China Life's 1H12 Disappoints

Yesterday, China Life Insurance Co. Ltd. (LFC - Analyst Report) reported its 2012 interim results. The company witnessed operating earnings of RMB0.34 per share (81 cents per ADR) in the first half of 2012, witnessing a plunge of 26.1% from RMB0.46 per share (US$1.05 per ADR) in the first half of 2011.

Net income also declined 25.7% to RMB9.64 billion (US$1.52 billion) from RMB12.96 billion (US$1.98 billion) in the year-ago period. Additionally, China Life’s total revenue declined 8.3% to RMB208.6 billion (US$32.98 billion) from RMB227.5 billion (US$34.74 billion) in the prior-year period.

Further, gross premiums written declined 5.1% to RMB185.4 billion (US$29.3 billion) from $195.5 billion (US$29.86 billion) in the first half of 2011. Net premium earned during the first half of 2012 also declined 5.2% to RMB184.7 billion (US$29.2 billion) from RMB194.8 billion (US$29.75 billion).

Meanwhile, investment income increased 16.5% year over year to RMB35.3 billion (US$5.58 billion).

Segment Results

Individual Life Insurance Business: Net premium earned in the reported period moved down 5.5% to RMB176.5 billion (US$27.9 billion) from the year-ago period.

Group Life Insurance Business: Net premium earned showed a 5.7% year-over-year improvement to RMB316 million (US$49.96 million).

Short-Term Insurance Business: Net premium earned during the reported period was RMB8.6 billion (US$1.36 billion), showing a 3.5% hike over the comparable period of 2011, primarily due to a 9% improvement in the short-term accident insurance business.

Financial Update

As of June 30, 2012, China Life had total assets amounting to RMB1,769.2 billion (US$279.95 billion), rising 11.7% from December 31, 2011. The company’s investment assets also increased 11.2% to RMB1,661.7 billion (US$262.94 billion) at the end of June 2012.

China Life’s shareholders’ equity totaled RMB213.5 billion (US$33.78 billion) as of June 30, 2012, growing 11.5% from RMB191.5 billion (US$30.09 billion) at 2011-end. Return on equity declined to 4.71% from 6.22% in the first half of 2011.

Conclusion

China Life has reported lower top as well as bottom line in the first half of 2012 due to poor operating performance. However, investment income witnessed a remarkable improvement. Asset position and shareholders’ equity also improved significantly, although return on equity disappointed. The company needs to improve its operating efficiency, particularly in the Individual Life Insurance business.

China Life’s main competitors include 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 #3 Rank, implying a short-term Hold rating. However, considering the fundamentals, we maintain our long-term ‘Neutral’ stance on the shares.