Fitch Affirms Taikang Life at IFS 'A-'; Outlook Stable
KEY RATING DRIVERS
The rating reflects Taikang's well-established franchise, strong distribution network, and good profitability. The rating also takes into account its capitalisation, which remains vulnerable to unfavourable capital market movements.
The insurer has a solid market position with 4.3% of total premiums in China's life insurance market at end-June 2015, making it the seventh-largest life insurer in the country. The company's efforts to increase more-profitable regular premium products support the steady rise in its embedded value and the improvement in profit margins of new business. Taikang's large business scale and margin-focused strategy contribute to its good profitability, with a pre-tax return on assets of 1.9% in 2014 and 1% in 2013. Steady mortality gains sustain its earnings stability, although profitability remains subject to volatility from its investment income.
Taikang has managed to maintain adequate capitalisation via earnings retention and the injection of CNY4bn of new capital from existing shareholders in 2012. Its equity-to-assets ratio was 6.4% at end-2014 (3.7% at-end 2011), with operating leverage of 14.5x (close to the median ratio for an 'A' IFS Rating). Taikang's regulatory solvency ratio was 161% at end-2014, above the regulatory preferred benchmark of 150%. The ratio is likely to increase under the second-generation solvency regime - the China Risk-Oriented Solvency System - because insurance reserves will be released, adding to available capital. Taikang has issued subordinated debt to support its solvency with a financial leverage ratio (debt to the sum of debt and equity capital) of 32.7% at end-2014 (including new debt issuances of CNY11bn in 9M15).
Taikang has increased alternative investments (mainly linked to property and infrastructure projects) to about 17% of invested assets as of end-2014 (9% at end-2013). This could make its asset quality more vulnerable to an economic downturn. Its capitalisation is also sensitive to stock market volatility given that its significant equity exposures - more than twice its shareholders' equity as of end-2014.
Key rating triggers for a downgrade include deterioration in capitalisation with the equity-to-assets ratio falling below 5% on a sustained basis, and an increase in financial leverage above 35% for a prolonged period.
An upgrade is unlikely in the near term because its capitalisation and profitability remain vulnerable to market movements. An upgrade would hinge on a significant improvement in profitability with greater stability and stronger capitalisation. This would be challenging amid ongoing intense market competition.