China Life Insurance Earnings: Profit Slumps on Investment Losses, NBV Growth Slowdown In Line

With new business value, or NBV, growth tracking our assumptions, we retain our fair value estimate for China Life 601628 at CNY 19 per A-share and HKD 20 per H-share. The H-shares are attractive, trading at a sharp discount to our fair value estimate and the A-shares. We stick to our full-year NBV growth projection of 14%, which implies second-half NBV declines by two thirds from the first half. This would be due to the weaker sales momentum after the guaranteed rate was cut to 3% from 3.5% starting August, as well as curbed bancassurance sales. Both measures are the result of greater regulatory scrutiny as policymakers continue to focus on improving industry health.

The results highlight a larger-than-expected decline in total investment return by 60 basis points to 2.81% for the first nine months, from 3.41% in the first half as a result of a significant increase in investment impairment losses in the third quarter. China Life added a position in its stock investment following the domestic market slump in July 2022. This newly added position started to recognize impairment losses in the third quarter once the holding period was over one year, according to the accounting requirement. Management expects a much smaller impairment loss in the fourth quarter if share prices stabilize.

Cumulative nine-month net profit further declined 35% year on year, versus the 8% decline in the first half under the new accounting rules. Under the old rules, the year-on-year contraction would be 48% versus 35% in the first half. Unlike major peers, which adopt a progressive dividend policy based on operating profits that exclude the impact of short-term investment variance, China Life still bases dividend payment on net profits under the old accounting rules. We believe the increased earnings volatility adds higher uncertainty to its 2023 dividend payment and weighs on short-term sentiment as the company fails to give clear guidance on future dividend policy.