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Beginning this week, credit rating agency Moody’s Investors Service affirmed China Life Insurance Co. Ltd.’s (LFC - Analyst Report) insurance financial strength rating of “A1” with a positive outlook based on the company’s stable capital, investment and financial leverage position.

However, China Life reported operating earnings of RMB0.13 (US$0.07) per share during the third quarter of 2011, witnessing a 45.7% decline from RMB0.24 (US$0.10) per share in the third quarter of 2010. Net income also declined 45.7% to RMB3.8 billion (US$2.03 billion) from RMB6.9 billion (US$2.82 billion) in the year-ago period.

China Life’s net income reduced due to high surrenders, low premium income and increased impairment losses as a result of the decline in the Shanghai Stock Exchange, where the company’s shares are listed. Furthermore, restrictions on bancassurance sales played a significantly role in reducing premium income.

As a result, premium income during the reported period declined 6.2% to RMB68.7 billion (US$30.46 billion) from RMB73.3 billion (US$28.7 billion) in the year-ago period. Investment income remained almost flat at RMB15.0 billion (US$4.74 billion), while other income declined to RMB627 million from RMB926 million in the year-ago quarter.

China Life recorded impairment losses of RMB2.4 billion (US$0.37 billion) in the reported quarter, which increased substantially from RMB637 million (US$93.95) in the year-ago quarter. Surrenders also surged 56.3% to RMB10 billion (US$1.56 billion) from RM6.4 billion (US$0.94 billion) in the third quarter of 2010.

Financial Update

As on September 30, 2011, China Life had total assets amounting to RMB1,521.9 billion (US$236.9 billion), up 7.9% from December 31, 2010. The company’s investment assets were RMB1,423.8 billion (US$221.67 billion) at the end of the reported quarter.

China Life’s shareholders’ equity totaled RMB176.1 billion (US$27.42 billion) as on September 30, 2011, down 10.6% from RMB197.1 billion (US$30.69 billion) at the end of June 2011. The decline was primarily a result of increased unrealized losses in China Life’s investment portfolio.

Additionally, weakened capitalization leads Moody’s to believe that China Life’s local solvency margin ratio has declined from 164.2% at the end of June 2011, although the company did not disclose the ratio at the end of the reported quarter.

Loan Update

In August 2011, China Life obtained the board of directors’ approval for the issue of subordinated term debt amounting to RMB30 billion (US$4.67 billion) for a 5-year period. Moody’s believes that the debt issue will increase China Life’s local solvency margin ratio and hence, is mildly credit positive. Moreover, Moody’s expects the pro forma financial leverage to increase to 15-20% due to the debt issue, which is in line with the current rating of “A1.”

Moody’s Take

Considering the earnings decline and volatile market conditions, Moody’s expects China Life to be careful about its dividend payout in the coming quarters. Additionally, the rating agency expects the interest rates in China to remain at the current inflated levels for some time and hence, anticipates that the surrender rates will remain high in the next 12-18 months.

However, as China Life has a highly liquid investment portfolio, Moody’s believes that the company will not have any problems in meeting the liquidity requirements due to the high surrender rate.

China Life’s main competitors are ING Group NV (ING - Snapshot Report), Manulife Financial Corporation (MFC - Analyst Report) and Sun Life Financial Inc. (SLF - Analyst Report).

China Life carries a Zacks #4 Rank, implying a short-term Sell rating.

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