OREANDA-NEWS. Fitch Ratings has affirmed Taikang Life Insurance Co., Ltd.'s (Taikang) Insurer Financial Strength (IFS) Rating at 'A-'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects Taikang's well-established franchise, strong distribution network, and good profitability. Its capitalisation, which remains vulnerable to unfavourable capital market movements, is the key offsetting factor.

The insurer has a strong market position with 5.4% of the 9M14 total premiums in China's life insurance market, making it the sixth-largest life insurer in the country. The company's efforts to increase more profitable regular premiums support the steady rise in its embedded value and the improvement in profit margins of new business. Taikang's large business scale and margin-focused strategy contribute to its good profitability, with a pre-tax return on assets of 1.0% in 2013 and 0.5% in 2012. Steady mortality gains sustain its earnings stability, although profitability remains subject to volatility from its investment income.

Taikang has managed to maintain adequate capitalisation via earnings retention and the injection of CNY4bn of new capital from existing shareholders in 2012. Its equity-to-assets ratio was 5.8% at end-2013 (3.7% at-end 2011), with operating leverage of 15.8x (close to the median ratio for an 'A' IFS Rating). Taikang's regulatory solvency ratio was 166% at end-2013, above the regulatory preferred benchmark of 150%. The ratio is likely to increase under the second-generation solvency regime - the China Risk-Oriented Solvency System - because insurance reserves will be released, adding to available capital. Taikang has issued subordinated debt to support its solvency with a financial leverage ratio (debt to the sum of debt and equity capital) of 27% at end-2013 (31% at end-2012).

Investment risk is adequately managed, with almost 80% of Taikang's invested assets allocated to bonds and cash and bank deposits at end-2013. However, Taikang has increased alternative investments (mainly associated with property and infrastructure projects) to about 9% of invested assets at end-2013 (5% at end-2012). This could make its asset quality more vulnerable to an economic downturn. The insurer's capitalisation is also sensitive to stock market fluctuations given still-significant equity exposures at about twice its shareholders' equity at end-2013.

RATING SENSITIVITIES
Key rating triggers for a downgrade include deterioration in capitalisation with an equity-to-assets ratio falling below 5% on a sustained basis, and an increase in financial leverage above 35% for a prolonged period.

An upgrade is unlikely in the near term because its capitalisation and profitability remain vulnerable to market movements. An upgrade would hinge on a notable improvement in profitability with greater stability and stronger capitalisation. This would be challenging amid ongoing intense market competition.