We have retained our Outperform recommendation on China Life Insurance Co. Ltd. (LFC) following impressive first half results. We expect superior brand name, an extensive domestic distribution channel and strong investments of China Life to bolster its operations in the upcoming term. This leading Chinese life insurance company carries a Zacks Rank #2 (Buy).
Why the Reiteration?
China Life’s earnings for the first half of 2013 came in at RMB0.83 per share ($0.13 per ADR), witnessing a surge of 68.1% year over year.
The Zacks Consensus Estimate for 2013 moved up by 0.4% to $2.59 over the last 30 days. The estimate also translates to a year over year increase of 178.5%. Similarly, for 2014, the Zacks Consensus Estimate improved by 0.3% to $2.94 over the same time frame.
With a strong distribution and service network, China Life is well positioned to reap benefits of scale from the Chinese insurance market. In fact China Life became the first Chinese insurance company to obtain a private equity fund license and enter the private equity business in Aug 2011. The private equity business can generate impressive profits if managed properly.
Moreover, the company’s continuous efforts to maintain its huge clientele base through dedicated customer service are expected to help the company write new business going forward. Additionally, the company’s strong brand name and goodwill has enabled it to achieve success in the new field easily, compared to lesser-known insurance companies.
China Life has also been facilitated by the increased allocation in held-to-maturity securities, bank deposits and a higher volume of policy loans and debt investment plans. As a result, investment income has been increasing over the past few years and is expected to improve further with the improving economic scenario. The Chinese life insurer also scores strongly with the credit rating agencies.
However, China Life’s declining operating cash flow, exposure to domestic market risks and higher than expected benefits and expenses are some of the matters that need attention. Also with the growth in the Chinese insurance market, China Life encounters threats from potential new entrants that must be countered through growth strategies.
Other Stocks to Consider
Among other life insurance companies that are worth considering are StanCorp Financial Group Inc. (SFG) carrying a favorable Zacks Rank #1 (Strong Buy) and Health Insurance Innovations Inc. (HIIQ) and Lincoln National Corporation (LNC) sharing the same Zacks Rank as China Life.