China Life Insurance said Thursday that the National Audit Office of China had determined that its predecessor had breached insurance laws, but that the newly listed firm would be spared any liability.

China Life, which raised US$3.5 billion from the world's biggest IPO last year, still faces a class action in the US by shareholders who accuse it of not adequately disclosing the allegations of misconduct or the pending release of the state audit report.

The US Securities and Exchange Commission is reportedly conducting an informal investigation, as is the Hong Kong stock exchange.

"To a certain extent, the announcement has helped remove investor worries," said Ben Kwong, associate director at KGI Asia.

Traders said that on the news, investors bought China Life shares, which had given up much of their post-IPO gains.

The insurer's Hong Kong-listed shares closed 5.6 percent higher at HK$5.15.

China's top life insurer said it had received copies of reports from the National Audit Office on its state-owned predecessor, China Life Insurance (Group) Co. (CLIC), up to 2002.

China Life was formed in June 2003 by plucking healthier assets from CLIC to pave the way for the listing. CLIC is still China Life's controlling shareholder, with a 72 percent stake.

The audit report, dated March 30, found that CLIC had made investments not permitted by the nation's insurance laws and used agents that were not legally qualified, while some CLIC branches had misstated expenses and income, leading to underpayment of taxes. The firm also failed to pay some taxes on time.

China Life announced that CLIC would have to pay 67.5 million yuan (US$8 million) in taxes and fines.

China's state auditor said in February it had found accounting irregularities worth about 5.4 billion yuan (US$652 million) at CLIC.

The listed company, which has said it will vigorously contest the US lawsuit, did not mention the amount of accounting irregularities in its statement yesterday.

China Life shares are 46 percent above their IPO price of HK$2.59 each, but way off their all-time high of HK$7.05.

China Life took over from CLIC policies sold in or after June 10, 1999.

But the restructuring left CLIC with substantial losses, as the guaranteed rates it had committed to pay on the retained policies were higher than the returns it was able to generate on its investment assets.

(China Daily April 9, 2004)