Fitch Rates China's Taikang Life at IFS 'A-'; Outlook Stable

Sun Mar 2, 2014 9:52pm EST

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(The following statement was released by the rating agency) HONG KONG, March 02 (Fitch) Fitch Ratings has assigned China-based Taikang Life Insurance Co., Ltd. (Taikang) an Insurance Financial Strength (IFS) Rating of 'A-'. The Outlook is Stable. KEY RATING DRIVERS The rating reflects Taikang's well-established franchise, strong distribution capability, and good profitability. The rating also takes into account the insurer's commitment to strengthen its regulatory solvency ratio to above 200% in 4Q14 from 166% at end-2013 via a capital injection. The insurer has managed to maintain its solvency ratio at moderately above the regulatory preferred benchmark of 150%, but earnings volatility and persistent capital demand for business expansion could drag down the ratio. The insurer has a strong market position with 5.7% of 2013 total premiums in China's life insurance market, making it the sixth-largest life insurer in the country. It has been following a strategy of increasing regular premiums for sustainable growth and better profitability. This has contributed to a steady increase in its embedded value despite the slowdown in new premium growth (mainly due to the decline in single-premium revenues). New business margins also continued to rise as a result of the increasing share of more profitable regular-premium policies. Taikang's large business scale and margin-focused strategy support good profitability, with pre-tax return on assets of about 0.5% in 2011 and 2012. A steady contribution of mortality gains sustains its earnings stability, although profitability and capitalisation remain subject to high volatility from its investment income, which has significant exposure to the Chinese stock market. The insurer has also strived to streamline daily operations to reduce the negative impact of expense overruns. Investment risk is adequately managed, with 88.5% of Taikang's invested assets allocated to bonds and cash and bank deposits at end-2012. It has established a well-defined internal rating scale to assess and control credit risks and it has concentrated on policy and state-owned banks and large corporates with investment-grade internal ratings. Equity exposures were sizeable at 10.5% of invested assets at end-2012, representing well over 100% of the company's equity. Thus Taikang's moderate capital base remains vulnerable to unfavourable stock market fluctuations. Taikang, like most of its Chinese peers, has relied on subordinated debt issuances to support its solvency with a financial leverage ratio (debt to the sum of debt and equity capital) of 31% at end-2012. Taikang may issue more subordinated debt if its solvency ratio falls below 150%, although China Insurance Regulatory Commission's cap on sub-debt issues to 50% of a company's net assets would constrain the amount that Taikang may issue. RATING SENSITIVITIES Key rating triggers for a downgrade include failure to increase the solvency ratio to above 200% in 4Q14 and maintain it at this level thereafter, and an increase in financial leverage above 35% for a prolonged period. An upgrade is unlikely in the near term. It would depend on a notable improvement in profitability and internal capital generation capability, which would be challenging amid ongoing intense market competition. Contact: Primary Analyst Joyce Huang, CFA Director +852 2263 9595 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Terrence Wong Director +852 2263 9920 Committee Chairperson Harish Gohil Managing Director +44 20 3530 1257 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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