Finance, Accounting and Control Case Study

Valuation of CPIC's IPO: Enterprise Value Vs Embedded Value

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Abstract:
China Pacific Insurance (Group) Company (CPIC), the third largest life insurance underwriter of China, was about to launch its A-share and H-share, IPO (initial public offering) in Shanghai and Hong Kong in order to raise more than $6 billion. In order to launch this IPO, CPIC decided to sell its entire 50% stake in Pacific Antai Life Insurance Co Ltd (PALIC), a 50-50 joint venture with ING Group. This decision had invoked debates as to whether selling the stakes of PALIC's JV (joint venture) had turned out to be a viable decision for CPIC. Until 2006 the JV with ING Group had sustained heavy losses and had made profits for the first six months of 2007. CPIC had used the embedded value (EV) method to calculate its intrinsic value. While calculating its EV, CPIC had considered its past performance and one year projected future sales. Since CPIC's JV with PALIC had incurred losses up to 2006, both the value-in-force and the net worth of the JV stood out to be quite low, which prompted CPIC to sell its stake in the JV. If CPIC had used the enterprise value method for its valuation, the JV with PALIC would have shown a probability of earning future profits.

Pedagogical Objectives:

• To understand the growth strategies of CPIC.
• To understand the reliability of embedded value for calculating the firm's value.
• To understand the effect on CPIC's performance of offloading the JV with PALIC and launching its IPO.

Keywords :  Adjusted net worth (ANW), Chinese life insurance market growth, Chinese life insurers, Net worth, Enterprise value, Intrinsic value, Pacific Antai Life Insurance Co Ltd (PALIC), A-share IPO (initial public offering), H-share IPO, Strategic fit, Embedded value (EV), 50-50JV (joint venture) with ING, Value-in-force