China Life Hurt By Low Interest Rates, Market Share Loss

We issued an updated research report on China Life Insurance Co. Ltd. (NYSE:LFC) on Aug 29, 2016.

In the first half of 2016, the company reported net profit of RMB 10.4 billion (US$1.56 billion), which plunged 67% year over year, as low interest rate resulted in weak investment income. Nonetheless, total revenue for the same period inched up 2% year on year to RMB 337.7 billion (US$50.6 billion).

China Life Insuranceremains exposed to market risks associated with the economic slowdown in China. Also, stiff completion from new entrants in both domestic and international markets raises caution. Moreover, continuous increase in operating expenses remains a drag. The company’s return on equity declined to 3.30% in the first half of 2016 from 10.45% in the same period last year.

Total investment income in the first half of 2016 plunged 49% year over year due to low interest rates. The company is also faced with the challenge to manage its assets and liabilities in this low interest rate environment.

In addition to the capital erosion, weak cash flow from operation also raises concerns about the company’s operating efficiency. Though the company maintains a leading position in the market where it operates, it saw its domestic market share decline from nearly 50% to just 20.6% in the first half of 2016. Notably, China Life Insurance in thefirst insurer from the nation that obtained a private equity fund license. The insurer retains its market position by continuously upgrading and innovating its products and services.

Nevertheless, premiums – the main source of business for an insurance company – have been increasing in the recent years. The uptrend was witnessed in the first half of 2016 as well with the company’s net premiums earned reaching RMB 284.2 billion (US$42.6 million), up 23.9% over the last year.

Zacks Rank:

China Life currently carries a Zacks Rank #4 (Sell).

Stocks worth a look:

Some better-ranked stocks in the life insurance space are Health Insurance Innovations, Inc. (NASDAQ:HIIQ) and Primerica, Inc. (NYSE:PRI) and Sun Life Financial Inc (TO:SLF) . While Health Insurance Innovations sports Zacks Rank #1 (Strong Buy), the other two stocks hold a Zacks Rank #2 (Buy).