On Dec 5, 2014, we issued an updated research report on China Life Insurance Co. Ltd. (LFC). We believe that the company’s superior brand name and core growth potential are likely to open up new avenues. Meanwhile, the company’s third-quarter earnings improved year over year on higher investment income.
China Life has the most extensive distribution and service network among all insurance companies operating in China. Additionally, to take care of its huge clientele, the company has established a strong customer service network with dedicated customer service representatives operating its innumerable sales outlets along with its customer service counters and help lines that operate in every major city of China. In the first nine months of 2014, the company maintained the business development momentum, and optimized the premium structure, thereby witnessing steady growth.
Moreover, the investment income of China Life has shown substantial improvement over the past few years and has also increased in the first nine months of 2014. China Life has been witnessing an increase in net premiums over the past few years. Although net premiums earned decreased in the first nine months of 2014, optimization of the premium structure by increasing the share of mid-to-long term regular premiums is expected to help the company recover this metric going forward.
Given that premiums are the main source of business for an insurance company, premium increase is essential for top-line growth in the long run. Thus, a rising premium trend is likely to bolster growth going forward. The company also scores strongly with the credit rating agencies.
However, on the flip side, China Life is facing a decline in cash flow for quite some time. Cash flow also declined in the first nine months of 2014. Persistent decline in cash flow can impact the cash balance of the company, thereby weakening its balance sheet and financial position.
China Life is substantially exposed to market risks as majority of the company’s investments is limited to China, making it highly vulnerable to a downturn in the nation’s economy. Further, the investments outside China are exposed to foreign exchange risks along with volatility in the concerned markets.
Additionally, China Life has been incurring higher-than-expected benefits and expenses owing to increased expenses in its individual, group and short-term insurance businesses. Further, China Life needs to strengthen its cost management to curb the rising expenses, which might prove to be a drag on its financials over the long haul due to capital erosion.
China Life currently sports a Zacks Rank #1 (Strong Buy). Other stocks in the life insurance space that look attractive at current levels include American Equity Investment Life Holding Co. (AEL), Lincoln National Corp. (LNC) and StanCorp Financial Group Inc. (SFG). All these have a Zacks Rank #2 (Buy).
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