities incurred by Party B, including but not limited to losses sustained by Party B as a result of Party A's failure to settle the matters described in Clause 8.6.1. 34 9. Environmental Protection 9.1. Party A has not committed any action that severely violates environmental protection laws and regulations in respect of the Injected Assets or related business. 9.2. The assets and related business injected into Party B by Party A are not the subject of any current or pending material claims, whether civil, criminal or administrative in connection with environmental protection, investigations, complaints or litigation. 10. Information 10.1. All information set out in this Agreement and its appendices is true, complete and accurate. 10.2. All information provided to Party B, its lawyers, accountants, and sponsors for the Listing, and its underwriter and such underwriter's lawyers and other professional advisers, including but not limited to the information in relation to Party B's business, activities, affairs, assets or liabilities, is true, complete and accurate in all respects. 35 Appendix II Financial Report 1. Consolidated Balance Sheet of China Life Insurance Company Limited 2. Consolidated Income Statement of China Life Insurance Company Limited 3. Consolidated Cash Flow Statement of China Life Insurance Company Limited This Appendix can be inspected at any time at the following location: China Life Insurance Company Limited, Finance Department 36 Appendix III Injected Assets Injected Assets specifically include: 1. Cash, bank deposits, securities (including but not limited to government bonds, enterprises bonds, and securities investment funds), accounts receivable, buildings, equipment, facilities, projects under construction, vehicles of transportation, and all other assets listed in the Restructuring Plan, which are to be injected by Party A and recorded in the Restructuring Plan. 2. All the Transferred Policies and other contracts and agreements (including the amendments and supplements to such contracts and agreements) in connection with the Injected Assets and Party B's personal insurance business (hereinafter referred to as Transferred Contracts) as well as any rights and obligations of Party A under Transferred Contracts. 3. If their assignment is permitted by law, all interests under all permits, licenses, approval certificates, certifications, powers of attorney and any other similar documents held or owned by Party A in connection with the operation of the Injected Assets. 4. Rights of request, rights of set-off, claims or any other similar rights against any third party owned by Party A arising from or in connection with the Injected Assets. 5. All materials that are owned by Party A in connection with the insurance business arising out of Transferred Polices and other Transferred Contracts, including original documents, copies, computer discs, business records, financial and accounting records, business data, statistics, training manuals and all relevant technology records, technology information, technology data, technology handbooks, technology books, R&D project materials as well as all software relating to the business of Party B and the intellectual property rights in connection with such software (in written form or saved on computers or kept in any other ways). 6. Employees hired by Party A and associated with the Injected Assets, including all relevant personnel records and data regarding to remuneration and other benefits of such employees. 37 7. Any other assets or liabilities of Party A agreed by Party A and Party B to be injected into Party B on or before the Establishment Date of Party B. 38 Appendix IV Legal Proceedings The following is a list of material ongoing litigation to which Party A is a party and which concern the Injected Assets:
- -------------------------------------------------------------------------------------------------------- Amount subject to Plaintiff Defendant Cause of Action Dispute (RMB) Status - -------------------------------------------------------------------------------------------------------- Qingshan sub-branch of CLIC Baotou Mingtian Unjust enrichment 1,510,700 Hearing Baotou Branch Technology Co., Ltd. - -------------------------------------------------------------------------------------------------------- Li Jian Qiu CLIC Baotou branch Murder of the insured 1,127,000 Hearing by the claimant - -------------------------------------------------------------------------------------------------------- Jin Ping Xie Tong CLIC Tianjin Branch Premium dispute 2,430,000 Hearing Accounting Firm Limited - -------------------------------------------------------------------------------------------------------- CLIC Tianjin Branch Guangxia sub-branch Deposit interest 2,250,000 Hearing of ICBC disputes - -------------------------------------------------------------------------------------------------------- Mazhang sub-branch of CLIC Chikan sub-branch Policy falsification 1,400,000 Hearing Zhanjiang Branch of Bank of China Zhanjiang Branch - -------------------------------------------------------------------------------------------------------- Zhang Han Xing CLIC Xuchang Branch Murder of the insured 1,500,000 Hearing - -------------------------------------------------------------------------------------------------------- CLIC Puyang Branch ICBC Puyang Branch Deposit dispute 2,614,000 Hearing - -------------------------------------------------------------------------------------------------------- CLIC Changchun Branch Bank of China Deposit dispute 24,000,000 Hearing Changchun Branch - -------------------------------------------------------------------------------------------------------- China Textile, Grain Chaoyang sub- Insurance policy 8,500,000 Pre- - --------------------------------------------------------------------------------------------------------
39 - -------------------------------------------------------------------------------------------------------- and Oil I&E branch of CLIC dispute hearing Company Ltd. Beijing Branch - -------------------------------------------------------------------------------------------------------- Zhongguancun sub-branch of Chongwen sub-branch Unjust enrichment 2,231,600 Hearing Beijing City Commercial of CLIC Beijing (usurious interest Bank Company Limited Branch rate on bank deposit) - -------------------------------------------------------------------------------------------------------- Daqing Petroleum CLIC Beijing Branch Insurance policy 34,599,000 Hearing Administration Bureau dispute - --------------------------------------------------------------------------------------------------------
40 Appendix V Restructuring Documents 1. No. 2576 File, issued by the State Office of the State Council. 2. China Life Insurance (Group) Company's Restructuring Plan in connection with the Establishment of China Life Insurance Company Limited and its Domestic and Overseas Listings. 3. CIRC Bao Jian Fu [2003] No.88: Approval of the Restructuring of China Life Insurance Company. 4. China Securities Supervisory Committee Guo he Han [2002] No12.: Acceptance of the Application by China Life Insurance Company for Overseas Listing. 5. Ministry of Finance Cai Jin [2003] No.72: Approval of the Assets Valuation Review of China Life Insurance Company for the Establishment of the Company limited by Shares. 6. Ministry of Finance Cai Jin [2003] No.77: Approval of Certain Matters Regarding the Management of State Share Ownership in China Life Insurance Company Limited. 7. CIRC Bao Jian Fu [2003] No.115: Approval of the Establishment of China Life Insurance Company Limited. 8. Articles of Association of the China Life Insurance Company Limited. 9. CIRC Bao Jian Fu [2003] No. 147, Approval of the Restructuring and IPO of China Life Insurance Company. 10. Insurance Company Legal Person License of China Life Insurance Company Limited. 11. Business License of China Life Insurance Company Limited (Registration No.: 1000001003796). This Appendix can be inspected at any time at the following location: China Life Insurance Company Limited, Administration Office. 41 Appendix VI Valuation Report China Certified Accountants & Financial Management. Zhong Hua Ping Bao Zi [2003] No.018: Valuation Report in connection with the Establishment of China Life Insurance Company Limited by China Life (Group) Company. This Appendix can be inspected at any time at the following location: China Life Insurance Company Limited, Finance Department. 42 Appendix VII Electronic Document The data document as specified in the actuarial database contained in the electronic document dated June 30, 2003: 43 Appendix VIII Reinsurance Contracts 1. Surplus Reinsurance Contract between China Life Insurance Company and AIA Shanghai, entered into on December 31, 1996. 2. Surplus Reinsurance Contract between China Life Insurance Company and AIA Guangzhou, entered into on December 31, 1996. 3. Surplus Reinsurance Contract between China Life Insurance Company and AIA Shenzhen, entered into on November 1, 1999 and its Supplemental Contract entered into on March 28, 2000. 4. Surplus Reinsurance Contract between China Life Insurance Company and China Reinsurance Company, entered into on January 1, 2000. 5. Quota Share Reinsurance Contract between China Life Insurance Company and China Reinsurance Company, entered into on March 30, 2000. 6. Quota Share Reinsurance Contract between China Life Insurance Company and China Reinsurance Company, entered into on September 21, 2001. 44 Appendix IX List of Assets and Liabilities Transferred to Party B 45 EX-10.2 6 dex102.txt TRADEMARK LICENSE AGREEMENT Exhibit 10.2 ENGLISH TRANSLATION OF CHINESE LANGUAGE ORIGINAL Trademark License Agreement between China Life Insurance (Group) Company and China Life Insurance Company Limited This Service Trademark License Agreement is entered into on September 30, 2003 in Beijing, China by and between the following two parties: Party A: China Life Insurance (Group) Company ("China Life"), a wholly state-owned enterprise duly organized and existing under the laws of the People' Republic of China, with its address at No. 5 Guang Ying Yuan Xi Qu, Xicheng District, Beijing. Party B: China Life Insurance Company Limited ("Stock Limited Company"), a joint stock company with limited liability duly organized and existing under the laws of the People's Republic of China, with its address at China Life Building, No. 16 Chao Wai Avenue, Chaoyang District, Beijing. In accordance with the Contract Law of People's Republic of China and the Trademark Law of People's Republic of China, through negotiation, Party A and Party B have reached the following agreement with regard to the licensing of trademarks from Party A to Party B: Article 1. Trademarks 1.1. The trademarks under this Agreement refer to the service trademarks of Party A that are registered or are in the process of registration in the PRC during the effective term of this Agreement. Such trademarks, including service trademarks or their combination (the "Licensed Trademarks") are listed in the Annex to this Agreement (hereinafter referred to as "Licensed Trademarks"). Article 2. Licenses 2.1. Party A hereby grants to Party B and its branches the right to use the Licensed Trademarks in territories where such trademarks are respectively registered according to the terms of this Agreement. 2.2. Unless otherwise provided by the listing rules or other rules of the Stock Exchange of Hong Kong Limited (the "HKSE") or requested by the HKSE, Party B shall use the Licensed Trademarks and in accordance with the provisions of this Agreement, whereas Party A and its subsidiaries may continue to use the Licensed Trademarks pursuant to Article 5.1(a). 2.3. Party A shall not license the use of the Licensed Trademarks to any third party, nor shall Party A assign the Licensed Trademarks to any third party, provided, however, that Party A may grant its subsidiaries the right to use the Licensed Trademarks. Article 3. Terms 2 Party B and/or its branches may use Licensed Trademarks until the valid registration of the Licensed Trademarks expires so that such trademarks are no longer protected by law, or until the termination date mutually agreed by the parties. Article 4. Fees 4.1. Party A agrees that Party B and/or its branches may use the Licensed Trademarks without compensation, and Party A will pay all fees to maintain the validity of the Licensed Trademarks in accordance with relevant laws and regulations. Party B has no obligation to pay such maintenance fees to Party A. 4.2. If Party A fails to pay fees to maintain the Licensed Trademarks in accordance with this Agreement, Party B may unilaterally employ a trademark agent to prepare documents for the extension of the Licensed Trademarks and pay any fees for such extension. Party A shall provide all assistance (including but not limited to executing documents) in connection with such extension, and shall compensate Party B for reasonable expenses incurred in connection with such extension. Article 5. Rights and Obligations 5.1. Party A's rights: (a) Party A has the right to use the Licensed Trademarks in the territories where they are respectively registered; (b) Party A has the right to request Party B and/or its branches to use the Licensed Trademarks in accordance with the provisions of this Agreement. 