China Life 2008 results

Overview:
The largest life insurance company in China with approximately 40% market share in 2008 and RMB $1,045B total asset and the largest life insurance company in the world by market capitalization. It has 3 main lines of business: Life, Annuities and Health & Accident. It also operates an asset management company. In 2008, it is developing a new lines of business as an underwriter on fixed security issuance.

2008 Results (vs 2007)
1. Total Revenue down 12.8% to RMB $166.8B
- Total annualized premium (tradition & investment) up 50.3% to RMB $296.6B, that's an awesome result which also inline with the industry average of 48.3%;
- Net earned premium up 20.9% to RMB $134.7B;
- Net investment income & gain down 61.4% to RMB $30.2B mainly due to a) increase in net realized gain of RMB $12.8B and b) increase in HFT equity loss of RMB $26B c) an one time impairment written down in equity of RMB $15.7B. To me, it is kind of expected;

2. Reported EPS down 45.7% to RMB $0.75
- EPS in line with analysts' consensus- Loss ratio down to 66.7% from 68.5%;
- Total expense ratio (excluded deferred income & participating dividend) down to 80.8% from 84.2%.
- Total expense ratio down to 98.4% from 119.3%.
- In income statement prospective, I am glad to see a decrease in expense;
- Tax expenses down 78% to RMB $1.4B due to tax rate cut from 33% to 25% and increased in the portion of non-taxable income adjustment.

3. Balance Sheet
- Total assets up 11.9% to RMB $1,044.8B, LFC net purchased on debt & equity security in 2008 are RMB $96.3B and (RMB $9.9B);
- Investment in equity down 61.5%, RMB $10B or 5.1% due to net proceed which means 56.4% due to mark-to-market. Its 2008 equity performance (56.4%) is better than the market performance of (65.4%) by 9%.
- Long term investment type insurance contacts up 27% or RMB $77.7B to RMB $362.2B and Deferred income also up 54% to RMB $74.5B
-Total Equity and AOCI down 12.1% and 25.7% to RMB $181.6B and RMB $ 85.4B, better than my expectation.
- Embedded value down 4.9% to RMB $240B or RMB $8.49 from RMB $8.94. It is better than analysts' consensus' RMB $8.0. Looks like the smaller decrease is due to decreased in investment return assumption which offset with a decrease in discount rate.

Risk
- Increase competition as bank may aggressively expand into insurance market if regulation relax further in future;
- Increase competition as foreign insurance company may get more market share over time;
- LFC's majority of the 50.3% 2008 premium increase distributed through bank channel.
- Potential interest rate drop will trigger LFC's investment spread to go down

Comments
Buy, fair value HKG $34.95. No change until I review the complete annual report (not yet published).