HONG KONG/SHANGHAI China Life, (2628.HK) the world's largest insurer by market value, issued a profit warning that signalled its first quarterly loss since 2008 and sent its Hong Kong-listed shares down as much as 4 percent, as weak financial markets batter Chinese insurers' investment income.
The warning from the state-controlled company, which said net profit in the first nine months of the year would fall about 55 percent, surprised analysts and could bode ill for other financial firms hurt by falling stock and bond markets. Slowing growth has also made it harder for insurers to raise premiums.
China Life's Hong Kong shares have risen about 12.5 percent this year, lagging a 13.9 percent rise in the benchmark Hang Seng index .HSI and an 18 percent rise in the shares of rival Ping An Insurance (Group) Co (601318.SS) (2318.HK).
China Life's Shanghai-listed shares (601628.SS) fell as much as 3 percent, extending the previous day's 4 percent drop and hitting their lowest since August, while the company's New York-listed shares closed down 5.7 percent at $43.01.
By midday, its shares recouped some of their losses, trading down 2 percent at HK$22.55 in Hong Kong and down 1 percent at 17.51 yuan in Shanghai.
China Life attributed the drop in nine-month net profit to a fall in investment yield and higher impairment losses because of weakness in capital markets.
If borne out when results are reported on October 26, those figures would translate into a 2.1 billion yuan ($335 million) third-quarter loss when taking into account first half profits - its first quarterly loss since the global financial crisis.
"This is a shock," said Hong Jinping, analyst at China Merchants Securities. "The company's impairment losses during the quarter far exceed market expectations."
Three analysts polled by Reuters had expected a quarterly profit increase of around 30 percent, instead of a loss.
Still, analysts said that net profit would be only one of several factors for investors in assessing the company's overall valuation and that the longer-term outlook for premium growth was positive, despite the short-term impact on the share price.
"We expect a much smaller loss, if any, in comprehensive income and stable net asset value," Barclays Asia insurance analyst Mark Kellock wrote in a research note.
He believed China Life had turned a corner after stronger-than-expected new business value in the first half of this year, with premium growth likely to continue in the fourth quarter.
"However, near-term share price movement is likely to be capped by the weak (third quarter) financial results," he said.
Chinese insurers are allowed to invest up to 20 percent of assets in domestic stocks, which have fallen 4 percent this year after a decline of 22 percent in 2011.
Unlike its main rival Ping An, which has diversified into banking and asset management, China Life is highly vulnerable to a volatile stock market.
Ping An is expected to post a 20 percent rise in net profit during the first nine months of the year, according to a forecast by Chinese brokerage Shenyin Wanguo Securities Co.
China Life has issued profit warnings for previous quarters and in August posted its seventh consecutive decline in quarterly profit. Chairman Yang Mingsheng said in August that he did not expect investment yields to improve in the second half.
China Life has a market capitalization of more than $83 billion. Majority-owned by the Chinese government, it posted a 45.5 percent drop in full-year profit in 2011.
The statement on Wednesday did not specify which assets had been impaired. The company last reported a quarterly loss in the fourth quarter of 2008.
($1 = 6.2640 Chinese yuan)
(Editing by Matthew Tostevin and Edmund Klamann)