5.2. Party A's obligations: (a) Party A represents and warrants as to the legality and validity of the Licensed Trademarks under this Agreement, and warrants not to intentionally commit any acts to the detriment of such legality and validity. If Party B and/or its branches incurs any third-party claims, litigation or losses in connection with this Agreement, Party A warrants that it will indemnify against the losses of Party B and/or its branches within thirty (30) days after Party B makes such request in writing; (b) Party A guarantees to pay applicable fees in a timely manner to the relevant authorities so as to maintain the validity of the Licensed Trademarks. It shall maintain the respective 3 registrations of the Licensed Trademarks, and shall not abandon the renew the Licensed Trademarks' respective registrations, or apply to cancel such registrations. Party A may increase the registration classes for the Licensed Trademarks upon the request of Party B or register the Licensed Trademarks in countries and regions designated by Party B. The above registration fees and maintenance charges shall be borne by Party A; (c) Upon the execution of this Agreement, Party A shall file this Agreement with the relevant administration for industry and commerce and with the trademarks administrative authority; (d) Party A shall apply to the relevant authorities for the protection of the Licensed Trademarks if so requested by Party B, or if circumstances so require; and (e) If any third party infringes upon or claims that its own rights or interests have been infringed upon by the Licensed Trademarks, Party A shall timely notify Party B in writing (the "Notice"), and submit a grievance to the relevant authorities or file lawsuit or take other legal action and pay all related expenses. If Party A does not send Such Notice to Party B in accordance with this Agreement, Party B may take all necessary actions on its own to stop such infringement or defend against relevant claims. Party B shall have the right to request Party A to compensate it for any losses incurred in connection with such actions. 5.3. Party B and/or its branches' rights: (a) Party B shall have the right to use the Licensed Trademarks in accordance with the provisions of this Agreement; (b) Party B shall have the right to grant the right to use the Licensed Trademarks to third parties subject to the written consent of Party A. 5.4. Party B's obligations: (a) Unless written consent is received from Party A, Party B shall not permit any third party to use the Licensed Trademarks, provided, however, that Party B may grant its branches the right to use the Licensed Trademarks; (b) If any third party infringes upon or claims that its rights or interests have been infringed upon by the Licensed 4 Trademarks, Party A shall submit grievances to the relevant authorities or initiate legal action, and Party B shall assist in ascertaining the factual circumstances of such infringement. All relevant fees shall be borne by Party A. Article 6. Further Undertakings Both Parties to this Agreement have the duty to take any further actions, including entering into other agreements, contracts or documents that are necessary to effect the objectives of and the provisions set forth in this Agreement. Article 7. Modification and Termination 7.1. After Party B has listed on the HKSE, the transactions under this Agreement shall constitute related party transactions as described in the listing rules. According to the listing rules, such transactions can only be conducted after obtaining an exemption from HKSE, or upon the approval of independent shareholders, or conforming with any other requirements concerning connected transactions in the listing rules. Therefore, the performance of this Agreement shall, to the extent that are deemed to be connected transactions, be conditional on obtaining the approval of the HKSE or conforming to any other requirements concerning associated transactions in the listing rules. Both Parties undertake to observe the relevant requirements of the listing rules. 7.2. If the HKSE exemption contains additional conditions, this Agreement shall be performed in accordance with such additional conditions. Both Parties undertake to strictly observe such conditions. 7.3. If the HKSE exemption for such connected transactions is retracted, rescinded, or becomes ineffective, and such transactions do not comply with the requirements concerning connected transactions in the listing rules, the performance of this Agreement relating to such transactions shall be terminated. 7.4. If the performance of all transactions contemplated by this Agreement is terminated pursuant to Section 7.3, this Agreement shall be terminated. 7.5. This agreement shall be terminated upon the occurrence of any of the following events: (a) Both parties agree to terminate this Agreement before the expiration of the term; or 5 (b) Applicable laws and regulations, or the adjudication ruling or order of a complete court or arbitration panel require the termination of this Agreement. Article 8. Breach A Party shall compensate the other Party for any economic losses suffered by the other Party as a result of the breach by such Party. The non-breaching Party shall have the right to request the actual performance by the breaching Party of its obligations under this Agreement. Article 9. Representations and Warranties 9.1. Representations and Warranties of Party A (a) Party A is a duly established enterprise with the status of an independent legal person and holds a valid business license; (b) Party A's execution of this Agreement and performance of its obligations hereunder will not violate any laws, regulations or other agreements, or the articles of association of Party A. (c) Party A lawfully owns the Licensed Trademarks, and is entitled to grant to Party B the right to use the License Trademarks pursuant to this Agreement. There is no dispute relating to the ownership or use of the Licensed Trademarks as of the date of execution of this Agreement. Party A will compensate Party B for any losses due to the infringement of the intellectual property rights or interests of any third party by the Licensed Trademarks (excluding losses due to Party B's violation of the provisions of this Agreement). 9.2. Representation and Warranties of Party B (a) Party B is a duly established joint stock limited liability enterprise with the status of an independent legal person and holds a valid business license. (b) Party B's execution of this Agreement and performance of its obligations hereunder will not violate any laws, regulations or other agreements, or the articles of association of Party B. Article 10. Force Majeure 10.1. If a party fails to perform all or part of its obligations under this Agreement due to an event of Force Majeure (meaning an event beyond the reasonable control of the affected party that is unforeseeable, or unavoidable and beyond remedy if foreseen, and 6 which happens after the execution of this Agreement and renders the full or partial performance of this Agreement impossible or impracticable.) Events of Force Majeure include but are not limited to floods, fires, draughts, typhoons, earthquakes and other acts of God, strikes, insurrections, turmoil and war (whether declared or not) and any action or inaction of any governmental authorities. The performance of such obligations shall be suspended during the period during which such performance is affected by the event of Force Majeure. 10.2. The Party claiming to be affected by an event of Force Majeure shall notify the other Party in writing of the occurrence of such event as soon as possible, and shall, within 15 days after the occurrence of such event, provide the other Party by personal delivery or registered air mail with appropriate evidence in support of the occurrence of the event of Force Majeure and the period of its occurence. The Party claiming that its performance of the Agreement has become impossible or impracticable due to an event of Force Majeure shall make all reasonable efforts to eliminate or minimize the effects of such event of Force Majeure. 10.3. If an event of Force Majeure occurs, both Parties shall immediately consult with each other regarding the performance of this Agreement, and shall immediately resume their respective obligations under this Agreement upon the termination or elimination of the event of Force Majeure. Article 11. Miscellaneous 11.1. Unless otherwise provided for in this Agreement, a Party may not transfer all or part of its rights and obligations under this Agreement without the written consent of the other Party. 11.2. This Agreement and the Annex attached hereto constitute the entire agreement, and supersede all previous oral and written agreements, contracts, understandings and communications of the parties concerning the matters set forth herein. 11.3. Any provision hereof that becomes illegal, invalid or unenforceable will not affect the validity and enforceability of the other provisions of this Agreement. 11.4. Any amendment to this Agreement or its annex may be made only pursuant to a written agreement executed by the authorized representatives of each Party, and shall be approved by each Party after having taken appropriate corporate actions. If such amendment constitutes a material and substantial change to this Agreement, it shall 7 become effective upon the notification of the HKSE or upon obtaining approval from the HKSE (subject to thethen current requirements of the HKSE) and/or ratification at a shareholders' meeting of Party B (if applicable). 11.5. Unless otherwise provided for in this Agreement, any delay or failure on the part of any Party hereto to exercise any right, power or privilege under this Agreement shall not operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude the exercise of any other right, power or privilege. 11.6. The Annex attached hereto constitutes an integral part of this Agreement and has the same binding effect as the Agreement on the parties hereto. Article 12. Notice 12.1. Notices and other communications required to be given by any Party pursuant to this Agreement shall be written in Chinese, and may be delivered by hand or registered mail to the address of the other Party or sent by facsimile transmission to the number of the other Party set forth below. The dates on which notices shall be deemed to have been effectively delivered shall be determined as follows: (a) Notices delivered by hand shall be deemed effectively delivered on the date of such hand delivery; (b) Notices given by registered mail shall be deemed effectively delivered on the 7th day (if the last day falls on a Sunday or a public holiday, then such date shall be extended to the next working day) after the date on which they were mailed (as indicated by the postmark); (c) Notices given by facsimile transmission shall be deemed effectively delivered at the time when the transmission is completed, provided that the sender shall produce the transmission report evidencing the successful transmission of relevant documents. The addresses and fax numbers of the Parties for the delivery of notice are as follows: China Life Insurance (Group) Company Address: No. 5 Guang Ying Yuan Xi Qu, Xicheng District, Beijing Fax number: 010-6611 1567 8 Telephone number: 010-6611 4433 China Life Insurance Company Limited Address: China Life Building, No.16 Chao Wai Avenue, Chaoyang District, Beijing Fax number: 010-8565 2232 Telephone number: 010-8565 9999 12.2. If either Party changes its address or fax number, it shall promptly notify the other Party in writing of such change pursuant to this section. Article 13. Governing Law and Dispute Settlement 13.1. This Agreement shall be governed by and construed in accordance with the laws of the People's Republic of China. 13.2. Any disputes arising from or in connection with this Agreement shall be resolved by both parties through friendly consultation. If the dispute cannot be settled in the aforesaid manner within ninety (90) days, either Party shall have the right to submit the dispute to the China International Economic Trade Arbitration Commission for arbitration to be conducted in accordance with the Commission's arbitration rules then effective at the time of the submission of the arbitration. The arbitration award shall be final and binding upon both parties. Article 14. Definitions 14.1. Party A's subsidiaries shall mean: 14.1.1 a wholly owned subsidiary of Party A; 14.1.2 a subsidiary in which Party A holds an equity interest of 51% or more; 14.1.3 a company in which Party A holds, through joint action with other persons, 30% or more of the issued and outstanding shares of such company; 14.1.4 a company in which Party A may exercise, or cause to be exercised through joint action with other persons, 30% or more of the voting rights of such company; 9 14.1.5 a company in which more than half of the directors of the board are elected by Party A; and 14.1.6 a company that Party A, through joint action with other persons, effectively controls through other means; and 14.1.7 and shall specifically exclude Party B or any subsidiaries of Party B. 14.2. Party B's branches shall mean: Any branch, sub-branch or field office of Party B that is duly established by Party B, and that conducts the insurance of Party B business as stipulated and authorized by the Articles of Association of Party B and by the CIRC. Except as otherwise approved by the CIRC, Party B's branches shall not take any other form. 14.3. Third parties shall mean any party or person other than Party A, Party B or any of their respective affiliated companies. Article 15. Supplementary Provisions 15.1. This Agreement is written in Chinese. 15.2. This Agreement is executed in four originals, with two originals to be held by each Party. After the execution of this Agreement by both Parties' authorized representatives and the affixing of both Parties' company seals, this Agreement shall become effective, and its effectiveness shall retroactively commence as of the date when Party B's business license was issued. Each original shall have the same force and effect. 10 Party A: Party B: China Life Insurance (Group) Company China Life Insurance Company Limited (Seal) (Seal) Legal Representative/ Legal Representative/ Authorized Representative (Signature) Authorized Representative (Signature) Annex to the Service Trademark License Agreement : List of service trademarks
