OREANDA-NEWS. Fitch Ratings has published China-based Sunshine Life Insurance Corporation Limited's (Sunshine Life) Insurer Financial Strength Rating (IFS) of 'A' and Long-Term Issuer Default Rating (IDR) of 'A-'. The Outlook is Stable. The agency has assigned Sunshine Life's proposed senior unsecured notes an expected 'A-(EXP)' rating.

KEY RATING DRIVERS

The ratings reflect Sunshine Life's wide range of premium sources, continued growth in value of new business (VNB) and improving operating profitability. The ratings also recognise Sunshine Life's solid solvency strength and ongoing capital support from its immediate parent, Sunshine Insurance Group Company Limited (SIG). Fitch believes SIG has better financial flexibility to support the group's expansion after it reported a material improvement in overall capital strength following the infusion of CNY16bn in fresh capital last year.

Fitch believes Sunshine Life has an adequate capital buffer to support its planned growth over the coming year and withstand potential asset volatility. Additional capital contributions and solid surplus growth strengthened the company's solvency adequacy in 2015. The company's local solvency ratio increased to 356% at the end of 2015 from 267% in the previous year. Its capital ratio, as measured by China's new solvency framework for insurers, amounted to 327% at the end of 2015, well exceeding the 100% regulatory minimum.

Sunshine Life further improved its operating profitability in 2015. Its pre-tax return on assets increased to 1.2% from 0.6% in 2014, following a turnaround in operating results in 2013. The growth of Sunshine Life's VNB and existing business remains strong, as it has placed greater emphasis on distributing traditional life policies since 2012. Business from these products accounted for 45% of the company's total premiums in 2015 (2012: 6%).

Sunshine Life plans to issue US dollar-denominated notes with maturities of up to 10 years, using the proceeds for working capital and general corporate purposes. The notes constitute senior unsecured obligations of Sunshine Life and are rated at the same level as the issuer's IDR. This reflects average recovery prospects in the event of default. The final rating is contingent on the receipt of final documents conforming to information already received.

Fitch believes SIG's financial leverage will remain manageable after the proposed note issue, and estimates SIG's financial leverage on a consolidated basis will increase to 28.6% from 12.4% at the end of 2015 on a pro-forma basis. Fitch expects the group's fixed-charge coverage ratio to come down after the proposed debt issuance. Nonetheless, given the operating profitability of its insurance subsidiaries, Fitch believes that the group has sufficient capacity to service the interest cost of the senior notes.

A key rating constraint for Sunshine Life is its short track record of positive operating profitability compared to some of its well established peers. The company has broken even in terms of pre-tax profit since 2014. Another constraint is Sunshine Life's capital position, which could be sensitive to stock market volatility. This is due to its exposure to listed and unlisted equities and equity related funds, which Fitch estimates accounted for about 130% of the company's shareholders' equity at the end of 2015.

Sunshine Life is the 10th largest life insurer in China in terms of directly written premiums. The company has 33 provincial branches, over 800 sub-branches and over 80,000 employees across the country. Its gross written premium was CNY31bn in 2015, representing a market share of 2.0% in direct written premiums.

Fitch views both Sunshine Life and Sunshine Property & Casualty Insurance Company (SPCI) as core operating entities within SIG. Fitch believes SIG is capable of providing capital support to both entities, if needed.

RATING SENSITIVITIES

Downgrade rating triggers include:
- SIG's consolidated capital score consistently below the 'Strong' category, as measured by the Fitch Prism Factor Based Model (FBM),
- an increase in SIG's financial leverage on a consolidated basis to higher than 35% for a prolonged period,
- deterioration in SPCI's combined ratio to more than 103% or a sustained decline in the operating profitability of Sunshine Life, a key affiliate within SIG, with SIG's interest coverage consistently below 5x (2015: about 11x).

An upgrade of Sunshine Life's IFS rating is unlikely in the short term, given the group's existing credit fundamentals. However, over the medium to long term, upgrade rating triggers include:
- SIG's ability to keep its capitalisation with a capital score of at least 'Strong', as measured by Prism FBM,
- SIG's ability to consistently maintain its consolidated financial leverage below 20%,
- a decrease in SPCI's combined ratio to less than 95% on a sustained basis and Sunshine Life's ability to continue growing its new business value, with SIG's interest coverage persistently higher than 10 times.