We have maintained our Underperform recommendation on China Life Insurance Co. Ltd. based on the company’s weak earnings in 2012, declining cash flow, interest rate and currency risks, and increasing competition on the domestic front.
China Life reported 2012 operating earnings of RMB0.39 per share (93 cents per ADR), witnessing a plunge of 40% from RMB0.65 per share (US$1.50 per ADR) in 2011. Net income also declined 39.7% to RMB11.1 billion (US$1.76 billion) from RMB18.3 billion (US$2.83 billion) in the year-ago period, due to both internal and external factors.
Moreover, China Life’s cash flow from operating activities is declining gradually. It fell 1.3% year over year in 2012, mainly due to an increase in insurance benefits. Operating cash flow recorded a year-over-year decline in 2011, primarily due tohigher claims payments along with an upside in cash outflow from the allocation of securities at fair value through profit or loss.
Further, China Life is substantially exposed to market risks as a majority of the company’s investments is limited to China. The investments outside China are exposed to foreign exchange risk in addition to volatility in the concerned market. Moreover, China Life faces intense competition from both domestic as well as foreign companies.
However, on the upside, this Zacks Rank #2 (Buy) company has the most extensive distribution and service network among all insurance companies operating in China. Moreover, the investment income of China Life has shown substantial improvement over the past two years.
Other Stock to Consider
Some insurance stocks worth a look are Protective Life Corporation (PL) – Zacks Rank #1 (Strong Buy), Lincoln National Corporation (LNC) – Zacks Rank #2 (Buy) and Manulife Financial Corporation (MFC) – Zacks Rank #2 (Buy).