- -------------------------------------------------------------------------------------------------------------------------------- Registration No. Trademark Certificate No. Holder Class Service classification Term - -------------------------------------------------------------------------------------------------------------------------------- [GRAPHIC] 1125974 China Life Insurance No.36 Insurance, life insurance, Nov. 7, 1997- (Group) Company insurance consultancy, insurance Nov. 6, 2007 brokerage, fund investments, securities brokerage, guarantees, jewellery appraisal, real estate leasing, charitable fund raising [GRAPHIC] Pending China Life Insurance (Group) Company is the registered applicant (Chinese Character) Pending China Life Insurance (Group) Company is the registered applicant
China Life Pending China Life Insurance (Group) Company is the registered applicant
13 EX-10.3 7 dex103.txt POLICY MANAGEMENT AGREEMENT Exhibit 10.3 ENGLISH TRANSLATION OF CHINESE LANGUAGE ORIGINAL Policy Management Agreement between China Life Insurance (Group) Company And China Life Insurance Company Limited Table of Contents 1. AUTHORIZATION.........................................................3 2. BASIC PRINCIPLES......................................................4 3. SCOPE OF AGENCY.......................................................5 4. ACCOUNT AND ACCOUNT MANAGEMENT........................................6 5. DATA AND DOCUMENTATION................................................8 6. INSPECTION AND REPORT.................................................8 7. INSURANCE AGENCY SERVICE FEES AND PAYMENTS THEREOF....................9 8. PAYMENT OF COMMISSIONS...............................................10 9. THIRD PARTY COSTS AND EXPENSES.......................................10 10. TAXATION.............................................................11 11. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS.........................11 12. TERM.................................................................12 13. INDEMNIFICATION......................................................12 14. LIABILITY FOR BREACH.................................................12 15. TERMINATION..........................................................13 16. FORCE MAJEURE........................................................14 17. CONFIDENTIALITY......................................................15 18. ASSIGNMENT...........................................................15 19. NON-WAIVER...........................................................15 20. NOTICES..............................................................15 21. PERFORMANCE OF THIS AGREEMENT........................................16 22. FURTHER ACTIONS......................................................16 23. GOVERNING LAW AND DISPUTES SETTLEMENT................................16 24. EFFECTIVENESS, VERSIONS AND MODIFICATIONS............................17 2 This Policy Management Agreement (the "Agreement"), is entered into on September 30, 2003 in Beijing, People's Republic of China ("PRC"), by and between the following two parties: (1) China Life Insurance (Group) Company ("Party A") Address: No. 5 Guan Ying Yuan Xi Qu, Xicheng District, Beijing Legal Representative: Wang Xianzhang (2) China Life Insurance Company Limited ("Party B") Address: China Life Tower, No. 16 Chao Yang Men Wai Avenue, Chao Yang District, Beijing Legal Representative: Wang Xianzhang Whereas: (1) Party A is a wholly state-owned life insurance company duly organized and existing under the laws of the PRC. (2) Party B is a joint stock life insurance company, exclusively and legally initiated and established by Party A, and is duly existing under the laws of the PRC. (3) Party A and Party B have entered into a Restructuring Agreement on September 30, 2003, pursuant to which Party A shall transfer to Party B certain "Transferred Policies" and Party A shall retain Non-transferred Policies (the "Old Policies") as defined in such agreement. (4) According to the Non-Competition Agreement signed by Party A and Party B, Party A undertakes that it will not, directly or indirectly, engage in, participate in or operate, within the territory of China (not including Hong Kong, Macau and Taiwan), any life, health or accident insurance business that may compete with the business of Party B, and that Party A will authorize Party B to manage the business under Old Policies on its behalf (including the modification or renewal of riders in relation thereto). (5) Both Parties are willing to make fair and reasonable arrangements for the management of the insurance business under Old Policies. Therefore, after friendly negotiations, and on the basis of equality and mutual benefits, both parties agree as follows: 1. Authorization According to the terms and conditions of this Agreement, Party A authorizes Party B as its agent to manage the insurance business under the Old Polices, 3 and shall in return pay Party B service fees Party B agrees to and accepts such authorization. 2. Basic Principles 2.1. Party B shall perform the duties of insurance agent in accordance with this Agreement, and any rights of policyholders under the Old Policies and any obligations, benefits, losses or risks of the insurer in regard to the Old Polices shall be undertaken by Party A. Unless otherwise agreed by both parties, Party B shall under no circumstances be liable to pay any benefits or claims, or to make any advances due in respect of any benefits or claims under the Old Polices. 2.2. Party B shall have a fiduciary duty to Party A, which shall require Party B to diligently perform its duties as agent so as to comply with relevant laws, regulations and rules of the insurance regulatory department. Party B shall have discretion to conduct the authorized insurance business with the same experience, skills, judgment and discretion as it applies to its own business. 2.3. Party B shall manage the insurance business in accordance with relevant laws, regulations and rules of the insurance regulatory authority, the terms of the Old Policies and the relevant management system, rules, business standards and regulations set forth in writing (as modified from time to time) by Party A and acknowledged by Party B. The service standard for the agency business shall not be lower than the current service level enjoyed by the holders of the Old Policies and external supervising standards. 2.4. Party B may employ the same resources of its insurance business (e.g. personnel, offices, equipment, etc.) to manage the agency business, but Party B shall separately manage, settle the accounts of (including daily bookkeeping and monthly settlement), and conduct internal verification of its own insurance business and the agency business. 2.5. For purposes of this Agreement, Party B may hire, either directly or on behalf of Party A's, auditors, actuaries, attorneys and other professional experts, provided that prior approval or consent has been obtained from Party A, and that the necessary delegation of authority has been made. 2.6. Party B's own insurance business and the agency business shall use a unified set of documents and receipts printed by Party B and the seals of Party B, but in conducting the agency business, Party B shall place special note at the appropriate place of related documents and receipts indicating that, "The insurance business under this insurance policy is being conducted by China Life Insurance Company Limited on behalf 4 of China Life Insurance (Group) Company, and the legal responsibilities under this insurance policy shall be borne by China Life Insurance (Group) Company." 3. Scope of Agency 3.1. Party A hereby authorizes Party B to manage on its behalf the following insurance business under Old Policies: (i) day-to-day insurance administration services: conservation, claim settlements, payment and premium collections, daily settlements, account verifications and preparation of business and financial reports; (ii) customer services: answering or handling inquiries or complaints from the policy holders, insureds or beneficiaries of Old Policies; (iii) statistics and file management; (iv) invoice and receipt management; (v) the reinstatement of Old Policies and the addition or renewal of riders (for purposes of this section, Party B permits holders of the Old Policies to purchase Party B's riders supplemental to such holders' main insurance contracts, and the premium income thereby generated shall belong to Party A. In addition, the business thereby required to be underwritten shall be underwritten in accordance with Party B's underwriting standards); (vi) reinsurance; and (vii) the handling of disputes relating to Old Policies, including bringing or defending suits on behalf of Party A. 3.2. Party A hereby authorizes Party B to conduct separate account verifications and financial management in respect of the agency business in accordance with the accounting and financial management rules set forth in writing by Party A. Party B shall provide to Party A periodically, and according to Party A's requirements, accurate and complete accounting information, including internal business reports and supervisory reports, necessary to make internal decisions regarding the management of the business and external disclosures. 3.3. Party B shall set up separate accounting books to account for all agency business items, including income, expenditures, assets, liabilities and owners' equity. All branches and offices under Party B 5 at various levels shall set up independent accounting systems for the agency business. 3.4. Party A hereby authorizes Party B to maintain on its behalf the business and finance system applications supporting the Old Policies in order to keep the such system applications in good condition. 3.5. Party A hereby authorizes Party B to manage Party A's products in accordance with Party B's reasonable requirements, and Party A shall provide Party B with relevant actuarial support. 4. Account and Account Management 4.1. Party B shall maintain separate accounts for income and payments in respect of the agency business. Within 5 business days after this Agreement becomes effective, Party B shall open, in its own name, agency business income and payment accounts with a bank approved by both Parties in accordance with the requirements of this section 4.1. 4.2. The headquarters and provincial branches of Party B shall open agency business income accounts and expense accounts exclusively for income and expense settlements in regard to the agency business. 4.3. (1) The city-level or county-level branches of Party B shall open agency business income accounts to be used exclusively for the collection of premium payments in regard to the agency business, in accordance with the needs of agency business. The premium funds of such accounts shall be transferred in a timely manner to the headquarters of Party B in full, and shall then be transferred from Party B's headquarters into the account designated by Party A by 4:00 p.m. Beijing time every day. (2) Unless otherwise provided in this Agreement, Party B shall not withdraw, dispatch, employ or pledge the premium payments in the agency business income account without permission, and shall not open other accounts to collect, deposit, hide, or retain in any other fashion premium payments collected in connection with the agency business. 4.4. (1) The city-level or county-level branches of Party B should open payment accounts for the agency business in accordance with the needs of the agency business. Payment accounts shall be exclusively used for the deposit and payment of the claims and 6 benefit amounts, commissions, and third party costs and expenses under the Old Policies. (2) Within 5 business days before the start of each calendar month, Party A shall, based on the funding request of Party B, actuarial forecasts and historical expense data issued by an actuary and attached to such request, transfer to the payment account for the agency business at Party B's headquarters the estimated funds in cash for payment of insurance claims and benefit amounts, commissions and third party costs and expenses under the Old Policies. Party B's headquarters shall in a timely manner transfer funds in full to the payment accounts of Party B's city-level or county-level branches, and shall allocate and monitor such accounts. (3) Party B has the right to withdraw, dispatch and employ the funds transferred by Party A in accordance with this Agreement to satisfy payment obligations in regard to claims and benefit amounts, commissions and third party costs and expenses under the Old Policies. Unless otherwise provided in this Agreement, Party A shall not in any fashion interfere with or in any way withdraw, dispatch, employ or pledge such funds. (4) If in its reasonable judgment Party B concludes that the funds transferred by Party A in accordance with this Agreement will become insufficient to meet the payment needs of the current month after 10 business days, it shall request from Party A emergency funding, together with the related actuarial forecasting report provided by an actuary. Party A shall transfer the needed supplementary funds for such month to the payment account of Party B's headquarters within 5 business days after receiving such request. 7 4.5. Both Parties shall within 1 month after the end of each calendar quarter, inquest the accounts in regard to the receipt and payment of amounts in connection with the agency business for such quarter. 5. Data and Documentation 5.1. Party A owns all data generated in connection with the agency business under this Agreement (including, but not limited to, business data and financial data) and all documentation relating to the agency business under this Agreement (including but not limited to paper documentation and electronic documentation) (collectively, the "Agency Business Data and Documentation"). 