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On Jan 9, we retained our Neutral recommendation on China Life Insurance Co. Ltd. (LFC - Analyst Report) as strong market position, growth in premiums and investment income are expected to outweigh headwinds like higher expenses and declining cash flow.

Why the Reiteration?

This life insurance company with a Zacks Rank #4 (Sell) has the most extensive distribution and service network among all insurance companies in China. Additionally, the company has been continuously enhancing its customer service network to retain its huge clientele.

China Life also boasts a solid brand value, impressive market standing, widespread domestic distribution network, strong risk-based capitalization and liquidity in investment portfolio, which allows it to retain the confidence of rating agencies. The company was the first insurance company in China to obtain a private equity fund license and foray into the private equity business.

On the tepid side, China Life’s cash flow has been declining for quite some time reflecting the company’s waning operating efficiency and weakening balance sheet. This in turn will impede the company from undertaking long-term growth strategies.

Moreover, China Life is exposed to foreign exchange risk in addition to volatility in the concerned market. Higher-than-expected benefits and expenses within its individual, group and short-term insurance businesses also amplify operating risks.

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.

Nevertheless, strong brand name and goodwill have helped the company in establishing new businesses successfully and have also bolstered premium growth. This trend of higher premiums has continued in the first nine months of 2013 as well.

In the last reported quarter, operating earnings of China Life stood at RMB0.27 per share (US$0.4 per ADR), rebounding from a loss of RMB0.08 per share (US$0.01 per ADR) in the third quarter of 2012.

Other Stocks to Consider

Some better-ranked stocks in insurance industry include Protective Life Corporation (PL - Analyst Report), Reinsurance Group of America Inc. (RGA - Analyst Report) and ACE Limited (ACE - Analyst Report). All three stocks carry a Zacks Rank #2 (Buy).

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