Fitch Ratings-Hong Kong-10 June 2014: Fitch Ratings has affirmed China-based Huaxia Life Insurance Company Limited’s (HXLF) Insurer Financial Strength (IFS) rating at ‘A-‘. The Outlook is Stable.
KEY RATING DRIVERS
The rating reflects HXLF’s good distribution capabilities, dynamic new business growth, significant increase in value of in-force business, and adequate capital cushion. However, continued operating losses and high concentration on single-premium participating and universal life products will continue to constrain the company’s rating.
Despite the challenging market environment, sales of universal life insurance policies have remained strong for HXLF. The company became China’s third-largest life insurer in terms of new premiums for universal life products, seizing a market share of about 10.3% in 2013. Its new business value and value of in-force business (after the cost of capital) increased by 89% and 129% respectively in 2013.
Persistent operating deficits due to expense overruns associated with non-recurrent expansion costs and rapid premium expansion have weakened HXLF’s local solvency ratio to about 180% at end-2013 (end-2012: 203%) despite the infusion of CNY5bn of fresh equity by its shareholders in 2013. HXLF will maintain its solvency adequacy in 1H14 through a further increase in shareholders’ equity and planned issuance of subordinated debt. The additional capital will also support its growth and provide a buffer against asset volatility.
RATING SENSITIVITIES
Negative rating triggers include a decline in HXLF’s local solvency ratio to below 200% on a sustained basis, an increase in financial leverage to above 25% (end-2013: 6.1%) and a significant reduction in persistency rates and mortality profits.
An upgrade is unlikely in the near term unless the company is able to consistently achieve positive operating earnings, optimise its business composition, and further improve its new business margin.
