China Life Insurance Co. Ltd. (LFC) reported 2011 operating earnings of RMB0.65 per share (US$1.50 per ADR), witnessing a plunge of 45.4% from RMB1.19 per share (US$2.63 per ADR) in 2010.
Net income also declined 45.5% to RMB18.3 billion (US$2.83 billion) from RMB33.6 billion (US$4.96 billion) in the year-ago period.
China Life’s net income reduced due to higher impairment losses rising as a result of poor capital market conditions in China. However, the company’s efforts to improve the efficiency of its sales team, boost product innovation, improve support services and actively manage macro-economic and regulatory changes helped in increasing premiums.
The company’s total revenue declined 3.9% to RMB370.9 billion (US$57.3 billion) from RMB385.8 billion (US$56.91 billion) in the prior-year period. Net premium earned during 2011 remained almost at par with 2010 at RMB318.3 billion (US$49.17 billion).
Total insurance benefits, claims and expenses increased to RMB352.6 billion (US$54.47 billion) from RMB346.6 billion (US$51.13 billion) in 2010. Investment income increased 24.3% year over year to RMB60.7 billion (US$9.38 billion), while other income nudged up 0.5% year over year to RMB2.8 billion (US$0.43 billion).
China Life’s effective tax rate for the reported period was 9.86%.
Segment Results
Individual Life Insurance Business: Net premium earned in the reported period inched down 0.3% to RMB302.0 billion (US$46.65 billion) from the year-ago period buoyed by a decrease in the first-year regular premiums from the bancassurance channels, which offset the premium growth from the exclusive individual agent channel. Segment revenue for the period was RMB349.5 billion (US$53.99 billion).
Group Life Insurance Business: Net premium earned showed a 7.3% year-over-year decline to RMB434 million (US$67.04 million), as a result of changes in the segment operating strategies, which led to a decline in the group whole life insurance products’ sale. Segment revenue for 2011 amounted to RMB3.0 billion (US$0.46 billion).
Short-Term Insurance Business: Net premium earned during the reported period was RMB15.9 billion (US$2.46 billion), showing a 6.7% hike over 2010, primarily due to improvement in the accident insurance business. Segment revenue amounted to RMB16.2 billion (US$2.5 billion).
Corporate and Other Business: Revenue from Corporate and Other Business for the reported period amounted to RMB3.0 billion (US$0.46 billion).
Financial Update
As on December 31, 2011, China Life had total assets amounting to RMB1,583.9 billion (US$248.86 billion), rising 12.3% from December 31, 2010. The company’s investment assets also increased 11.9% to RMB1,495.0 billion (US$234.89 billion) at the end of the reported year.
China Life had cash and cash equivalents amounting to RMB56.0 billion (US$29.07 billion) at the end of 2011, showing a 17% surge from December 31, 2010. However, cash from operations declined 25% to RMB134.0 billion (US$20.7 billion) from RMB178.6 billion (US$26.35 billion) in the prior year.
China Life’s shareholders’ equity totaled RMB191.5 billion (US$30.09 billion) as on December 31, 2011, down 8.2% from RMB208.7 billion (US$31.56 billion) at 2010-end.
Dividend Update
The Board of Directors of China Life proposed a dividend of RMB0.23 (US$0.04) per share. However, the dividend needs to be approved by the shareholders in the Annual General Meeting on May 22, 2012.
Loan Update
During 2011, China Life issued subordinated term debt amounting to RMB30 billion (US$4.69 billion) for a 5-year period.
Conclusion
China Life has reported lower top as well as bottom line in the reported period. Cash flow from operations also declined substantially due to increased claims expenses and adverse changes in the fair values of securities, although total cash position improved due to the issue of subordinated debt. We feel that China Life’s decision to issue subordinated debt is good as it will help the company in obtaining the benefits of financial leverage and improve its solvency ratio.
The balance sheet position of China Life was strong at the end of the period, although shareholders’ equity declined. The company needs to improve its operating efficiency, particularly in the Individual Life Insurance business.
China Life’s main competitors are ING Group NV (ING), Manulife Financial Corporation (MFC) and Sun Life Financial Inc. (SLF).
China Life carries a Zacks #4 Rank, implying a short-term ‘Sell’ rating. However, considering the fundamentals, we maintain our long-term ‘Neutral’ stance on the shares.
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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