China Pacific Insurance (Group) Co. and the country’s pension fund plan to raise as much as HK$25.93 billion ($3.3 billion) in a Hong Kong share sale that may be the city’s second-biggest this year, four people familiar with the plan said.

The nation’s third-largest insurer and the National Social Security Fund are offering 861.3 million shares at HK$26.80 to HK$30.10 apiece, said the people, declining to be identified before an official announcement. The sale is made up of 90.9 percent new shares from the company, with the rest offered by the fund.

The offer values China Pacific at a discount of at least 27 percent to its two bigger competitors, based on estimates of embedded value by banks involved in the sale, two of the people said. The insurer, part-owned by Carlyle Group, will replenish capital after the company and rivals accelerated sales of lower- margin policies to boost market share.

“That’s a reasonable price range,” said Qiu Peng, a Shanghai-based investment manager at Western Securities Co. “China Pacific’s premium growth should pick up in 2010 after the company has almost completed structural adjustments. The stock market should also do well, boosting investment returns.”

The company made a 1.7 billion yuan profit in the third quarter, reversing a loss a year earlier as the domestic stock rally boosted returns.

Embedded Value

The 861.3 million shares being sold represent a 10.2 percent stake in the company. The share sale values China Pacific at 1.7 times to 1.9 times next year’s embedded value as estimated by banks involved in the sale, said two people familiar with the sale. China Life Insurance Co., the nation’s biggest insurer, trades at about 2.8 times and Ping An Insurance (Group) Co., the second largest, at 2.6 times.

Embedded value estimates a company’s net worth excluding new business.

“Some investors are willing to pay about 30 times new business value multiple for insurer stocks,” said Qiu, using a different evaluation method that reflects an insurer’s future profitability. “Insurers’ valuations remain relatively low.”

The price range would indicate room for at least a 20 percent increase before it rises to a 30 times new business value multiple, Qiu estimated.

Gains last week pushed the Hong Kong-traded H shares of larger Chinese insurers higher than their Shanghai-traded A shares, indicating the city’s investors are “more bullish on Chinese insurers,” said Olive Xia, an analyst at Core Pacific Yamaichi. China Life rose 2.6 percent to HK$41 in Hong Kong trading Dec. 4, 9 percent higher than its Shanghai-listed shares.

Better Market

“The market demand is fairly good now,” said Xia. “China Pacific’s H shares should also see some premium to the A shares after listing.”

Shanghai-based China Pacific rose by its 10 percent daily limit in Shanghai on Dec. 4, possibly reflecting investor expectations that demand for the Hong Kong offering will be strong and a trial of new endowment insurance products in Shanghai will boost sales, according to Xia.

China Pacific delayed a plan to sell as many as 900 million shares by September 2008 following the global equity rout.

Dow Jones Newswires reported the size and price range of the sale earlier.

China Pacific’s stock has rallied 144 percent this year in Shanghai, almost double the 78 percent advance for China Life’s stock trading in the Chinese city, and bettering the 125 percent for the A shares of Ping An. The stock fell 0.7 percent to 26.92 yuan as of 1:51 p.m. in local trading.

Improving Profitability

The solvency margin for life insurance at China Pacific dropped by 10 percentage points to 224 percent in the first half of the year, while the ratio for property insurance fell by 11 percentage points to 177 percent.

China Pacific made a 5.8 billion yuan profit from investments in the third quarter as the nation’s stock market recovered this year, helping the company reverse a 1.5 billion yuan loss a year earlier. Net premiums earned climbed 4 percent to 21.3 billion yuan.

The insurer is boosting sales of protection and savings products and curbing investment-type policies this year to improve profitability. New regular-premium business more than doubled in the first half to 6.8 billion yuan, according to the company.

The company’s property insurance arm reduced its combined ratio, which measures claims and expenses as a percentage of premiums, by 7 percentage points from a year earlier, to 101.5 percent in the first half, as it cut management costs.

Taking Orders

The insurer plans to start taking orders from international institutions on Dec. 7 and price the shares around Dec. 16, said two people familiar with the plan. Corporate investor including Allianz SE will take a combined $395 million of the shares. The sale may be expanded to 990 million shares to meet demand, the three people said.

The stock is scheduled to start trading on Dec. 23. Allianz, Europe’s largest insurer, alone will be buying $150 million of the shares, according to two people.

China International Capital Corp., Credit Suisse Group AG, Goldman Sachs Group Inc. and UBS AG are managing the sale. CICC didn’t reply a request for a comment, while the other investment banks declined to comment. Liu Li, a spokeswoman for China Pacific, wasn’t immediately available for comment.

China Minsheng Banking Corp., the nation’s first privately owned lender, last month raised HK$30.1 billion in the city’s biggest public share sale since April 2007.