5.2. During the term of this Agreement, Party B has the obligation to safely maintain and regularly update the Agency Business Data and Documentation, to keep it confidential, and to manage it with the degree of diligence as its own business data and documentation. However, Party B shall manage and store the Agency Business Data and Documentation and its own business data and documentation separately. 5.3. Party B shall manage the business data and financial data of the agency business under this Agreement in accordance with the relevant data management rules formulated by Party A in writing and acknowledged by Party B, and shall separately process and transmit such business data and financial data in conformity with business and finance processing systems acknowledged by both Parties. 5.4. During the term of this Agreement, in accordance with the terms and conditions of this Agreement, Party A may use, reference and inspect Agency Business Data and Documentation, and Party B shall provide all necessary or desirable assistance Party A in respect thereto. In response to Party A's reasonable request, Party B shall provide Party A with raw data in connection with the agency business data and copies of relevant documentation. 5.5. Party B shall return such raw data and documentation to Party A when this Agreement is terminated. 6. Inspection and Report 6.1. Without affecting or interfering with Party B's normal business operations, Party A shall have the right to conduct on-site or off site, and daily or annual inspections in order to determine whether Party B's conduct of the agency business under this Agreement complies with the business standards, financial standards, rules and systems agreed upon by both Parties, and to test the accuracy of the related accounting 8 information provided by Party B. Party B shall provide all reasonably necessary assistance and cooperation. Expenses incurred due to such inspections shall be borne by Party A. 6.2. Within 90 days after the end of each calendar year, Party B shall prepare and submit to Party A an annual report concerning its insurance business agency. 7. Insurance Agency Service Fees and Payments Thereof 7.1. The method of calculating service fees for any period shall be as follows: (i). the number of policies in force as of the last day of the period, multiplied by RMB8.00 (number of policies in force for a group insurance policy is equal to the number of individuals covered by such policy (not including individuals under lapsed or expired policies)); plus (ii). 2.5% of the actual premiums and deposits collected during such period. When this Agreement is renewed pursuant to Section 12.2, both Parties may, prior to the commencement date of such renewal period, redefine the method of calculating the service fees for such renewal period in accordance with the principle of market fair dealings, and enter into a written agreement pursuant to Section 24.3. Otherwise, the service fees for such renewal period shall be calculated in accordance with the method of calculation for the period prior to such renewal period. 9 7.2. Payment procedure for service fees: (i). In every year, each period starting from January 1st and ending on June 30th, and starting from July 1st and ending on December 31st, shall be deemed to be a payment period. (ii). Within one month after the end of a payment period, Party B shall consolidate all the information and determine the amount of service fees for such payment period in accordance with Section 7.1, and submit the related bill with detailed schedules to Party A. (iii). Unless Party A provides, within 30 days after receiving such bills and detailed schedules, adequate evidence that the amount of such service fee is unreasonable, the service fee specified in such bill shall be paid into Party B's designated account within thirty days after Party A receives such bill and detailed schedules. 8. Payment of Commissions 8.1. Any direct commissions to insurance agents and any corresponding pension fees incurred in connection with premium collections for the renewal of Old Policies shall be borne and paid by Party A in accordance with the payment standards that were specified when such policies were issued. Except for such aforementioned direct commissions and pension fees, all other supplementary commission expenses incurred in connection with such insurance agents (including, but not limited to, bonuses, social welfare expenses, training expenses, and allowances) shall be borne by Party B. 8.2. Commissions payable to insurance agents in connection with riders to Old Policies shall be calculated based on available standards for the relevant insurance products. Such commissions shall be borne by Party A, and paid by Party A to Party B. Party A shall notify Party B in writing of all applicable standards for the commissions of such riders. 8.3. All of the aforementioned commissions borne by Party A shall be paid in accordance with the requirements of Section 4.4 of this Agreement. 9. Third Party Costs and Expenses 9.1. Third party costs and expenses mean costs and expenses received by third parties, and arising in connection with Party B's performance of its duties and agreed by Party A, excluding service fees payable to Party B pursuant to Section 7 of this Agreement, commissions set forth 10 in Section 8 and tax duties and related expenses set forth in Section 10. Such costs and expenses include, but are not limited to, fees for auditors, actuaries, external lawyers and other external professionals hired by Party B for its own account or for the account of Party A for purposes related to this Agreement. Party A shall not refuse or withhold, without appropriate reason, its approval or consent of such third party costs and expenses, as long as they are considered by Party B to be appropriate, necessary or reasonable. 9.2. Third party costs and expenses shall be borne by Party A, and shall be paid in from the business settlement or payment account for the agency business. Under no circumstances shall Party B be obligated to pay, or to pay on behalf of Party A, such costs and expenses using its own funds. 9.3. Unless otherwise provided in this Agreement, Party A shall not be liable for any other expenses incurred in connection with the agency business. 10. Taxation 10.1. Party A shall be responsible for all tax obligations required to be borne by Party A as tax obligor or withholding obligor pursuant to tax laws and regulations. Party A shall bear and pay all expenses incurred in connection with such tax obligations. 10.2. Party B shall provide all necessary assistance to Party A in performing the duties set forth in Section 10.1, including but not limited to assistance in the preparation of tax declaration forms, the preparation and provision of required files and documents, and the payment or withholding of tax. 10.3. Party B shall be liable for the payment of any taxes that are imposed on it in accordance with applicable tax laws and regulations. 11. Representations, Warranties and Undertakings Each Party to this Agreement makes the following representations, warranties and undertakings to the other Party: (i). It has obtained adequate power and authority (including but not limited to the procurement of approvals, consents and permits from relevant regulatory authorities, and the internal authorization of the company) to sign this Agreement; 11 (ii). After this Agreement comes into effect in the manner set forth herein, it shall be binding on such Party, and will be enforceable against such Party in accordance with its terms; (iii). All terms of this Agreement are in compliance with Articles of Association of such parties, and with the laws and regulations of China. 12. Term 12.1. This Agreement shall remain in effect until December 31, 2005. 12.2. Subject to the listing rules of the stock exchange(s) where Party B is listed, this Agreement shall be automatically renewed for successive one-year terms unless terminated by either Party by providing the other Party with a written notice indicating its intention not to renew at least 180 days prior to the expiration of the then current term. 13. Indemnification 13.1. Any claim, suit, loss, judgment, damages, fines or expenses (hereinafter collectively referred to as a "Loss") sustained by Party B, its directors, officers, employees, agents or representatives (hereinafter collectively referred to as "Indemnified Parties") in the performance of their duties under this Agreement, shall be fully indemnified by Party A. Party A shall hold each Indemnified Party harmless against any such Loss and/or liability, unless it is finally determined through legal or administrative procedures that such Loss and/or liability is caused due to the fault of such Indemnified Party. 13.2. Notwithstanding any other provision of this Agreement, Indemnified Parties shall not be responsible for any loss of Party A or any third party caused by any action or inaction, or by any erroneous decision, on the part of an Indemnity Party in discharging its obligations under this Agreement, unless it is finally determined through legal or administrative procedures that such loss was incurred due to the fault of such Indemnified Party. 13.3. This indemnity clause shall survive the termination of this Agreement, regardless of the manner in which this Agreement is terminated. 14. Liability for Breach 14.1. If Party A has not paid, or is incapable of paying, Party B the service fees in accordance with the terms of this Agreement, it shall pay a penalty of 0.021% of the amount due to Party B for each day that such amount is overdue, until the service fee is paid in full. Party A may 12 deduct amounts payable by Party B from any cash dividends payable by Party A to Party B. 14.2. Notwithstanding the foregoing provision, if (i) Party A has not paid or is incapable of paying service fees in full to Party B as stipulated by this Agreement, and the amount due reaches RMB100,000,000 or more, or (ii) Party A has not transferred or is incapable of transferring adequate funds into Party B's account as provided by this Agreement, as a result of which the claims, benefit amounts, commissions, and/or third party costs and expenses that are not timely paid by Party B reach RMB300,000,000 or more, Party B shall be entitled to send to Party A a written notice of rescission. Unless waived by Party B, this Agreement shall be rescinded upon the 30th day after such written notice is delivered to Party A. 14.3. Subject to the restrictions set forth in Section 13.2 of this Agreement, Party B shall be liable for the direct financial losses of Party A incurred by Party B's breach of this Agreement in managing the insurance business agency hereunder, which liability shall be capped by the amount of service fees collected by Party B in the relevant calculation period. 15. Termination 15.1. (a) This Agreement shall be terminated upon the occurrence of any of the following circumstances: (i) The obligations under the Old Policies have been discharged; (ii) With the approval of each of Party B and CIRC, Party A legally transfers all Old Policies to a third party, and such third party undertakes to perform the insurer's duties under the Old Policies, or authorizes any institution other than Party B to perform the insurer duties thereunder; (iii) With the approval of each of Party B and CIRC, Party A authorizes any institution other than Party B to perform the insurer duties under the Old Policies; (iv) This Agreement is not renewed after the expiration of the initial term or a renewal term; 13 (v) Party B effectively rescinds this Agreement pursuant to Section 14.2.; (vi) Party A is unable to make payments, is declared bankrupt, enters into a liquidation procedure, is ordered to be dissolved, or is put into receivership. (b) If Party A has legally transferred part of the Old Polices to a third party with the approval of each of Party B and CIRC, and such third party performs the insurer's obligations under such Old Polices or authorizes a third party other than Party B to perform the insurer's obligations thereunder, such Old Policies shall not be subject to this Agreement starting from the date of transfer. 15.2. If this Agreement is terminated due to the foregoing Section (a) (ii), (iii), (iv), (v) or (vi), or if the holders of a substantial number of Old Policies are adversely affected or incur losses due to the foregoing Section (b), Party A shall assume all related liabilities. 15.3. If this Agreement is terminated pursuant to Section 15.1 (a) or certain Old Policies are transferred pursuant to Section 15.1 (b) and are therefore no longer subject to this Agreement, the obligations and responsibilities of Party A and Party B under this Agreement that had already arisen before such termination shall not be terminated or affected thereby. 16. Force Majeure 16.1. If a Party fails to perform in whole or in part its duties under this Agreement due to an event of force majeure, this performance shall be suspended in the affected period of force majeure. 16.2. The Party claiming that it has been affected by an event of force majeure shall inform the other Party of such event of force majeure in writing as soon as possible, and shall provide the other Party with appropriate evidence regarding the existence and ongoing nature of such event of force majeure within 15 days after the occurrence thereof. The Party claiming that the performance of its obligations under this Agreement is objectively impossible and impracticable due to such event of force majeure shall take all reasonable measures to lessen the losses caused by such event of force majeure. 16.3. Upon of occurrence of any event of force majeure, both Parties shall immediately consult with each other in respect of the performance of their obligations under this Agreement, and shall immediately resume 14 the performance of their respective obligations hereunder upon the termination or elimination of such event of force majeuree. 