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Rating Action:

Moody’s affirms New China Life’s A2 IFSR, changes outlook to positive

 The document has been translated in other languages

10 October 2019

Hong Kong , October 10, 2019 – Moody's Investors Service has affirmed the A2 insurance financial strength rating (IFSR) of New China Life Insurance Company Ltd. (NCI).

At the same time, Moody's has changed the rating outlook to positive from stable.

RATINGS RATIONALE

The change in outlook to positive reflects NCI's successful shift to an agency model and increased focus on long-term protection products. This strategy has resulted in increased agency productivity, improved product mix and higher new business margins, in turn supporting long-term profitability and capital generation.

The insurer started its transformation at the end of 2014, and the share of renewal premiums has since increased to 79% for H1 2019 from 53% for 2015. Supported by its focus on health insurance (56% of first year premium (FYP) in H1 2019) and policies with a policy term of more than 10 years (51%), NCI delivered resilient 12% total premium growth in 2018, outpacing the 1% growth rate of the industry.

While its total number of agents has been growing slower than that at its major peers, productivity has been increasing. Specifically, the insurer had around 140,000 qualified agents at the end of June 2019. The number of these agents and the monthly FYP per qualified agent have also been gradually increasing over the past few years.

NCI's profitability has been improving steadily, with return on capital (ROC) trending up and a five-year average of 9% for 2013-18. Although the value of new business (VONB) margin declined by 12.5 percentage point year-on-year to 38% for H1 2019, amid intensifying pricing competition, this decline followed a robust 59% growth of VONB between 2015 and 2018, supported by growth in long-term protection-type products. In addition, the insurer delivered largely stable investment returns at least above 4.6% for the past five years, owing to the high proportion of fixed-income investments in its portfolio.

The affirmation of the rating also reflects the insurer's established market franchise and diversified product mix. It also has strong capital adequacy, with sustained growth in capitalization over the past few years. NCI has maintained one of the highest solvency ratios among the major peers — registering a strong comprehensive solvency margin ratio of 290% at the end of June 2019 — under China Risk Oriented Solvency System (C-ROSS). Its capitalization has consistently strengthened over the past few years, supported by strong profitability and prudent dividend payouts.

Nonetheless, the insurer maintains a high exposure to non-standard assets relative to its shareholders' equity. Moody's views the credit risk associated with these exposures as manageable, given that most of its investments are issued or guaranteed by large financial institutions with minimal exposure to overcapacity sectors, such as the coal and steel industries. However, most of the non-standard assets are of short duration, between three to five years, adding to reinvestment risk and challenging its asset-liability management amid the declining interest rate environment.

Following the recent change of the chairman and Chief Executive Officer of the insurer earlier this year, NCI has been increasing its focus on asset management as a new growth driver. While this positions NCI well to capture the growing demand for long-term retirement solutions, this strategic shift will require additional investments. It is uncertain whether its management focus would shift away from its liability-driven transformation, which has been successfully implemented for the past few years. Nonetheless, the new arrangement where the roles of the chairman and Chief Executive Officer roles have been segregated will strengthen the insurer's corporate governance.

NCI's A2 IFSR incorporates a one-notch uplift from its a3 standalone credit profile, reflecting the potential government support provided through its biggest shareholder, Central Huijin, which is a state-owned investment company. Moody's believes that Central Huijin will provide support to preserve the value of the state-owned financial assets that it has invested in, including in the form of direct capital injections, in times of stress.

RATINGS DRIVERS

NCI's rating could be upgraded if (1) the quality of its underlying earnings further improves, with a lower reliance on spread income, while profitability remains stable, with return-on-capital (ROC) consistently above 10%; and (2) it continues to enhance its distribution capabilities, with a continuous high portion of premiums from the agency force, and increased agent productivity; and (3) the insurer does not deviate significantly from its strategy to focus on selling long-term protection products.

Given the positive outlook, a downgrade is unlikely. However, the outlook on the rating could return to stable if (1) there is a sharp deterioration in asset quality, with the ratio of high-risk asset exposures to shareholders' equity rising above 250% on a sustained basis; (2) its underlying profitability declines, with its ROC falling below 6% on a sustained basis; (3) the company's capital position weakens, such that its solvency ratio falls below 250% on a sustained basis; and/or (4) there is a reduction in Central Huijin's stake in NCI, resulting in turn in a lower likelihood of government support for NCI in times of stress.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Beijing, New China Life Insurance Company Ltd. offers life insurance, health insurance and accident insurance in China. At 30 June 2019, its assets and shareholders' equity totaled RMB808 billion and RMB77 billion, respectively, on a consolidated basis.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Frank Yuen, CFA
VP-Senior 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
Client Service : 852 3551 3077

Sally Yim, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 852 3758 1350
Client Service : 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
Client Service : 852 3551 3077

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