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Is China Life Insurance a Long-term Buy?

China Life Insurance Company Ltd. (LFC) shares may be up more than 20 percent in 2009, but the stock could be a good buy now given its future prospects.

China Life Insurance Company Ltd. [[LFC]], the largest life insurance provider in China, may have already risen more than 20 percent so far in 2009, but many investors remain bullish on the company. The Chinese life insurance industry is still growing steadily, while the company’s reasonable multiple and strong growth rates make it a compelling value in today’s market.

The life insurance industry is attractive to many investors, including Warren Buffett, thanks to its strong cash flow generation. In fact, net cash provided from operating activities at China Life Insurance amounted to $12.4 billion – or 63.9 percent of its net income. Recently, this cash has been used to purchase underperforming securities, but a turnaround could be on the way.

Meanwhile, more normalized interest rates going forward should help grow profitability at China Life Insurance. After all, interest rates affect returns on safe investment assets; declining rates expose them to reinvestment risks, while rising rates can generate unrealized capital losses for debt securities designated as trading. The earlier happens to be true in today’s environment.

China Life Insurance saw its revenues jump from $7.1 billion in 2004 to more than $43.6 billion in 2007, but fell to $19.4 billion in 2008. However, the company’s balance sheet remains robust with a current ratio of 1.21 with approximately $5 billion in cash and cash equivalents on its books. These levels suggest that the company will be able to weather the economic storm.

In the end, China Life Insurance faced a temporary setback thanks to the global economic crisis and lower interest rates in China. However, these problems should be solved as interest rates normalize and the economy recovers. Investors willing to wait out the storm may find this stock quite profitable over the long-term.

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