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* China Life Q3 net profit 7.5 bln yuan vs loss a year earlier
* Ping An Insurance Q3 net profit 5.4 bln yuan vs 2.1 bln yuan a year earlier
* Price competition pushes auto sector to verge of non-profitability
By Lawrence White
HONG KONG, Oct 25 (Reuters) - China's two biggest insurers reported huge gains in profitability as life premium incomes rose and returns on their financial market investments improved, offering some respite to worries about a sagging auto insurance market.
China Life Insurance Co Ltd , the world's biggest insurer by market value, swung to a third-quarter profit of 7.5 billion yuan ($1.23 billion) from a loss a year earlier. Smaller rival Ping An Insurance Group Co of China Ltd more than doubled its profit.
An increasingly less profitable auto insurance market is threatening to drag down insurers' results this year and the next, analysts say. That will disrupt the progress made in their life insurance business, the other earnings driver.
While China Life is not involved in auto insurance, business in that segment of the industry is important for smaller rivals Ping An, China Pacific Insurance Group Co Ltd and People's Insurance Company (Group) of China Ltd .
China's property and casualty (P&C) insurance sector, of which the auto insurance market accounts for some 70 percent, is on the verge of bleeding due to cut-throat competition and inflation, the analysts say.
For auto insurers, their so-called combined ratio, which measures losses and expenses against premiums earned, is close to 100 percent, according to Morgan Stanley Research. When that number hits 100 percent, it means the sector is unprofitable.
"On the P&C side, underwriting results continue to deteriorate...the industry will report an underwriting loss in 2013," Linda Sun-Mattison of Bernstein research said in a note.
That trend is likely to continue next year. Insurers with too much cash on hand are incentivised to slash prices to try and win market share, but that will self-correct when the excess cash is spent, analysts say.
The insurers may find hope for the P&C sector in the Shanghai free trade zone. The FTZ, which covers an area of nearly 29 sq km on the eastern outskirts of the commercial hub, was inaugurated at the end of September.
Officials are promising a more open and streamlined environment for foreign firms to do business in China, along with the loosening of policies for a raft of service sectors.
The FTZ will spur development of marine, liability and health insurance, which will help insurers diversify their business away from the troubled auto sector, ratings agency Moody's said in a research note.
In the long run, insurers will also benefit from China's relaxation of regulations on guaranteed interest rates for life policies. Allowing insurers to set their own rates in response to market supply and demand should bolster the sector.
China Life's shares ended down 1.01 percent to HK$19.62 in Hong Kong trading on Friday, ahead of the company's earnings announcement. The stock has underperformed the Hang Seng Finance Index by 22.5 percent year to date.
Ping An fell 0.78 percent to HK$57.05. The shares have underperformed the same index by 12.4 percent so far this year. ($1 = 6.0820 Chinese yuan) (Reporting By Lawrence White; Editing by Ryan Woo)