Morgan Stanley’s Jenny Jiang believes China Life Insurance Company Ltd. (ADR) (NYSE: LFC) has made “dramatic” changes in its product strategy and business model over the last 18 months, which have led to a worsening of the risk-reward.

Jiang downgraded the rating on the company from Overweight to Equal-weight, with a price target of HK$20.

Concerns

“We believe interest rate, credit, and capital risks are all on the rise for China Life for the next couple of years, a tougher period for earnings and margins in view of pressure from lower yield. On the other hand, the benefit of bank/insurance synergy, in our view, could take a long time to materialize,” the analyst mentioned.

China Life announced its average liability costs continued to be low in H1 2016 at 2.58 percent, driven by its large and robust in-force business.

However, the analyst expressed concern regarding the company’s product strategy and cost of liabilities trends over the near to medium term, given the rapid growth of the sales force and persisting rate decline in China.

Rate Risk

“By our projection, China Life’s average minimum guaranteed rate could rise more quickly than the market expects, owing to renewals. Potential regulatory tightening could help slow down the deterioration, but China Life may choose to maintain a more aggressive pricing strategy than peers to keep its distribution force from falling,” Jiang said.

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