16.4. Force majeure means the objective circumstances, occurring after this agreement becomes effective that cannot be reasonably controlled, predicted, avoided or overcome, and which make the performance of the obligations under this Agreement in whole or in part objectively impossible or impracticable (including, but not limited to, circumstances when such obligations cannot be performed even after spending a reasonable amount of money). Such circumstances include but are not limited to floods, fires, droughts, wind, earthquakes, and other acts of God, strikes, riots, turmoil and wars (declared or not) and the acts or omissions of governmental authorities. 17. Confidentiality Unless otherwise provided by law or relevant regulatory authorities or in order to meet the legal disclosure requirements of information on Party B when it is to be listed or as a listed company, either Party shall provide or disclose to any company, enterprise, organization or individual the business-related information or data of the other Party without the prior written approval of the other Party. 18. Assignment Neither Party may assign any right or obligation under this Agreement without the prior written approval of the other Party. 19. Non-Waiver Unless otherwise provided for by law, any delay or failure on the part of either Party hereto to exercise any right, power or privilege under his Agreement shall not operate as a waiver thereof, nor shall any partial exercise of any right, power or privilege preclude the exercise of any further right, power or privilege. 20. Notices Any notice related to this Agreement shall be sent in writing, and shall be delivered in person or by fax or mail. If delivered in person, such notice shall be deemed delivered upon submission. If sent by fax, such notice shall be deemed delivered when the fax machine indicates that the fax has been transmitted. If delivered by mail, such notice shall be deemed delivered on the third business day (statutory holidays excluded) following the day such notice was mailed. Notices shall become effective upon delivery. Addresses of the Parties are as following: 15 China Life Insurance (Group) China Life Insurance Company Company Limited Address: No.5 Guan Ying Yuan Xi Address: China Life Tower, No. 16 Qu, Xicheng District, Beijing Chao Yang Men Wai Avenue, Chaoyang District, Beijing Telephone: 010-6611 4433 Telephone: 010-8565 9999 Fax: 010-6611 1567 Fax: 010-8565 2232 21. Performance of this Agreement 21.1. After Party B has listed on the Hong Kong Stock Exchange, the transactions under this Agreement shall constitute a connected transactions as described in the Hong Kong Stock Exchange Listing Rules (the "Listing Rules"). According to the Listing Rules, such transactions may be conducted only after obtaining a waiver from Hong Kong Stock Exchange or the approval of independent shareholders and/or in conformity with any other requirements concerning connected transactions under the Listing Rules. Therefore, the performance of the obligations set forth in this Agreement shall, to the extent that they are deemed to be connected transactions, be subject to the approval of the Stock Exchange HK and/or conditional on conforming to any other requirements concerning connected transactions under the Listing Rules. Both Party A and Party B undertake to observe the relevant requirements of the Listing Rules. 21.2. If the Hong Kong Stock Exchange exemption contains additional conditions the obligations set forth in this Agreement shall be performed in accordance with such additional conditions. Both Party A and Party B undertake to strictly observe such conditions. 22. Further Actions Both Parties shall take further actions and measures in order to fully and effectively perform this Agreement, including consultations with each other to set forth the execution plan or detailed rules of this Agreement in accordance with the principles set forth in this Agreement, and provided that such plan or rules shall not violate the terms hereof. 23. Governing Law and Disputes Settlement 23.1. This Agreement shall be governed by, and interpreted and enforced in accordance with, the laws of China. 23.2. Any disputes arising from or related to this Agreement shall first be settled by the Parties through friendly consultations. If no resolution is 16 reached within 30 days after the dispute occurs, either Party may submit such dispute to the China International Economic Trade Arbitration Commission for arbitration in accordance with its arbitration rules in effect when such dispute is submitted. The arbitration award shall be final and binding on both Parties. 24. Effectiveness, Versions and Modifications 24.1. This Agreement shall come into effect after the execution hereof by each Party's authorized representative and the affixing of each Party's company seal. The effectiveness of this Agreement shall retroactively commence as of the date when Party B's Business license was issued by the relevant department for industry and commerce. 24.2. This Agreement is executed in four originals, with two originals to be kept by each Party. Each original shall have the same legal effect. 24.3. Any amendment to this Agreement shall be made only pursuant to a written agreement executed by the authorized representatives of each Party, and shall be approved by each Party after taking appropriate corporate actions. If such modification constitutes a material and significant change to this Agreement, it shall become effective upon the notification of and procurement from approval from the Hong Kong Stock Exchange and/or a shareholders' meeting of Party B (if applicable) (subject to the listing rules and requirements of the Hong Kong Stock Exchange then in effect). 24.4. If amendments to Chinese laws, regulations or relevant rules would affect the performance of this Agreement, both Parties shall, based upon the object of this Agreement and the principles of equity and reasonableness, through friendly negotiations, timely modify the affected provisions in order to eliminate and lessen, to the extent possible, the impact caused by such amendments. 17 Signature page: Party A: Party B: China Life Insurance (Group) Company China Life Insurance Company Limited (Seal) (Seal) Legal Representative/ Legal Representative/ Authorized Representative (Signature) Authorized Representative (Signature) 18 EX-10.6 8 dex106.txt PROPERTY LEASING AGREEMENT Exhibit 10.6 ENGLISH TRANSLATION OF CHINESE LANGUAGE ORIGINAL Property Leasing Agreement between China Life Insurance (Group) Company and China Life Insurance Company Limited TABLE OF CONTENTS CLAUSE 1 PREMISES OF THE AGREEMENT........................................3 CLAUSE 2 SCOPE OF LEASE...................................................4 CLAUSE 3 LEASE TERM.......................................................4 CLAUSE 4 PAYMENT OF RENT..................................................5 CLAUSE 5 RIGHTS AND DUTIES................................................6 CLAUSE 6 FURTHER UNDERTAKINGS.............................................8 CLAUSE 7 AMENDMENT AND TERMINATION........................................8 CLAUSE 8 DEFAULT AND DAMAGES..............................................9 CLAUSE 9 REPRESENTATIONS AND WARRANTIES...................................9 CLAUSE 10 FORCE MAJEURE...................................................10 CLAUSE 11 MISCELLANEOUS...................................................11 CLAUSE 12 NOTICES.........................................................12 CLAUSE 13 GOVERNING LAW AND DISPUTE SETTLEMENT............................13 CLAUSE 14 SUPPLEMENTARY PROVISIONS........................................13 SCHEDULE I..................................................................15 SCHEDULE II.................................................................17 2 This Property Leasing Agreement (the "Agreement") is entered into on September 30, 2003 in Beijing, People's Republic of China ("PRC") by and between the following two parties: Party A: China Life Insurance (Group) Company Address: No. 5 Guan Ying Yuan Xi Qu, Xicheng District, Beijing Legal Representative: Wang Xian Zhang Party B: China Life Insurance Company Limited Address: China Life Building, No. 16 Chao Wai Avenue, Chaoyang District, Beijing Legal Representative: Wang Xian Zhang WHEREAS, (1) Party A is a wholly state-owned insurance company duly organized and existing under the laws of the PRC; (2) Party B is a joint stock insurance company with limited liability duly organized and existing under the laws of the PRC; and (3) In accordance with the Municipal Real Estate Law of the PRC, the Contract Law of the PRC, as well as other relevant laws and regulations, both parties wish to make fair and reasonable arrangements regarding the leasing or subleasing of real estate from Party A to Party B. On the basis of mutual benefit and through friendly consultations, both parties hereto have agreed to enter into this Agreement as follows: Clause 1 Premises of the Agreement 1.1. Party A owns all the real property listed in Schedule I of this Agreement (hereinafter referred to as "Party A Real Property"). The Party A Real Property listed in Schedule I includes real property owned by Party A and its affiliates, and Party A's affiliates have agreed to have Party A to enter into this Agreement. 1.2. Party A is entitled to sublet all real property listed in Schedule II of this Agreement (hereinafter referred to as "Party A Leased Property"). 1.3. The real property referred to in clauses 1.1 and 1.2 are collectively referred to in this Agreement as "Agreement Property". 3 1.4. Party A agrees to lease Party A Real Property and sublease Party A Leased Property to Party B in accordance with the terms and conditions of this Agreement for Party B's use as office space and Party B agrees to lease or sublease such properties as the case may be. Clause 2 Scope of Lease 2.1. There is a total of 833 for sites Party A Real Property, having a total construction area of 637,143 square meters. The detailed description of such sites is set forth in Schedule II, which constitutes a part of this Agreement. 2.2. There is a total of 1,764 for sites Party A Leased Property, having a total construction area of 1,060,261 square meters. The detailed description of such sites is set forth in Schedule II, which constitutes a part of this Agreement. 2.3. The Agreement Property shall be deemed to have been delivered to Party B when Party B is duly organized. Party A shall ensure that the Agreement Property is in good condition satisfactory to Party B when delivered. 2.4. Both parties hereby agree that each party may, by giving written notice to the other party no later than November 30th of each year, reduce the number of properties under the lease in accordance with its business needs. Upon receipt of such notice from the other party, each party shall modify the Schedules of this Agreement accordingly and as per the requirements of Clause 11.4, and make adjustments to the rent payable for the following year in accordance with Clause 4.4 of this Agreement. 2.5. Both parties hereby agree that each party may, by giving written notice to the other party no later than November 30th of each year, increase the number of properties under the lease. If both parties agree to such increase before December 31 of such year, they shall modify the Schedules of this Agreement accordingly and as per the requirements of Clause 11.4, and make adjustments to the rent in accordance with Clause 4.4 of this Agreement. Clause 3 Lease Term 3.1. Unless otherwise required by the listing rules of the Stock Exchange of Hong Kong Limited, this Agreement shall expire on December 31, 2005. 3.2. The term of the sublease under this Agreement shall be the term of the original head lease less the period during which Party A rented such sublease estates prior to the effective date of this Agreement, provided however, that such term shall not extend beyond December 31, 2005. 4 3.3. Except as otherwise provided in this Agreement, unless the prior written consent of the other party is obtained, a party may not terminate this Agreement or any of the estates set forth herein before the expiry date. Clause 4 Payment of Rent 4.1. Rents for Party A Real Property under this Agreement shall be determined by reference to market rents or, if market rents are not readily available, by reference to the costs incurred by Party A in holding and maintaining such sites (including amortization of book value or depreciations, maintenance costs, property tax, business tax, supplementary fees, stamp tax, etc.), plus a reasonable profit margin of 5%. Party A shall be responsible for the payment of all taxes in connection with the lease of its Real Properties. 4.2. Rents for Party A Real Properties shall be based on the rental amounts set forth in the original head lease, plus all taxes required to be paid by Party A in connection with the sublease, including property tax, business tax, supplementary fees, stamp tax, etc. 4.3. Party B shall pay to Party A a proposed annual rent of RMB334.83 million (inclusive of management fees) in accordance with this Agreement, in respect of which RMB126.56 million is rent for Party A Real Properties and RMB208.27 million is rent for Party A Leased Property. Party B shall determine the final rent in accordance with Clauses 2.4, 2.5, 4.4 and 4.7 of this Agreement. 4.4. To reflect changes in market rents and the number of properties leased under this Agreement, within one month before the end of each calendar year, the parties shall enter into a supplementary agreement to adjust the rent for the following calendar year. 4.5. From 2004 to 2005, the rents set forth in this Agreement shall be paid to Party A by Party B on a quarterly basis, with the amount of each payment being one quarter of the yearly rent. Each payment of rent shall be made before January 10th, April 10th, July 10th, and October 10th of each year (hereinafter referred to as "Payment Date")respectively. If a Payment Date does not fall on business day, the rent shall be paid on the last business day before the Payment Date. 4.6. The rent incurred by Party B during the period starting from the date when its business license is issued and ending on December 31, 2003 shall be paid by Party B to Party A before December 31, 2003. 