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Rating Action:

Moody's downgrades Union Life's IFSR to Ba1 and senior debt to Ba3, changes outlook to negative

 The document has been translated in other languages

31 July 2020

Hong Kong , July 31, 2020 - Moody's Investors Service has downgraded the insurance financial strength rating (IFSR) of Union Life Insurance Co., Ltd (Union Life) to Ba1 from Baa3.

At the same time, Moody's has downgraded Union Life's senior unsecured debt rating to Ba3 from Ba1.

The entity-level outlook has been revised to negative from ratings under review.

This rating action concludes the review initiated on 22 April 2020.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. It has affected Union Life, given its elevated risky asset exposure, weak capital buffer and increasing refinancing and liquidity risks. Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Today's action reflects the impact of the breadth and severity of the shock on Union Life, and the deterioration in credit quality it has triggered.

The downgrade of Union Life's IFSR and senior debt rating reflect the insurer's increased exposure to non-standard assets relative to its capital base with material credit and concentration risks, which has further eroded its already weakening capital position. The downgrade also reflects its increasing refinancing and liquidity risks given its maturing debt in September 2021. In addition, the potential increase in impairment charges from its risky asset exposure could continue to pressure its relatively weak solvency ratio.

Union Life has significant exposure to alternative investments. In particular, its exposure to trust products has increased over the past two years, with some of the underlying assets comprising loans for financing its real estate projects. Some of these largest investments represent material concentration risk relative to the insurer's shareholders' equity. The risk of these investments is evident in the material impairment charges taken by the insurer in 2019 and H1 2020 for its investments in trust products that have defaulted.

In addition, the insurer's solvency has declined in recent years and has been weak, to 165% at the end of Q1 2020 from 175% at the end of 2019. Moody's expects it to remain under pressure given the low interest rate environment and higher capital charges from its increasing exposure on risky assets. The insurer's subdued and volatile earnings have constrained its capital replenishment over the past few years.

Furthermore, Union Life has made limited progress in introducing new strategic investors to boost its capitalization. Moody's expects the insurer would rely on debt issuance to replenish its capital, which would further increase its financial leverage

Its Ba1 IFSR reflects high proportion of renewal premiums, which helps stabilize Union Life's premium income. The insurer has also continued its efforts to improve its product mix and profitability, although weak economic growth and intense competition will slow the pace of improvement. Even though Union Life is headquartered in Wuhan, Union Life's exposure to the city in terms of premium income is not particularly high. While Moody's expects the direct financial impact from the increase in claims from the coronavirus outbreak will be manageable, the subsequent business disruption to the insurance industry could slow down the insurer's new business sales in 2020 while the slowdown of China's economic activity could further weaken the asset quality of its investments.

Moody's has downgraded Union Life's senior unsecured debt rating to Ba3, positioning it two notches below its Ba1 IFSR. Moody's widened the notching between the IFSR and the senior debt rating, compared to the standard one-notch spread, reflecting the subordination of senior unsecured note holders to Union Life's policyholders. The widened notching between Union Life's IFSR and its USD senior unsecured debt rating reflects Moody's expectation for the higher likelihood of a default given the absence of concrete refinancing or repayment plans by the insurer for its USD debt maturing in September 2021. Moody's expects market conditions will remain challenging for the insurer to refinance the debt, sell its USD assets, some of which are illiquid like real estate, and/or obtain USD funding to repay the debt. This is despite the insurer's repurchase of around 10% of its debt in April 2020.

The negative outlook reflects our expectation that Union Life's capitalization and earnings would remain weak and volatile considering its high investment risk from its increased exposure of alternative investments. In addition, there remains significant uncertainty with regards to its ability to refinance or repay its USD debt given the volatile market conditions.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, an upgrade of the ratings is unlikely. Moody's could return the outlook to stable if Union Life: (1) executes a comprehensive refinancing or repayment plan for its maturing debt, thereby reducing its refinancing risk, (2) improves its capitalization significantly, with its comprehensive solvency ratio consistently above 180%, and/or (3) materially reduces its risky asset exposure, particularly in real estate, trust plans and equity-type investments.

On the other hand, Moody's could downgrade the ratings if: (1) Union Life has no solid refinancing or repayment plan for its maturing senior unsecured debt, which will exacerbate its liquidity risk, (2) its comprehensive solvency ratio falls consistently below 150%, which could be driven by further impairment charges on investment assets, (3) its high risk asset ratio remains consistently above 450%, while the insurer maintains a high investment concentration risk, (4) its earnings coverage falls consistently below 1.0x, and/or (5) there is a significant reduction in its premium growth and profitability.

The principal methodology used in these ratings was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Union Life Insurance Co., Ltd, headquartered in Wuhan in Hubei province in China, offers traditional, participating and accident and health insurance products in China. As of the end of 2019, its total assets were RMB102.3 billion and shareholders' equity was RMB6.8 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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
MD-Financial Institutions
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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