The affirmation of China Life's A1 rating continues to reflect its strong brand, exceptional market position and vast domestic distribution network. It also has a liquid investment portfolio, mainly consisting of government and government agency bonds and listed equities. Its capitalization, which has somewhat deteriorated because of weak earnings and dividend payout, is still solid.
Moody's has maintained a positive outlook on China Life, solely based on our view of strong support from the Chinese government, which has an effective stake of 68.4% in the company. The Chinese government bond rating is Aa3 with a positive outlook.
Nonetheless, Moody's notes several factors that are putting negative pressure on the standalone credit profile of China Life, namely, the company's 1) volatile profitability; 2) increasing financial leverage; and 3) weak premium growth.
First, for the first nine months of 2012, China Life's net income attributable to equity holders fell 55.5% to RMB7.6 billion, mainly because of significant impairment losses from its equity investment portfolio. As a result, its annualized, year-to-date return on average capital in 3Q 2012 declined to 4.1% from 8.5% in 2011.
Second, because of the negative impact of its weakened earnings on its organic capital growth, China Life has issued RMB68 billion of subordinated debt since November 2011 to replenish its solvency capital. Consequently, its pro forma financial leverage is estimated to have increased to around 25%-30% currently. This is the upper limit of the financial leverage acceptable for the current baseline credit assessment (its stand-alone credit profile).
Third, China Life's premium growth has been under pressure because of disruptions in the bancassurance channel, which contributed 45.5% of its gross written premium in 2011. This stems mostly from the competition of wealth management products offered by banks and regulation changes on the stationing of insurance personnel at bank branches.
Given the negative pressure on the company's business and financial profiles, Moody's would consider changing China Life's rating outlook to stable from positive if (1) profitability remains weak, which could be due to volatile investment income, missteps in underwriting or regulatory risk, such that, for instance, return on capital consistently falls below 8%; (2) there is a material increase in the company's adjusted financial leverage to more than 30%; and/or (3) its capitalization significantly and consistently weakens, such that its adjusted capital-to-assets ratio falls below 10%.
On the other hand, Moody's will consider upgrading China Life's rating if: (1) China's sovereign rating is upgraded; (2) China Life maintains its capital adequacy such that its adjusted capital to assets ratio is above 16% or its local solvency ratio is above 250%; (3) its profitability improves, with a return-on-capital consistently above 12%; (4) it achieves successful diversification of its distribution channels and product offerings; (5) it improves its asset quality by reducing its equity investments and exposure to the banking sector; and (6) it achieves continued improvement in its risk management.
The principal methodology used in rating China Life was "Moody's Global Rating Methodology for Life Insurers", published in May 2010, and "Government-Related Issuers: Methodology Update", published in July 2010.
Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
ABOUT CHINA LIFE
Headquartered in Beijing, China Life Insurance Co Ltd is the largest life insurance company by premium income in the country, offering term life, whole life, endowment, annuities, universal life, accident, and health insurance products. As of 30 June, 2012, China Life's total assets amounted to RMB1.8 trillion. Its shareholders' equity totaled RMB213.5 billion.
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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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Sally Yim VP - Senior Credit Officer Financial Institutions Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Stephen Long MD - Financial Institutions Financial Institutions Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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