4.7. Party B's quarterly rent shall be calculated as follows: (1) quarterly rent payable to Party A shall equal sum total of the quarterly rent for each site leased from Party A. 5 (2) quarterly rent for each site shall equal the yearly rent of each estate divided by 365 (or 366 for leap years) and multiplied by the actual number of days that Party B uses such site. 4.8. Party B shall pay the rents above into the designated account of Party A. Clause 5 Rights and Duties 5.1. As the lessor of the Agreement Property, Party A shall enjoy following rights: (1) To collect rental payments in accordance with the provisions of this Agreement; and (2) Other rights set forth in this Agreement. 5.2. As the lessor of the Properties under this Agreement Property, Party A undertake to perform the following obligations: (1) Unless otherwise provided in this Agreement, Party A shall warrants that it has the right to lease the Party A Real Property in accordance with this Agreement, and that it has obtained all third party approvals required to sublease Party A Leased Properties in accordance with the original head lease entered into with such third parties and with this Agreement; (2) Party A undertakes to adopt any necessary measures to make the Agreement Property and the leasing thereof in compliance with relevant laws and regulations. If Party B suffers any losses (including any economic losses) as a result of Party A's violation of such undertaking, Party A shall indemnify Party B and hold Party B harmless within thirty (30) days after Party B makes a claim for such loses in writing; (3) To renew the lease for Party A Leased Property as per the requirements of Party B; (4) During the term of this lease, to pay all property tax, business tax, supplementary fees, stamp tax, land utility fees and other lawful taxes and fees in connection with the leasing of Party A Real Property; (5) During the term of this Agreement, if Party A desires to assign the ownership of Party A Real Property to a third party, it shall notify Party B. Party B shall have a right of first refusal in regard to such assignment under the same terms offered to the third party. If Party B forfeits its right of first refusal, Party A may assign the ownership of such property to a third party under such terms, provided, however, 6 that such third party shall be legally bound as the lessor under the term of this Agreement; (6) Party B may, by giving one month's prior written notice to Party A, reduce the number of properties under this Agreement in accordance with its business needs, and Party A shall agree to such reduction; (7) Party A shall provide necessary assistance in a timely manner in response to all reasonable requests by Party B in regard to the use of the Agreement Property; (8) Party A shall perform all of its obligations and duties as lessor in a timely manner. Party A shall not by any action or inaction affect Party B's normal use of the Agreement Property; (9) Unless otherwise provided for in this Agreement, during the term of this Agreement, Party A shall not repossess all or any part of the Agreement Property or terminate this Agreement before the expiry date. 5.3. As the lessee of the Agreement Property, Party B shall have following rights: (1) To occupy and use the Agreement Property in accordance with the provisions of this Agreement; (2) In response to its business needs, to decorate and renovate Structural integrity thereof or the Agreement Property without affecting the structural integrity thereof or violating this Agreement or relevant laws and regulations. Expenses in connection with decoration or renovation shall be borne by Party B and such decoration and renovation shall not adverse affect the value of the sites and/or Party A's rights; (3) To sublease any and all of the Party A Real Property under this Agreement with the prior written approval of Party A (this sublease is not applicable to the Party A Leased Property); (4) In accordance with its business needs, to request to increase the number of properties under this Agreement, which Party A shall make its best efforts to satisfy; (5) In accordance with its business needs, with one month's written notice to Party A, to request that Party A reduce the number of properties under this Agreement. Party A shall satisfy any such request from Party B; (6) Not withstanding the above requirement, if any damages occur to a certain site for reasons not caused by Party B , Party B has the right to to make its own judgments regarding the extent of such damages. If 7 such damages affect Party B's reasonable and normal use of such site, Party B may notify Party A in writing and request Party A to terminate the lease in respect of the affected site. Once such notice has been effectively given, the lease relationship (between the parties) with respect to such affected site shall be terminated. Party B shall not pay rent in respect of the affected site starting from the date when the damages occur. After Party A repairs the affected site, with the approval of Party B, both parties may restore such lease relationship starting from the date agreed upon by both parties and in accordance with the terms of this Agreement; (7) Under the same terms, to purchase Party A Real Property pursuant to a right of first refusal when Party A plans to assign itsReal Property. 5.4. As the lessee of the Properties under this Agreement, Party B shall perform following duties: (1) To pay rent in accordance with the terms of this Agreement; (2) To repair the Agreement Property during the term of the lease (not including repairs involving the main structure of the sites), except for repairs and maintenance that shall be undertaken by a third party or the owner of the sites pursuant to an agreement between Party A and such third party; (3) To be responsible for the payment of water, electricity, heating and repairs in connection with the Agreement Property, in addition to other fees arising due to the use of the Agreement Property during the term of the lease; (4) To promptly return the Agreement Property to Party A upon the expiry or termination of this Agreement. Clause 6 Further Undertakings Party A has the obligation to take any further actions, including the execution other relevant agreements, contracts or documents, necessary to effect the objective and termsof this Agreement. Clause 7 Amendment and Termination 7.1. This Agreement shall be terminated under the following circumstances: (1) The term of this Agreement expires; 8 (2) The parties hereto agree to terminate this Agreement before the expiration of the term; (3) Applicable laws and regulations, or an adjudication, ruling or order of a court of complete jurisdiction or body of arbitration require the termination of this Agreement; or (4) The termination of this Agreement pursuant to Clause 14.6 of this Agreement. Clause 8 Default and Damages 8.1. A party shall compensate the other party for any direct and indirect economic losses caused as a result of any breach of this Agreement by such party. 8.2. Party A permits Party B to use the sites in respect to which Party A has not yet obtained full legal title and undertakes to use its best efforts to compete relevant procedures required to obtain full legal title. If the use by Party B of the Party A Leased Property is challenged, interfered with or the subject to any claim by a third party, Party A shall indemnify Party B and hold Party B harmless within 30 days after Party B files a written claim in connection therewith. 8.3. If the use by Party B is challenged, interfered with or the subject to any claim by a third party, Party A shall indemnify Party B and hold Party B harmless within 30 days after Party B files a written claim in connection therewith. Clause 9 Representations and Warranties 9.1. Representations and Warranties of Party A (1) Party A is a duly organized and existing wholly state-owned company with independent legal person status, holding a valid business license and having the legal right to possess, lease, and manage its assets and to execute and perform this Agreement; (2) Party A has conducted its business in accordance with applicable law and has never engaged in any activities beyond its approved business scope; (3) Party A has obtained all government approvals (if applicable) and internal authorizations for the execution of this Agreement, and this Agreement will be executed by its validly authorized representative so 9 that upon such execution, this Agreement will be legally binding on Party A; (4) Party A's execution of this Agreement and its performance of its obligations hereunder will not violate any laws or regulations, any other agreements or the bylaws of Party A; (5) The term of the sublease conforms with clause 3.1 of this Agreement. 9.2. Representations and Warranties of Party B (1) Party B is a duly organized and existing stock limited company with independent legal person status, holding a valid business license and having the legal right to possess, lease, and manage its assets and execute and perform this Agreement; (2) Party B has conducted its business in accordance with applicable law and has never engaged in any activities beyond its approved business scope; (3) Party B has obtained all government approvals (if applicable) and internal authorizations for the execution of this Agreement, and this Agreement will be executed by its validly authorized representative so that upon such execution, this Agreement will be legally binding on Party B; (4) Party B's execution of this Agreement and its performance of its duties hereunder will not violate any laws or regulations, other agreements or the bylaws of Party B. Clause 10 Force Majeure 10.1. If a party fails to perform all or part of its obligations under this Agreement due to an event of Force Majeure (meaning an event beyond the reasonable control of the affected party that is unforeseeable, or unavoidable and beyond remedy if foreseen, and which happens after the execution of this Agreement and renders the full or partial performance of this Agreement impossible or impracticable). Events of Force Majeure include but are not limited to floods, fires, draughts, typhoons, earthquakes, and other acts of God, traffic accidents, strikes, insurrections, turmoil and war (whether declared or not) and any action or inaction of any governmental authority). The performance of such obligations shall be suspended during the period during which such performance is affected by the event of Force Majeure. 10.2. The Party claiming to be affected by an event of Force Majeure shall notify the other Party in writing of the occurrence of such event as soon as possible, 10 and shall, within 15 days after the occurrence of such event, provide the other Party by personal delivery or registered air mail with appropriate evidence in support of the occurrence of the event of Force Majeure and the period of its occurence. The Party claiming that its performance of the Agreement has become impossible or impracticable due to an event of Force Majeure shall make all reasonable efforts to eliminate or minimize the effects of such event of Force Majeure. 10.3. If an event of Force Majeure occurs, both Parties shall immediately consult with each other regarding the performance of this Agreement, and shall immediately resume their respective obligations under this Agreement upon the termination or elimination of the event of Force Majeure. Clause 11 Miscellaneous 11.1. Unless otherwise provided for in this Agreement, a Party may not transfer all or part of its rights and obligations under this Agreement without the written consent of the other Party. 11.2. This Agreement and the attachments hereto constitute the entire agreement, and supersede all previous oral and written agreements, contracts, understandings and communications of the parties concerning the matters set forth herein. 11.3. Any provision hereof that becomes illegal, invalid or unenforceable will not affect the validity and enforceability of the other provisions of this Agreement. 11.4. Any amendment to this Agreement or its Schedules may be made only pursuant to written agreement executed by the authorized representatives of each Party and shall be approved by each party having taken taking appropriate corporate actions. If such amendment constitutes a material and substantial change to this Agreement, it shall become effective upon the notification of the HKSE or upon obtaining approval from the HKSE (subject to the then current requirements of the HKSE) and/or ratification at a shareholders' meeting of Party B (if applicable). 11.5. Unless otherwise provided for in this Agreement, any delay or failure on the part of any party hereto to exercise any right, power or privilege under this Agreement shall not operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude the exercise of any other right, power or privilege. 11.6. The Schedules hereto constitute an integral part of this Agreement and have the same binding effect on the parties hereto as if they had been incorporated into this Agreement. 