China's largest life insurance company is China Life (NYSE:LFC). At the time of its blockbuster $3.5 billion initial public offering -- the largest IPO in 2003 -- the company held a 45% market share and had, get this, 650,000 agents. Imagine that many people and their families at the company picnic.
Since going public at $18.68, the stock has seesawed but not eclipsed the $35.60 it reached shortly after the IPO. While marketers are quick to point out that less than 4% of the Chinese population had life insurance policies at the end of 2004, not all Chinese have the wealth or inclination to buy insurance. The country's population growth rate is expected to slow from last year's 9.5% to 8% for 2006 through 2010. That's still extremely strong growth, which, combined with increasing income levels, is sure to benefit a local player in the life insurance industry.
On the down side, quoting numbers in the China Securities Journal, Reuters reported that life insurance premiums collected in the first seven months of 2005 increased a robust 13.3% -- but that was down from the 14.2% increase reported for the first half of 2004.
Declining premium revenue could be a concern because it may be an early warning of weaker prices during a market-share battle. When it joined the World Trade Organization in 2001, China agreed to open its fledgling insurance business to foreign competition but limited that access to joint ventures. Only American International Group (NYSE:AIG) can own 100% of its operations because of a U.S.-China trade deal in 1993. However, as many as 40 foreign companies have tried to tap into this market.
Despite an increasingly competitive environment, China Life has been able to increase its share of the life insurance market slightly since going public. The company also dominates the accident insurance market and offers short-term health insurance as well.
At first glance, it seems relatively inexpensive to buy into this company with $9.5 billion in 2004 revenue and a big footprint in China. The stock trades for 24.2 times trailing earnings and 13.7 times 2006 estimated earnings. That's cheap given that China Life's five-year annual earnings growth rate is expected to be 23%. Only one problem -- those estimates are from one analyst. For the purists, the company sells for a premium 2.5 times the most recent quarter's book value. To compare, AIG sells for a more modest 1.7 times book value.
With the population growing steadily and standards of living improving, companies that dominate in China are sure to create value for investors. China Life, as well as Motley Fool Rule Breakers' China-based recommendations Shanda Interactive (NASDAQ:SNDA) and NetEase (NASDAQ:NTES), is positioned to take full advantage.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
