(LFC) China Life Insurance Company Shares Remain Underperform

We have reiterated our Underperform recommendation on China Life Insurance Company Ltd. (LFC) based on itspoor operating results in the third quarter.

China Life reported operating earnings of RMB0.13 per share (US$0.31 per ADR) during the third quarter of 2011, witnessing a 45.7% decline from RMB0.24 per share (US$0.54 per ADR) in the third quarter of 2010.

The profitability of China Life is significantly affected by changes in interest rates. Although total investment income increased marginally in the first nine months of 2011, investment income from securities at fair value plunged 62.4% in 2010 and 62.9% in 2009 primarily due to interest rate decline. While afavorable interest rate change increases profit, the negative effects of an adverse change are too large to ignore.

China Life is also substantially exposed to market risks. Additionally, the company’s investment-assets form a majority of its total assets. Hence, any substantial decline in the value of investments can be severely detrimental for China Life’s financials in future.

Moreover, China Life faces increasingly intense competition both from domestic as well as foreign companies. Further, the Chinese government is encouraging the establishment of new health insurance companies to improve healthcare in the country. New entrants in the life insurance market as well as foreign companies, which have access to larger resources and better technology than China Life, are giving the company strong competition.

However, on the positive side, China Life has the most extensive distribution and service network among all insurance companies operating in China, making it one of the largest brands with one of the biggest customer base. Additionally, to take care of its huge clientele, the company has established a strong customer service network with innumerable sales outlets, customer service counters and customer service help-lines operating in every major city in China.

Moreover, in August 2011, China Life announced its entry into the private equity business. As the leading life insurance company with a strong brand value, China Life will benefit from this opportunity. Additionally, diversification of business will reduce the operational risk of the company.

Further, China Life’s stable capital and financial leverage position allow it to retain the confidence of the rating agencies. In October 2011, Moody’s affirmed China Life’s insurance financial strength (IFS) rating of “A1” with a positive outlook.

The rating agency expects the interest rates in China to remain at the current inflated levels for some time and hence, anticipates that the surrender rates will remain high in the next 12–18 months. However, as China Life has a highly liquid investment portfolio, Moody’s believes that the company will not have any problem in meeting the liquidity requirements due to the high surrender rate.

China Life’s main competitors are ING Group NV (ING), Aviva Plc. (AV), Manulife Financial Corporation (MFC) and Sun Life Financial Inc. (SLF). The Zacks Consensus Estimate for the company’s 2011 earnings is currently $1.72 per share, down 36% from 2010. For 2012, the Zacks Consensus Estimate stands at $2.49 per share, up 45% year over year.

China Life carries a Zacks #4 Rank, implying a short-term Sell rating.

AVIVA PLC-ADR (AV): Free Stock Analysis Report

ING GROEP-ADR (ING): Free Stock Analysis Report

CHINA LIFE INS (LFC): Free Stock Analysis Report

MANULIFE FINL (MFC): Free Stock Analysis Report

SUN LIFE FINL (SLF): Free Stock Analysis Report

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