11 Clause 12 Notices 12. Notices and other communications required to be given by any party pursuant to this Agreement shall be written in Chinese, and may be delivered by hand or registered mail to the address of the other party or sent by facsimile transmission to the number of the other party set forth below. The dates on which notices shall be deemed to have been effectively delivered shall be determined as follows: (a) Notices delivered by hand shall be deemed effectively delivered on the date of such hand delivery. (b) Notices given by registered mail shall be deemed effectively delivered on the 7th day (if the last day falls on a Sunday or a public holiday, then such date shall be extended to the next working day) after the date on which they were mailed (as indicated by the postmark). (c) Notices given by facsimile transmission shall be deemed effectively delivered at the time when the transmission is completed, provided that the sender shall produce the transmission report evidencing the successful transmission of relevant documents. The address and fax number of the parties for the delivery of notice are as follows: China Life Insurance (Group) Company: Address: No.5 Guan Ying Yuan Xi Qu, Xicheng District, Bejing Fax number: 010-6611 1567 Telephone number: 010-6611 4433 China Life Insurance Company Limited Address: China Life Building, No.16 Chao Wai Avenue, Chaoyang District, Beijing Fax number: 010-8565 2232 Telephone number: 010-8565 9999 If either party changes its address or fax number, it shall promptly notify the other party in writing of such change. 12 Clause 13 Governing Law and Dispute Settlement 13.1. This agreement shall be governed by and construed in accordance with the laws of PRC. 13.2. Any disputes arising from or in connection with this Agreement shall be resolved by both parties through friendly consultation. If the dispute cannot be settled in the aforesaid manner within ninety (90) days, either Party shall have the right to submit the dispute to the China International Economic Trade Arbitration Commission for arbitration to be conducted in accordance with the Commission's arbitration rules in effect at the time of the arbitration. The arbitration award will be final and binding on both parties. Clause 14 Supplementary Provisions 14.1. This Agreement is written in Chinese. 14.2. After the execution of this Agreement by both parties' authorized representatives and the affixing of both parties' company seals, this Agreement shall become effective and its effectiveness shall retroactively commence as of the date when Party B's business license is issued. 14.3. After Party B has listed on the HKSE, the transactions contemplated by this Agreement shall constitute the associated transactions as described by the listing rules and according to the listing rules, such transactions can only be conducted after obtaining the exemption from HKSE or upon the approval of independent shareholders or conforming to any other stipulations concerning associated transactions in the listing rules. Therefore, the performance of this Agreement relating to such associated transactions shall be on the premise of the obtaining of the approval from HKSE or upon conforming to any other stipulations concerning the associated transactions in the listing rules. Both parties undertake to observe the relevant stipulations of the listing rules. 14.4. If the HKSE exemption contains additional conditions, this Agreement shall be performed in accordance with such additional conditions. Both Parties undertake to strictly observe such conditions. 14.5. If the HKSE exemption for such related party transactions is retracted, rescinded, or becomes ineffective, and such transactions do not comply with the requirements concerning related party transactions in the listing rules, the performance of this Agreement relating to such transactions shall be terminated. 14.6. If the performance of all transactions contemplated by this Agreement is terminated pursuant to Clause 14.5, this Agreement shall be terminated. 13 14.7. This Agreement has been executed in four (4) originals, with one to be held by each party. One of the remaining two originals shall be submitted to the real property administration for registration, and the other shall be kept by Party B as a restructuring document for future reference. Each of these four originals has the same force and effect. Party A: Party B: China Life Insurance (Group) Company China Life Insurance Company Limited (Seal) (Seal) Legal Representative/ Legal Representative/ Authorized Representative (Signature) Authorized Representative (Signature) 14 SCHEDULE I List of Party A Real Property - ------------------------------------------------------------------------------- Annual rent Classification No. of Sites Area (m/2/) (yuan) - ------------------------------------------------------------------------------- 01 Anhui branch 43 25,257 4,984,372 - ------------------------------------------------------------------------------- 02 Beijing branch 1 426 600,000 - ------------------------------------------------------------------------------- 03 Dalian branch 2 3,298 1,150,000 - ------------------------------------------------------------------------------- 04 Fujian branch 24 11,035 1,067,788 - ------------------------------------------------------------------------------- 05 Gansu branch 92 45,179 7,263,574 - ------------------------------------------------------------------------------- 06 Guangxi Autonomous region branch 18 27,261 5,660,370 - ------------------------------------------------------------------------------- 07 Guangdong branch 93 56,375 11,208,394 - ------------------------------------------------------------------------------- 08 Guizhou branch 16 5,207 1,116,434 - ------------------------------------------------------------------------------- 09 Hainan branch 7 5,394 457,445 - ------------------------------------------------------------------------------- 10 Hebei branch 8 7,755 1,301,398 - ------------------------------------------------------------------------------- 11 Henan branch 34 39,874 3,428,141 - ------------------------------------------------------------------------------- 12 Helongjiang branch 18 11,351 4,641,909 - ------------------------------------------------------------------------------- 13 Hubei branch 24 15,413 3,425,663 - ------------------------------------------------------------------------------- 14 Hunan branch 11 13,236 1,632,246 - ------------------------------------------------------------------------------- 15 Jilin branch 38 35,846 5,218,363 - ------------------------------------------------------------------------------- 16 Jiangsu branch 39 41,839 11,603,160 - ------------------------------------------------------------------------------- 17 Jiangxi branch 30 12,484 1,565,752 - ------------------------------------------------------------------------------- 18 Liaoning branch 15 16,319 2,810,148 - ------------------------------------------------------------------------------- 19 Nemenggu Autonomous region branch 11 8,582 957,044 - ------------------------------------------------------------------------------- 20 Ningbo branch 16 4,633 559,300 - ------------------------------------------------------------------------------- 21 Nixia Autonomous region branch 9 1,662 38,800 - ------------------------------------------------------------------------------- 22 Qingdao branch 8 8,930 4,733,702 - ------------------------------------------------------------------------------- 23 Qinghai branch 2 474 34,511 - ------------------------------------------------------------------------------- 24 Shandong branch 35 53,397 15,406,069 - ------------------------------------------------------------------------------- 25 Shanxi branch 31 29,454 5,980,298 - ------------------------------------------------------------------------------- 26 Shaanxi branch 11 8,907 1,426,572 - ------------------------------------------------------------------------------- 27 Shanghai branch 5 3,834 1,399,102 - ------------------------------------------------------------------------------- 28 Shenzhen branch 9 7,476 1,716,547 - ------------------------------------------------------------------------------- 29 Sichuan branch 42 33,173 5,266,383 - ------------------------------------------------------------------------------- 30 Tianjin branch -- -- -- - ------------------------------------------------------------------------------- 31 Xiamen branch 1 942 106,192 - ------------------------------------------------------------------------------- 32 Xinjiang autonomous region branch 11 5,153 1,062,368 - ------------------------------------------------------------------------------- 15 - ------------------------------------------------------------------------------- 33 Yunnan branch 70 49,266 7,460,824 - ------------------------------------------------------------------------------- 34 Zhejiang branch 49 37,649 10,154,552 - ------------------------------------------------------------------------------- 35 Chongqing branch 10 10,063 1,123,498 - ------------------------------------------------------------------------------- 36 headquarters -- -- -- - ------------------------------------------------------------------------------- Total 833 637,143 126,560,920 - ------------------------------------------------------------------------------- 16 SCHEDULE II List of Party A Leased Property - ------------------------------------------------------------------------------- Annual rent Classification No. of Sites Area (m/2/) (yuan) - ------------------------------------------------------------------------------- 01 Anhui branch 58 37,440 5,076,900 - ------------------------------------------------------------------------------- 02 Beijing branch 27 19,649 13,357,050 - ------------------------------------------------------------------------------- 03 Dalian branch 2 2,622 1,230,000 - ------------------------------------------------------------------------------- 04 Fujian branch 88 18,398 1,906,328 - ------------------------------------------------------------------------------- 05 Gansu branch 58 18,220 3,053,709 - ------------------------------------------------------------------------------- 06 Guangxi Autonomous region branch 38 37,496 5,989,256 - ------------------------------------------------------------------------------- 07 Guangdong branch 137 87,001 32,014,436 - ------------------------------------------------------------------------------- 08 Guizhou branch 33 8,459 1,508,754 - ------------------------------------------------------------------------------- 09 Hainan branch 9 3,348 239,925 - ------------------------------------------------------------------------------- 10 Hebei branch 104 75,943 6,987,410 - ------------------------------------------------------------------------------- 11 Henan branch 134 107,133 11,555,623 - ------------------------------------------------------------------------------- 12 Helongjiang branch 54 29,176 4,726,583 - ------------------------------------------------------------------------------- 13 Hubei branch 73 42,544 8,690,031 - ------------------------------------------------------------------------------- 14 Hunan branch 69 52,625 10,723,336 - ------------------------------------------------------------------------------- 15 Jilin branch 27 14,938 2,071,600 - ------------------------------------------------------------------------------- 16 Jiangsu branch 58 47,479 8,481,492 - ------------------------------------------------------------------------------- 17 Jiangxi branch 63 32,942 2,595,549 - ------------------------------------------------------------------------------- 18 Liaoning branch 37 25,040 4,103,062 - ------------------------------------------------------------------------------- 19 Nemenggu Autonomous region branch 18 8,958 1,805,500 - ------------------------------------------------------------------------------- 20 Ningbo branch 42 15,017 1,281,750 - ------------------------------------------------------------------------------- 21 Nixia Autonomous region branch 15 7,532 1,273,053 - ------------------------------------------------------------------------------- 22 Qingdao branch 6 3,117 524,000 - ------------------------------------------------------------------------------- 23 Qinghai branch 9 1,903 388,526 - ------------------------------------------------------------------------------- 24 Shandong branch 135 103,348 11,430,907 - ------------------------------------------------------------------------------- 25 Shanxi branch 116 64,263 10,543,907 - ------------------------------------------------------------------------------- 26 Shaanxi branch 104 32,927 7,659,032 - ------------------------------------------------------------------------------- 27 Shanghai branch 27 15,145 7,553,509 - ------------------------------------------------------------------------------- 28 Shenzhen branch 1 183 109,632 - ------------------------------------------------------------------------------- 29 Sichuan branch 33 15,864 3,632,795 - ------------------------------------------------------------------------------- 30 Tianjin branch 11 16,248 5,519,897 - ------------------------------------------------------------------------------- 31 Xiamen branch 10 8,377 1,040,320 - ------------------------------------------------------------------------------- 32 Xinjiang autonomous region branch 50 22,618 5,649,064 - ------------------------------------------------------------------------------- 33 Yunnan branch 35 8,156 1,685,828 - ------------------------------------------------------------------------------- 17 - ------------------------------------------------------------------------------- 34 Zhejiang branch 46 51,479 10,508,767 - ------------------------------------------------------------------------------- 35 Chongqing branch 36 22,148 5,834,827 - ------------------------------------------------------------------------------- 36 headquarters 1 2,529 7,518,912 - ------------------------------------------------------------------------------- Total 1,764 1,060,261 208,271,271 - ------------------------------------------------------------------------------- 18 EX-10.7 9 dex107.txt NON-COMPETITION AGREEMENT Exhibit 10.7 ENGLISH TRANSLATION OF CHINESE LANGUAGE ORIGINAL Non-Competition Agreement between China Life Insurance (Group) Company and China Life Insurance Company Limited This Agreement is entered into on September 30, 2003 by and between the following two parties: Party A: China Life Insurance (Group) Company, a wholly state-owned company duly organized and existing under the laws of the People's Republic of China. Registered Address: No. 5 Guang Ying Yuan Xi Qu, Xicheng District, Beijing Business License No.: 1000001002372 Legal Representative: Wang Xian Zhang Party B: China Life Insurance Company Limited, a joint stock company with limited liability duly organized and existing under the laws of the People's Republic of China. Registered Address: China Life Building, No. 16 Chao Wai Avenue, Chaoyang District, Beijing Business License No.: 1000001003796 Legal Representative: Wang Xian Zhang WHEREAS: (1) Party A is an insurance company, the primary business scope of which is life insurance business; (2) Party A, in its capacity as the sole promoter, incorporated Party B on June 30, 2003 and Party B's primary business is also life insurance; (3) Party B plans to publicly offer its shares both in China and abroad and expects that upon completion of such offering Party A will remain as its controlling shareholder; (4) both parties acknowledge that their primary businesses compete with each other. NOW, THEREFORE, to avoid competition between the parties, Party A and Party B, agree as follows on certain matters concerning the business relationship between them: 1. Scope of Non-competition The scope of non-competition referred to in this agreement includes: life, health and accident insurance and other businesses that may compete with the insurance business of Party B. Any change to the scope of non-competition of this agreement shall only be made in an agreement entered into by the parties. 