Fitch Affirms China Life at IFS 'A+'; Outlook Stable
KEY RATING DRIVERS
The rating affirmation reflects China Life's well-established franchise, strong distribution capability, and sound risk-based capitalisation. These strengths are, however, counterbalanced by the insurer's risk concentration in China and keen competition.
China Life's capital buffer remains adequate to absorb potential earnings volatility. Its equity-to-assets ratio was among the highest in China at 13.2% at end-1H15 and the regulatory solvency ratio was 309.2%, well above the regulatory preferred benchmark of 150%. Financial leverage (ratio of debt to the sum of debt and equity capital) was moderate at 17.8% at end-1H15.
The increased equity holdings are likely to contribute to fluctuations in earnings and capitalisation. Equity investments increased to 18.6% at end-1H15 of total investments from 13.1% at end-2014. This represented 1.3x balance sheet capital at end-1H15. Alternative investments, such as infrastructure and real-estate debt investment plans and trust schemes, were still modest at less than 5% of invested assets at end-1H15.
China Life remains the largest life insurer in China with a market share of 24.8% by 1H15 gross premiums. High growth (41.8% yoy) in first-year premiums and efforts to expand in more-profitable long-term regular-premium products drove a strong increase of 38.5% yoy in its new business value for 1H15. Embedded value increased to CNY516.8bn at end-1H15 from CNY454.9bn at end-2014.
China Life's profitability remains sensitive to investment performance. Pre-tax return on assets improved to 3.6% in 1H15, compared with 1.9% in 2014. This mainly reflected the rise in investment yield to 9.3% in 1H15 from 5.5% in 2014, primarily due to strong capital gains from equity holdings.
Fitch does not factor in state support in China Life's standalone 'A+' IFS rating, although if necessary. there is a high probability that China's Ministry of Finance would provide capital and/or policy support to the company because of the state's majority ownership of China Life and the insurer's large base of more than 100 million long-term policyholders.
An upgrade is unlikely in the near future because the rating would be constrained by China's sovereign rating (A+/Stable). Conversely, if the rating on China were lowered, the rating on the insurer is also likely to be lowered. Other rating triggers for a downgrade include deterioration in its capitalisation with an adjusted equity-to-assets ratio falling below 8% on a sustained basis, and an increase in financial leverage above 30% for a prolonged period.