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On Oct 17, 2013, we downgraded our recommendation on China Life Insurance Co. Ltd (LFC - Analyst Report) to Neutral as increasing competition on the domestic front and waning cash flow levels are likely to weigh on company positives.

Why the Downgrade?

China Life’s operating income improved in the first half of 2013 due to increased investment income as well as other operating income. However, we believe substantial interest rate and currency risks might mar the results to some extent going forward.  

Furthermore, weak operating cash flow raises concern regarding the company’s ability to maintain and grow its operations. A continued trend of lower cash flows can deteriorate the cash balance of the company, thereby weighing on its balance sheet and financial position as well.

Additionally, China Life’s investments are limited to China. Thus the company’s operations are susceptible to a decline with a downturn in the Chinese economy. Further, with the growing Chinese insurance industry, China Life encounters threats from potential new entrants.

China Life is also exposed to foreign exchange risk in addition to volatility in the concerned market. Higher-than-expected benefits and expenses owing to increased expenses in its individual, group and short-term insurance businesses have also added to our concern regarding the company in the upcoming period.

The positives to look out for with China Life are its strong brand name, extensive distribution and service network, constant efforts to improve its existing services and upside in investment income. The company with a Zacks Rank #2 (Buy) also scores strongly with the rating agencies.

Over the last 60 days the Zacks Consensus Estimate for 2013 and 2014 increased only by a penny to $2.60 and $2.95 respectively, reflecting no clear directional pressure in the near term.

Other Stocks to Consider

Among other life insurance companies, StanCorp Financial Group Inc. (SFG - Analyst Report) carries a favorable Zacks Rank #1 (Strong Buy) while Lincoln National Corporation (LNC - Analyst Report) and Protective Life Corporation (PL - Analyst Report) share the same Zacks Rank as China Life.

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