Balanced View on China Life - Analyst Blog

On Jun 18, 2014, we issued an updated research report on China Life Insurance Co. Ltd. LFC. We believe that the company's robust market position and growth in premiums will help it to drive growth. However, competitive pressure, increase in interest rates and currency fluctuations are challenges to long-term growth.

Earlier, China Life reported first-quarter 2014 earnings that compared unfavorably with the year-ago quarter earnings. However, we remain optimistic about the stock's performance going forward. Hence, the Zacks Consensus Estimate for 2014 and 2015 is pegged at $2.73 and $3.08 per share, representing year-over-year improvement of 27.93% and 13.03%, respectively.

China Life has the most extensive distribution and service network among all insurance companies operating in China. Moreover, it constantly upgrades its existing services. The company has undertaken a number of initiatives in Mar 2014 to accelerate its claims settlement process and thereby improve customer service. Such endeavors are expected to enable China Life to reach out to more clients, help in establishing new businesses and effectively serve existing clients at the same time. The company also has a strong investment portfolio.

China Life has been witnessing an increase in net premiums over the past few years and the first quarter was no exception. Given that premiums are the main source of business for an insurance company, premium increase is essential for top-line growth in the long run. Thus, an increasing trend in premiums is likely to bolster the company's growth going forward. Moreover, China Life's solid brand value, impressive market standing, well-established franchise widespread domestic distribution network, strong risk-based capitalization and liquidity in investment portfolio enable it to retain the confidence of rating agencies.

On the flip side, China Life's cash flow from operating activities is declining gradually. Although cash flows increased in the first quarter of 2014, it is yet to signal a long-term trend. This is because the company already incurs significant levels of claims payments and hence, experiences cash outflow. Moreover, China Life is substantially exposed to market risks as majority of the company's investments is limited to China, making it highly vulnerable to a downturn in the Chinese economy. Further, with the Chinese government encouraging the establishment of new health insurance companies, the company is likely to face intense competitive pressure going forward.

This Zacks Rank #4 (Sell) stock has been witnessing higher-than-expected benefits and expenses and the first quarter was no exception. China Life needs to initiate cost management to avoid the negative impact of rising expenses on its financials in the long term due to capital erosion.

Other Stocks to Consider

Investors interested in the life insurance space could consider better-ranked stocks like Symetra Financial Corporation SYA, Lincoln national Corporation LNC and Sun Life Financial Inc. SLF. While Symetra Financial sports a Zacks Rank #1 (Strong Buy), Lincoln National and Sun Life carry a Zacks Rank #2 (Buy).