China Re started formal talks to sell a 10 per cent stake in December last year, sources said earlier.

'The financial investment is struggling because the company lost some money on winter storm claims where they had a bunch of exposure and they just aren't making money in general because the sector has been liberalised so international players can pretty much compete in every area,' said a source.

China was hit this winter by the worst storms in 50 years that caused property damage and transport delays across the country.

Beijing broke China Re's dominance of the mainland market in December 2005 when it scrapped rules requiring insurers to give part of their businesses to the company. Other areas of the country's financial industry, such as banking, place more limitations on foreign competition than in the reinsurance sector.

China Reinsurance could not be reached for comment.

The more open playing field of the reinsurance market is what turned private equity away from an investment in China Re on the current terms. 'There's no competitive advantage,' said one source.

Reinsurance companies agree to indemnify or pay damages to insurance firms should claims be filed, in what amounts to an insurance policy for the insurance companies.

By offloading the risk of paying out claims to reinsurers, insurance companies can sell more premiums.

Potential investors have been turned off by China Re's paltry 4 per cent return on equity, an indicator of profitability, when most market observers say a healthy figure would be closer to the mid-teens.

Australian investment bank Macquarie and US counterpart Merrill Lynch had been taking a look at investing but they lacked the reinsurance expertise that China Re is looking for, sources said.

Dominant market players such as Swiss Re and Munich Re have the historical underwriting and performance data that would enable China Re to price risk more effectively.

If the company is unable to attract a foreign investor, a move to a sole domestic market share offering would be more likely.

'The A-share market may be willing to accord them a better valuation without a big brand name,' said one source. 'It's a tough H-share sale.'

The mainland reinsurance market is expected to reach 100 billion yuan (HK$111 billion) by 2010, when its total premium revenue will surpass 1 trillion yuan, the China Insurance Regulatory Commission says.

China Re has registered capital of 36.2 billion yuan, making it the world's fifth-largest reinsurer. It had assets of 94 billion yuan and raised operating revenue 42 per cent to 29 billion yuan at the end of September.

The group in 2006 received a US$4 billion rescue from China SAFE Investments, the investment arm of the central bank, that left SAFE Investments with an 85.5 per cent stake. The balance is held by the Ministry of Finance.

China Re runs several subsidiaries including China Property and Casualty Reinsurance, China Life Reinsurance, China Continent Property and Casualty Insurance, China Reinsurance Asset Management, China Insurance News and Huatai Insurance Agency and Consultant Services.

Dampening effect

Winter storms claims took their toll on the reinsurer's business

Amount China Re is seeking to raise in its initial public offering, in US$: $2.6b