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Fitch Downgrades China Life's IDR to 'A'; Affirms 'A+' IFS Rating
September 20, 2017 / 9:02 AM / in a month

Fitch Downgrades China Life's IDR to 'A'; Affirms 'A+' IFS Rating

(The following statement was released by the rating agency) HONG KONG, September 20 (Fitch) Fitch Ratings has downgraded China Life Insurance Company Limited's Long-Term Issuer Default Rating (IDR) to 'A' from 'A+' and affirmed its Insurer Financial Strength (IFS) Rating at 'A+'. The Outlook is Stable. Fitch has also affirmed the rating of China Life's USD1.28 billion 4% subordinated notes due 2075, which may be extended, at 'A-'. The downgrade of China Life's IDR reflects its weakened standalone credit strength due to a large increase in risky asset exposure. Fitch now assesses China Life's standalone IFS at 'A+', down from 'AA-'. The final IFS Rating of 'A+' remains unchanged as a result. The debt rating is one notch below China Life's IDR, reflecting Fitch's assumption of below-average recovery prospects in the event of default. Fitch reassessed the notes as subordinated, given the possible presence of future junior obligations. No additional notching is applied for non-performance risk, which Fitch views as minimal, as interest deferral is at the issuer's sole discretion. The notes are classified as core Tier II instruments under China's new solvency regime - China Risk-Oriented Solvency System (C-ROSS). Claims under the notes will, in the event of winding-up, be subordinated to claims of policyholders, general creditors and holders of any supplemental capital of the issuer, and shall rank in priority to the claims of all holders of any junior obligations of the issuer. KEY RATING DRIVERS China Life's ratings reflect its well-established franchise, strong distribution capability and sound risk-based capitalisation. These strengths are countered by the insurer's significant equity investments and risk concentration in China, where competition in the life segment is keen. China Life remains the country's largest life insurer, with a market share of 19.4% by 1H17 gross written premiums. Ongoing growth of 10.8% yoy in first-year regular premiums and efforts to expand sales of more profitable long-term regular-premium products drove strong growth of 31.7% yoy in new business value for 6M17. Embedded value steadily rose to CNY698 billion at end-1H17, from CNY652 billion at end-2016. China Life's capitalisation, as measured by Fitch's PRISM Factor-Based Model (FBM), weakened due to the increase in risky assets, mainly equities. The insurer's Prism FBM score fell in the 'strong' category as of end-1H17, from 'extremely strong' at end-2015. The redemption of CNY58 billion in subordinated notes in 2016-1H17 also weakened capital strength. This, however, decreased financial leverage to 4% at end-1H17 (end-2015: 18%). Core and comprehensive solvency ratios were 276% and 280%, respectively, under C-ROSS, well above the regulatory minimum of 50% and 100%, respectively. China Life's equity investments, including listed and unlisted stocks, equity-related funds and private and long-term equity, increased to about 20% of total investments at end-1H17, from 15% as of end-2015. This represented 1.7x balance-sheet capital, indicating greater vulnerability of its capitalisation to equity market volatility and potential impairment losses. China Life acquired a few large single-name stakes in 2016, with total long-term equity investments representing 41% of capital at end-1H17. It plans to invest an additional CNY13.2 billion in China Guangfa Bank Co., Ltd. (BB+/Stable), with the total investment accounting for about 20% of China Life's end-1H17 capital, and CNY21.7 billion in China United Network Communications Limited in 2H17. China Life's profitability remains sensitive to investment performance. Pre-tax annualised operating return on assets fell to 1.3% in 1H17 and 1.1% in 2016, respectively, from 2.1% in 2015, due to declining interest rates and capital-market fluctuations. RATING SENSITIVITIES Fitch believes state strategic and financial support for China Life is possible, considering the effective 68.4% ownership by the Ministry of Finance via its direct parent China Life Insurance (Group) Co, large policyholder base and significant role in the country's financial system, worth CNY2.9 trillion in assets at end-1H17. The company's ownership support and core entity status underpin its ratings. However, if China's rating is downgraded, Fitch expects to take similar rating action on China Life due to the sovereign constraint. Key rating triggers for an IDR and debt rating upgrade include a reduction in the risky assets/shareholder equity ratio to below 130%, an improvement in capitalisation, with Fitch's Prism FBM score consistently well into the 'strong' category or above, while financial leverage remains below 30%. 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 Siew Wai Wan Senior Director +65 6796 7217 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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