China Life Mulls Raising Debt

Yesterday, China Life Insurance Co. Ltd. (LFC - Analyst Report) announced its plan of issuing subordinated term debts in a filing to the Hong Kong bourse. The company filing stated that the proposal for the issue will soon be submitted to the board of directors for its review and approval.

However, the financial details and terms of the debt are yet to be disclosed by China Life. Nevertheless, the company is planning to issue subordinated term debt amounting to about 30 billion Yuan ($4.69 billion), according to Reuters.

China Life is the world’s biggest insurer on the basis of market capitalization. Last week, the company also announced its entry into the private equity business. In June this year, China Life had announced a plan to invest 1.6 billion Yuan in China Life Property and Casualty Insurance Company. It is possible that the company is issuing subordinated debt to raise capital for investment in its private equity business.

China Life had no long term or subordinated debt as on March 31, 2011. Thus, we feel that the debt issue will be beneficial for the company as it will make available the advantages of financial leverage. Use of debt helps in increasing the return on equity as the after-tax cost of debt is lower than cost of equity although it also raises the risk of higher interest cost.

China Life’s main competitors are ING Group NV (ING - Snapshot Report), Manulife Financial Corporation (MFC - Analyst Report) and Sun Life Financial Inc. (SLF - Snapshot Report). China Life carries a Zacks #3 Rank, implying a short-term Hold rating.

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