“Rhythm” Turns To Ruin for Insurance Boss

By staff reporters Yu Ning, Su Dandan and Ji Minhua 

Life in the fast lane was lucrative for Guan Guoliang during heady years for China’s insurance industry. 

Today, however, Guan’s career as a high-profile insurance executive is running out of gas, and his once-prominent firm New China Life Insurance faces a bumpy future. 

After years of questionable investment schemes and an angry decision to sack auditors, Guan was ousted as New China Life chairman last fall. And in an unusual move in May, government regulators announced plans to use a national insurance-protection fund to buy stakes in the company controlled by Guan. 

In a notice to New China Life’s board, the China Insurance Regulatory Commission (CIRC) outlined the plan to spend 1.6 billion yuan (US＄ 209 million) to buy a combined 22.53 percent stake from Loncin Group Inc., Hainan Gelin Island Investment Co. and Orient Group Inc. (SH 600811) – three companies under Guan’s control. 

It was the first time CIRC had tapped the 8 billion yuan (US＄ 1.04 billion) fund to buy shares in a company it regulates. The 2-year-old fund, created when CIRC began collecting premium fees of up to 1 percent, is supposed to protect policyholders from insurers facing financial distress or bankruptcy. 

Technically, the fund is not to be used for buying businesses or other commercial deals. But the regulator took New China Life under its wings after Guan allegedly abused the company’s lax corporate governance and spent the company’s money as he wished for eight years. 

On May 29^th, CIRC responded to ’s magazine report by calling the decision to tap the insurance-protection fund as a “marketized measure.” 

Details of Guan’s fast-paced schemes were disclosed after some New China shareholders blew the whistle, leading to the CIRC investigation.  

Guan, 47, graduated from Dongbei University of Finance & Economics before working through the 1980s for the provincial Finance Administration Bureau in northeast China’s Heilongjiang Province. He quit the government in 1992 and joined Orient, a real estate and trading conglomerate, as vice president and chief accountant. 

On behalf of Orient President Zhang Hongwei, Guan helped lay the groundwork for New China Life’s launch as an independent company in 1996. He was appointed chairman of the insurance firm two years later. 

That’s when Guan punched the accelerator pedal. In only four years, he expanded New China Life from a mainly Beijing-based operation into a nationwide network of brokers. Annual revenues doubled for several years. By 2003, New China Life was ranked China’s fourth largest insurer, with 17.1 billion yuan (US＄ 2.23 billion) in annual premiums. 

“I prefer fast rhythm,” Guan said in 2005 for an article about the insurance company’s performance published by the official, Beijing-based newspaper Guang Ming Daily. 

Traditionally, Chinese insurers have been limited to a narrow scope of investment. Government rules barred firms from investments beyond treasury bonds and bank deposits at negotiated rates until 1999. Later, insurance firms were allowed to put some funds in stocks, and in June 2006 they were allowed to indirectly invest in infrastructure projects and real estate. 

Guan told in September 2006 that New China Life did not get involved in real estate projects. But a investigation found that he had indeed invested in real estate, either through his or business partners’ companies, with money borrowed from New China Life. 

Guan used two shell companies: Orient Group Financing Co. Ltd. and Beijing Xinhuarong Investment Co., which is 75 percent owned by the parent Orient Group and 25 percent held by Guan.  

Between 2003 and 2006, authorities say, Guan borrowed a combined 13 billion yuan (US＄ 1.69 billion) from New China Life for his various interests. However, some 2.6 billion yuan (US＄ 339 million) in loans were in default as of October 2006. 

learned that the alleged embezzlement funds were mainly channeled into several real estate projects in Beijing, used to buy stakes in Shenzhen Airlines, or distributed as loans to New China Life stakeholders indirectly controlled by Guan who then bought shares in New China Life. 

“He tasted the sugarplum in 2000 after investing with insurance funds,” said one of the insurer’s private shareholders. “From then on, he bit off a chunk of whatever amount of capital he could get from (New China Life), and refused to pay interest as long as he could. 

“His appetite became even bigger after 2003,” the shareholder said. 

A serious division in New China Life’s board – and Guan’s downfall – began in 2005 when the company planned an initial public offering. PricewaterhouseCoopers, the insurer’s authorized auditor, uncovered evidence of Guan’s fund-dipping scheme and notified the board.  

Guan reacted by firing PricewaterhouseCoopers, triggering a shareholder backlash. Guan critics on the board – headed by foreign shareholders such as Zurich Financial Services and state-owned enterprises such as Bao Steel -- called for improved governance. 

Change appeared imminent in late 2005, when three-year board terms neared an end for members seeking Guan’s ouster. But the effort failed thanks to Guan’s control of a board majority. 

The opposition won the upper hand in 2006 when Guan-controlled China Xinchanye transferred its 9 percent stake in New China Life to Shanghai AsiaBiz Holding Co. By July, the opposing board members were squabbling over when and how new shareholders should be selected. No agreement was reached. 

At the same time, a report about Guan’s allegedly illicit behavior was submitted to the State Council, China’s cabinet, which in turn ordered CIRC to join the fray. CIRC was supposed to mediate the dispute and appease both sides while pushing for a new board. 

In late September, CIRC tried to persuade Guan to relinquish his rights as the firm’s chairman-elect. Guan refused to cave in, prompting CIRC to abruptly launch a “routine investigation” into New China Life. 

CIRC forced Guan to aid the investigation and hand over control of New China Life to company President Sun Bin. An eight-months-long struggle ensued, embroiling Guan, his board enemies and the CIRC. 

Finally, CIRC decided to elbow Guan’s supporters off the board by buying stakes held by his companies. But CIRC’s huge outlay fell 1 billion yuan (US＄ 130 million) short of replacing all the funds allegedly siphoned by Guan. 

CIRC said Guan is currently looking for ways to pay the debt. 

So far, has learned, none of the players in the New China Life saga have found a way to close the funding gap. And a CIRC report showed the 2005 repayment capital adequacy ratio was about 61 percent at New China Life, far below the 100 percent ratio which is considered healthy. 

In the wake of the recent stake acquisition, a source told that CIRC’s preeminent concern has been to select a new board of directors. After new board members are elected, CIRC hopes to find qualified investors to buy what is now a government stake in New China Life.