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Announcement:

Moody's: Chinese insurers' universal life product sales have peaked, but credit impact will linger

 The document has been translated in other languages

13 Mar 2017

Hong Kong, March 13, 2017 -- Moody's Investors Service says that the risk associated with the sale of universal life policies will represent one of the key considerations in the assessment of the Chinese life insurance industry and the regulatory landscape in the coming 12-18 months.

"While the regulator's policy tightening should stall further growth of these products and speed up the transformation of the industry, some small- and medium-sized insurers with sizeable existing books of these policies will continue to face higher asset liability management challenges in the coming years," says Frank Yuen, a Moody's Assistant Vice President and Analyst.

"Our analysis also shows that the relatively high guaranteed rates and low surrender charges of universal life products are disadvantageous for insurers in both a rising and falling interest rate scenario," adds Yuen.

Moody's analysis is contained in its just-released report on the Chinese life insurance sector, "Universal Life Product Sales Have Peaked, but Credit Impact Will Linger".

Over the past year, the China Insurance Regulatory Commission (CIRC) has introduced various policy measures to slow the sales of aggressively priced, short-term savings products -- and in particular of universal life policies -- that will likely result in a shift in insurers' product mix in 2017.

While Moody's views this development as credit positive for the industry from a risk accumulation perspective, it will also raise considerable liquidity and investment risk for insurers that have seen strong growth in such products.

China's universal life products are essentially mass-market savings-type products that offer high crediting rates, short premium terms, low fees, and minimal protection elements for the insurer. This contrasts with certain universal life policies in developed markets that carry comprehensive fee structures, offer material protection elements and target high-net-worth clients.

The high return, high liquidity characteristics of China's universal life products make them very popular among Chinese policyholders, as reflected in their strong growth since 2014. However, these same features pose considerable risk to some insurers' credit standing.

In particular, many insurers have adopted a so-called "barbell" asset allocation, whereby they maintain (short-term) high cash holdings to meet the potential high surrender rates on the one hand, and invest their (long-term) non-cash holdings in high-risk assets to achieve the targeted returns on the other. This strategy raises credit and duration mismatch risk.

In addition, there are also material pricing risks embedded in these products. Policyholders receive relatively high minimum guaranteed rates, and also have the option to surrender the policy at any time at a low penalty.

Moody's analysis shows that the combination of these two features is disadvantageous for insurers in both a rising and falling interest rate scenario. Rising interest rates could trigger product lapses as customers pursue higher yields, thereby pressuring insurers' product margins. Falling interest rates, in turn, could result in negative spreads and thus trigger losses for insurers.

Subscribers can access the report at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1048851

The report may also be found through Moody's topic page "China's Trilemma: Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing. This page provides a centralized source for Moody's research related to key credit issues in China as the country's macroeconomic story continues to unfold.

Recent Moody's publications relating to China's Trilemma include:

• China's Coordinated Approach to Regulating Investment Products Would Be Credit Positive for Banks

• Default Report: Default Rate for Asian Non-Financial Corporates Expected to Remain Low in 2017

• Coal -- China: Government Measures Will Drive Coal Prices Lower but Strong Enough to Support Miners' Credit Profiles

• Rated High-Yield Non-Financial Companies -- China: Most Companies Could Manage 10% Renminbi Depreciation vs US Dollar in 2017

• Securitization -- China: Sector Update -- Q4 2016: Auto ABS and RMBS Performing Well as Insurance Grows

• China Government: Local Government Incentives Hinder Central Government Reform Agenda

• Quarterly China Shadow Banking Monitor

• Life Insurance -- China: Credit Profiles under Pressure from Shifting Investment Allocation

• Renminbi Bonds Monitor: February 2017

• Asia Credit -- 2017 Outlook: Challenging Global Environment to Test Asia's Robust Credit Fundamentals

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Wing Kei Frank Yuen
Asst Vice President - Analyst
Financial Institutions Group
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

Yat Man Sally Yim
Senior Vice President
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

No Related Data.
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