OREANDA-NEWS. Fitch Ratings has affirmed China-based Huaxia Life Insurance Company Ltd.'s (HXLF) Insurer Financial Strength (IFS) rating at 'A-'. The Outlook is Stable.

KEY RATING DRIVERS

The rating reflects HXLF's niche market position in the universal life (UL) products segment, turnaround in operating profitability, rapid premium growth, solid distribution network and ongoing capital infusion by its shareholders to support its expansion.

Operating volatility due to expansion costs, high concentration in single-premium UL products and keen market competition will continue to constrain the company's rating. Premiums from UL policies accounted for about 94% of the company's total premiums in 2014.

HXLF continues to put emphasis on the distribution of UL products as it further expands its market coverage. The company became the second-largest player in the UL segment in terms of new premiums, capturing a market share of 17% in 2014. Most UL products are disseminated through the bancassurance channel. Fitch expects the company's business strategy to remain unchanged even though the Chinese insurance regulator has removed a cap on the guaranteed investment returns that insurers pay policyholders.

HXLF staged a turnaround in its operating result in 2014 due mainly to favorable investment return. Investment gains have consistently been the key source of earnings for the company over the past three years. Nonetheless, Fitch expects the company's operating result to be volatile because expense overruns associated with non-recurrent expansion costs are likely to persist. HXLF's new business value (NBV) margin declined in 2014 even though it had strong growth in NBV and the value of in-force business.

In an attempt to enhance its overall yield, HXLF increased its exposure to less liquid trust products, which have an investment horizon ranging from one to six years. Investments in trust products rose to 7.2% of total assets at end-2014 from 3.6% at end-2013. While the company's overall liquidity position remained sound, the ratio of liquid assets to policyholders' liabilities dropped to 74.2% at end-2014 (end-2013: 113%).

Fitch expects HXLF to replenish its solvency capital through equity infusions in the near term as rapid premium growth and operating volatility will consistently erode the company's capital strength. The company plans to seek another round of capital contribution after the injection of CNY3bn of fresh equity by its shareholders in 1Q15. HXLF's local solvency ratio stood at 171% at end-2014 (end-2012: 203%) despite surplus growth due to better investment return in 2014.

RATING SENSITIVITIES

An upgrade of HXLF's IFS rating is unlikely in the near term given its existing capital buffer and operating volatility. Over the medium to long term, upgrade rating triggers include demonstration of an ability to improve its NBV margin, maintenance of better operating profitability, and optimisation of its business mix.

Downgrade rating triggers include a decline in the ratio of HXLF's shareholder's equity to total assets to below 9% on a sustained basis or a significant deterioration in surrender rates and mortality profits. While company intends to issue subordinated debt to enhance its solvency position, an increase in the company's financial leverage to above 25% (end-2013: 16.2%) could lead to a rating downgrade.