China Life's Earnings Dip

China Life Insurance Co. Ltd. (LFC - Analyst Report) reported operating earnings during the first half of 2011 of RMB0.46 (US$0.07) per share, witnessing a 28.1% decline from RMB0.64 (US$0.10) per share in the first half of 2010.

Net income also declined substantially to RMB12.96 billion (US$2.03 billion) from RMB18.03 billion (US$2.82 billion) in the year-ago period.

China Life’s net income reduced due to increased impairment losses and traditional insurance contract liabilities. 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 also rose 5.6% to RMB227.47 billion (US$35.56 billion) from RMB215.39 billion (US$33.67 billion) in the prior-year period. Net premium earned during the reported period increased 6.1% to RMB194.85 billion (US$30.46 billion) from RMB183.59 billion (US$28.7 billion) in the year-ago period.

Total insurance benefits, claims and expenses increased to RMB213.71 billion (US$33.41 billion) from RMB194.86 billion (US$30.46 billion) in the comparable period of last year. Investment income increased 22.6% year over year to RMB30.31 billion (US$4.74 billion), while other income increased 9.4% year-over-year.

China Life’s effective tax rate for the reported period was 12.41%, down from 16.15% in the first half of 2010.

Segment Results

Individual Life Insurance Business: Net premium earned in the reported period increased 6.5% to RMB186.85 billion (US$29.21 billion) from the year-ago period due to an increase in the first-year regular premiums and renewal premiums. Segment revenue for the period was RMB216.46 billion (US$33.84 billion).

Group Life Insurance Business: Net premium earned showed a 6.0% year-over-year growth to RMB298 million (US$46.58 million) as a result of increased premiums from group term life insurance products. Segment revenue for the first half of 2011 amounted to RMB1.90 billion (US$0.3 billion).

Short-Term Insurance Business: Net premium earned during the reported period was RMB7.71 billion (US$1.21 billion), showing a 1.3% decline from the first half of 2010, primarily due to increased unearned premium reserves. Segment revenue amounted to RMB7.96 billion (US$1.24 billion).

Corporate and Other Business: Revenue from Corporate and Other Business for the semi-annual period amounted to RMB1.49 billion (US$0.23 billion).

Financial Update

As on June 30, 2011, China Life had total assets amounting to RMB1,546.89 billion (US$241.82 billion), up 9.7% from December 31, 2010. The company’s investment assets also increased 8.8% to RMB1,454.45 billion (US$227.37 billion) during the semi-annual period.

China Life had cash and cash equivalents amounting to RMB79.53 billion (US$12.43 billion) at the end of the reported period, showing a 66.2% surge from December 31, 2010. However, cash from operations declined 13.7% to RMB90.1 billion (US$14.08 billion) from RMB104.37 billion (US$16.32 billion) in the year-ago period.

China Life’s shareholders’ equity totaled RMB197.05 billion (US$30.8 billion) as on June 30, 2011, down 5.6% from RMB208.72 billion (US$32.63 billion) at 2010-end.

Loan Update

On August 23, 2011, China Life obtained the board of directors’ approval for the issue of subordinated term debt amounting to RMB30 billion (US$4.69 billion) for a 5-year period. However, further approval has to be obtained from the shareholders of the company as well as the China Insurance Regulatory Commission before executing the issue.

The loan shall be raised at the ambient rate in the market from qualified investors who meet the relevant regulatory approval. The proceeds of the debt will be used to replenish the supplementary capital of China Life, thereby improving the company’s solvency ratio.

Our Take

China Life has reported improved premium and revenue in the reported period. The financial position of the company was also strong at the end of the period.

However, the company needs to improve premium earned from the short-term insurance business as well as cash from operations. 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.

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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