2. Party A's Commitments 2.1. Except as stated in Articles 3, 4 and 5 herein, during the term of this Agreement, Party A agrees that unless prior written consent is received from Party B, it will not, and will use its best endeavors to cause each of its affiliates not to, directly or indirectly, engage in, participate, or 2 operate, within the territory of China, any business that is within the business scope of Party B and its affiliates as set forth in Article 1 above. 2.2. If Party A is offered any business opportunity which involves business that is similar to or the same as the life, health and accident insurance business of Party B or its affiliates and if such business opportunity may directly or indirectly compete or lead to competition with the business of Party B, it shall immediately notify Party B in writing upon such opportunity becoming available and shall use its best efforts to make such business opportunity first offered to Party B on the terms and conditions that are no less favorable to that offered to Party A, its affiliates and any independent third parties. 2.3. Party A undertakes that it will grant Party B a right of first refusal under the same condition to purchase any legitimate new business developed by Party A. 3. Shares of China Life CMG currently held by Party A Party A undertakes that within three years of Party B's listing on the Stock Exchange of Hong Kong Limited (the "Buyout Period"), it shall assign all the 51% shares it currently holds in China Life CMG Life Insurance Company Ltd. (hereinafter referred to as "China Life CMG") to a third party, or it shall seek other means to avoid any possible competition between the business of China Life CMG and Party B. 4. Party A's Non-transferred Policies 4.1. Party B agrees that Party A shall retain the insurance business under non-transferred policies, including day-to-day insurance administration services, customer services, statistics and file management, invoice and receipt management, reinstatement of old policies, applications for and renewal of riders to the old policies, reinsurance, handling of disputes relating to the old policies and operation of insurance funds. Party A undertakes that such business shall not cause any material effect on the business of Party B and its affiliates. 4.2. Party A agrees that it will delegate Party B to manage on behalf of it the insurance business under non-transferred policies and pay a service fee to Party B for this purpose and Party B agrees to accept such delegation from Party A. Both parties agree that they will separately enter into a Policy Management Agreement regarding these service. 4.3. Party A agrees that it will delegate to Party B to provide investment management services for its insurance funds and will pay a service fee to Party B for this purpose and Party B agrees to accept such 3 delegation from Party A. Both parties agree that they will separately enter into an Asset Management Agreement regarding these service. 4.4. Party B shall have a right of first refusal on the same conditions if Party A decides to assign its business under non-transferred policies. 5. Both parties agree that Party B shall have a right of first refusal with regard to the Converted Policies Business, as defined herein, relating to Party A's Old Version Policies Business, as defined herein. If Party B chooses not to exercise such right of first refusal or the holders of such policies object to the underwriting by Party B of the Converted Policies Business, Party B agrees that Party A shall retain such business. 6. Term This Agreement shall become effective upon signing by both parties and shall remain effective until one of the followings occurs, whichever is earlier: (a) Party A holds, directly or indirectly, less than 30% of the voting power, as represented by the ownership interests of Party B, which Party A may exercise, or cause to be exercised, at Party B's shareholders meeting, and ceases to control the majority of Party B's board of directors; or (b) Party B's shares cease to be listed on the Stock Exchange of Hong Kong Limited or any other stock exchange. 7. Representations and Warranties of Both Parties Each party of this Agreement represents, warrants and undertakes to the other party that: (a) It has obtained all government approvals (if applicable) and internal delegations of authority for the valid execution of this Agreement and that the Agreement will be executed by its authorized representative to the effect that upon such execution, this Agreement will have a legally binding effect on such party. (b) The execution of this Agreement and the performance of the obligations hereunder will not violate any laws, regulations and other agreements and bylaws of such party. 8. Miscellaneous 8.1. All of the notifications, demands or other forms of communications made according to this Agreement shall be delivered by hand, registered mail or fax to the other party in writing at the following addresses or fax numbers (or other addresses or fax numbers that the recipient has informed the other party in writing 5 days in advance): If to Party B: 4 Address: China Life Building, No.16 Chao Wai Avenue, Chaoyang District, Beijing Fax Number: 010-8565 2232 Telephone Number: 010-8565 9999 If to Party A: Address: No. 5 Guang Ying Yuan Xi Qu, Xicheng District, Beijing Fax Number: 010-6611 1567 Telephone Number: 010-6611 4433 Any notification, demand or other communication with above stated recipient's details should be deemed effectively given upon (a) the date when it is delivered by hand; or (b) the 3rd day (if such 3rd day is a Sunday or public holiday, then the first business day immediately following such date) after the date on which a registered mail is sent (as indicated by the postmark); or (c) the time when a fax is sent out, provided that a fax confirmation report produced from the fax machine showing the successful transmission of the relevant documents is provided by the sending party. 8.2. Any modification of this Agreement shall be made in writing and signed by both parties. 8.3. Both parties shall take, cause to be taken, such further actions and execute, or cause to be executed, such other instruments and documents that are necessary to render the terms and conditions of this Agreement effective. 9. Governing Laws and Jurisdiction This Agreement should be governed by, and interpreted in accordance with the laws of People's Republic of China. Both parties hereby irrevocably submit to the jurisdiction of the courts of the People's Republic of China. 5 10. The following terms shall have the following respective meanings in this Agreement/1/: Converted Policies Business shall mean the business relating to the Old Version Policies which, for conversion purposes, shall be treated as surrenders or withdrawals first so that they can be converted on a favorable term, using the actual benefits received from such surrenders or withdrawals as single payment premium for products that have their terms approved by or filed with the CIRC on or after June 10, 1999. Non-transferred policies shall mean all the policies that are insured or reinsured by Party A, including stand-alone policies and riders supplemental to policies, which are still performing or are not being performed but can be reinstated and are other than Transferred Policies (as defined in the Restructuring Agreement). Old Version Policies Business shall mean business under the policies of 1996 or pre-1996 versions that were not sold by individual agents and the length between the date of surrender and the date of expiration is more than five years. Party A's Affiliate shall mean (a) a wholly-owned subsidiary of Party A; (b) a subsidiary over which Party A holds 51% or above of the equity interest; (c) any entity, over which Party A, alone or acting with others in concert, holds at least 30% (including 30%) of the issued share capital or exercises at least 30% of the voting power 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 exercise de facto control. Party's A's Affiliate shall not include Party B or Party B's Affiliate. Party B's Affiliate shall mean (a) a wholly-owned subsidiary of Party B; (b) a subsidiary over which Party B holds 51% or above of the equity interest; (c) any entity, over which Party B, alone or acting with others in concert, holds at least 30% (including 30%) of the issued share capital or exercises at least 30% of the voting power 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 exercise de facto control. - ---------- /1/ Translator's Note: The order of the terms defined hereunder have been re-arranged to English alphabetical order for the convenience of English readers. 6 11. Unless otherwise provided herein, the "articles" referred to this Agreement shall mean the articles in this Agreement. IN WITNESS WHEREOF, both parties hereto have caused this Agreement to be executed on the date first above written. 7 Signature page followed (There is no text on this page) Party A: Party B: China Life Insurance (Group) Company China Life Insurance Company Limited (Seal) (Seal) Legal Representative/ Legal Representative/ Authorized Representative (Signature) Authorized Representative (Signature) 8 EX-23.1 10 dex231.txt CONSENT OF PRICEWATERHOUSECOOPERS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS - ---------------------------------- We hereby consent to the use in this Registration Statement on Form F-1 of our reports dated October 8, 2003 relating to the financial statements and financial statement schedules of China Life Insurance Company Limited, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers PricewaterhouseCoopers, Hong Kong November 20, 2003 EX-23.5 11 dex235.txt CONSENT OF SALLMANNS (FAR EAST) LIMITED Exhibit 23.5 [LOGO] Sallmanns [NAME IN CHINESE CHARACTERS] ------------------------------------------------------------------------ Corporate valuation and consultancy 15/F Lucky Centre 165-171 Wanchai Road www.sallmanns.com Hong Kong Tel: (852) 2169 6000 Fax: (852) 2528 5079 20 November, 2003 The Directors China Life Insurance Company Limited No. 16 Chaowai Avenue Chaoyang District Beijing The People's Republic of China Dear Sirs, China Life Insurance Company Limited (the "Company") - ---------------------------------------------------- United States Securities and Exchange Commission - ------------------------------------------------ Form F-1 Registration Statement under the Securities Act of 1933 - ---------------------------------------------------------------- We refer to the prospectus of the Company (the "Prospectus") in relation to the captioned issue. We hereby give our consent to the inclusion in the Prospectus with the inclusion therein of our name and references to our letter, summary of values and valuation certificates for property valuation the form and context in which they respectively appear in the Prospectus. Yours faithfully, for and on behalf of SALLMANNS (FAR EAST) LIMITED /s/ Paul L. Brown Paul L. Brown BSc. FRICS FHKIS Director Hong Kong, Bangkok, Beijing, A member of ATIS REAL-Weatheralls [LOGO] Delhi, Kuala Lumpur, Manila, with offices in UK, Austria, Belgium, Shanghai, Singapore Czech Republic, Denmark, France, Germany, Hungary, Ireland, Italy, Netherlands, Russia, Spain, Australia, New Zealand, Chile, Columbia, Mexico, USA. EX-23.6 12 dex236.txt CONSENT OF TILLINGHAST-TOWERS PERRIN Exhibit 23.6 20 November 2003 Mr Miao Fu Chun Director and Vice President China Life Insurance Company Limited 16 Chaowai Avenue Chaoyang District Beijing 100020 China Dear Sir TILLINGHAST - TOWERS PERRIN ACTUARIAL CONSULTANTS' REPORT Tillinghast - Towers Perrin consents to: a) the inclusion of our Actuarial Consultants' Report dated 20 November 2003 within the Prospectus included in the Registration Statement on Form F-1 filed by China Life Insurance Company Limited with the United States Securities and Exchange Commission on 20 November 2003 ("Prospectus"), in the form and context in which it is included; b) being named in the Prospectus in connection with our Actuarial Consultants' Report in the form and context in which we are named. Tillinghast - Towers Perrin does not authorise or cause the issue of the Prospectus and does not make or purport to make any statement in that Prospectus other than its report. Yours faithfully for Tillinghast - Towers Perrin /s/ Mark Saunders Mark Saunders Principal & Managing Director, Asia -----END PRIVACY-ENHANCED MESSAGE-----