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China Life Insurance: Aggressive Recruitment Leading The Strong Volumes Growth

Carlo Forattini profile picture
Carlo Forattini
15 Followers

Summary

  • China Life Insurance 1H 16 Results.
  • Aggressive Recruitment: good volumes but discipline is needed.
  • New Product Mix: increasing the regular payments products.
  • Negative trading result in 1H 16, but investment yield still up.
  • Bottom Line.

Picture from China.org.cn

China Life Insurance (LFC) Company is the largest commercial insurance group in Mainland China. It is largely state-owned (only 30% free-float) and it is one of the biggest institutional investors in China's capital market.

The stock trades in 3 different exchanges (Shanghai Stock Exchange in RMB as A-share, Hong Kong Stock Exchange in HKD, and NYSE in USD as ADRs), with different volumes and premiums.

1H 16 Results:

  • Net Profit after Taxes down 67% y-o-y.
  • New Business Volumes up 50%, driven by aggressive recruitment.
  • Improved product-mix at Bancassurance.
  • Negative trading result, (-93.42% Net realized Gains on financial Assets vs 1H 15, -153.24% fair value gains through Profit / Loss vs 1H 15).
  • Net investment yield held up despite decreasing interest rate.

LFC Chart

LFC price since October 2015.

Aggressive Recruitment: good volumes but discipline is needed.

In 2015 the company hired 236000 new agents, bringing the individual channel work-force to 979000 (+31.8% vs. 2014). This strong recruitment is driving the volumes growth; however the number of agents with less than 2-year experience in the company is now about 300000, making future efficiency and productivity questionable. The underlying quality of earnings seems to decline, as commitment of new agents and agency management might become a key issue for profit margin in the future. At the moment the average annual productivity is 55719 new written premiums per agent.

Data from company reports. Author's own elaboration.

The big question is whether the economies of scale arising from a bigger work-force will offset the higher agency costs arising from managing such a remarkable growth. It is important to highlight that agents represent the biggest distribution channel, accounting for 62% of written premiums, and this is the reason why they are at the core of the company's growth strategy.

Data from company reports. Author's

This article was written by

Carlo Forattini profile picture
15 Followers
Fudan-MIT IMBA Student at Fudan University.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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