October 19, 2017 / 9:39 AM / in 2 months

Fitch Revises Outlook on Taikang Life to Negative on Higher Risky-Asset Exposure; Affirms at 'A'

(The following statement was released by the rating agency) HONG KONG, October 19 (Fitch) Fitch Ratings has revised the Outlook on Taikang Life Insurance Co., Ltd.'s Insurer Financial Strength (IFS) Rating to Negative from Stable and has affirmed the insurer's rating at 'A'. At the same time, the agency has revised the Outlook on Taikang Insurance Group Inc.'s Long-Term Issuer Default Rating (IDR) to Negative from Stable and has affirmed its rating at 'A-' and the rating on its USD800 million 3.5% senior unsecured bonds due 2022 at 'BBB+'. The Outlook revision reflects the increased vulnerability of the group's credit strength following a significant increase in risky asset exposure. KEY RATING DRIVERS Taikang Group's risky-asset exposure increased to 27% of invested assets at end-2016, from 20% at end-2015, amounting to 3.6x shareholders' equity. This leaves it capitalisation vulnerable to unfavourable stock market fluctuations and impairments, as the majority of the risky assets are equity-related, including listed and unlisted stocks, preferred shares and equity investment plans, although some of the equity investments are of lower risk with fixed maturities and yields. The remaining risky assets are property investments. The higher risky-asset exposure counters the strengths of Taikang Group and its primary and wholly owned subsidiary, Taikang Life, which include a well-established franchise, strong distribution network, sound profitability and adequate capitalisation. Taikang Group's concentration risk has also increased due to its CNY10.8 billion equity investment in PetroChina Pipelines Company Limited, which accounted for about 26% of Taikang Group's end-2016 capital, and CNY7.2 billion investment in Poly Real Estate Group Company Limited (BBB+/Stable) (17% of Taikang Group's end-2016 capital). Allocation to alternative investments, including debt investment plans and trust schemes (classified as loans or fixed-income investments), are also significant, making up about 16% of Taikang Group's invested assets as of end-2016. Fitch considers these types of investments as less transparent compared with straight bonds, with concentration in the property and infrastructure sectors, and more vulnerable to economic downturns. Taikang Group's capitalisation, as measured by Fitch's PRISM Factor-Based Model (FBM), remained adequate as of end-2016, supported by ongoing internal earnings generation. Its core and comprehensive solvency ratios were 262% and 293%, respectively, under the China Risk-Oriented Solvency System, and still well above the regulatory minimum of 50% and 100%, respectively. Taikang Life has a sound market position, with 4.3% of gross written premiums in China's life insurance market in 1H17, making it the country's seventh-largest life insurer. The group's large business scale and margin-focused strategy contribute to solid profitability, with a pre-tax operating return on assets of 2.0% in 2016 and 2.7% in 2015, as well as a sustained increase in embedded value. Taikang Group's financial leverage increased following the issue of its USD800 million senior bonds and a drawdown of bank borrowings in 1H17. Fitch estimates Taikang Group's leverage at 35% at end-2016, including the new debts. Taikang Group had long-term borrowing of CNY3.2 billion as of end-2016, mainly for the development of retirement homes and communities. Fitch considers these borrowing, which have reasonable loan/value ratios, as operational debts and does not include them in the calculation of financial leverage. RATING SENSITIVITIES Downgrade rating triggers include: - Taikang Group's capitalisation maintained at a Fitch Prism FBM score below the 'Strong' category by end-2018; or - persistently high risky-asset exposure at above 2.5x balance-sheet capital. The Outlook may be revised to 'Stable' if Taikang Group is able to: - strengthen its Fitch Prism FBM score well into the 'Strong' category while maintaining its financial leverage ratio below 35%; and - reduce risky-asset exposure to 2.5x balance-sheet capital or below. Contact: Primary Analyst Joyce Huang, CFA Director +852 2263 9595 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Terrence Wong Director +852 2263 9920 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 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 (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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