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Fitch Ratings-Taipei/Singapore-11 August 2009: Fitch Ratings has today downgraded Taiwan's China Life Insurance Co Ltd's (China Life) Insurer Financial Strength (IFS) rating to 'BB+' from 'BBB-' and its National IFS to 'A-(twn)' from 'A(twn)' and removed the ratings from Rating Watch Negative. The Outlook is Negative.
The rating downgrades and Negative Outlook on China Life primarily reflect the additional strain on the company's capitalisation from the acquisition of PCA Life Assurance Co Ltd's (PCA Life, Prudential Plc's Taiwan subsidiary) in-force policies with guaranteed rates substantially higher than current market interest rates. The rating actions also reflect Fitch's view of the greater challenges (including the extremely low TWD interest rates and potentially high volatility of the stock markets) Taiwanese life insurers are likely to face over the next few years under a more difficult economic environment.
China Life announced in February 2009 that it would acquire PCA Life's core assets (around TWD190bn) and liabilities for a nominal consideration of TWD1.00, and completed the transaction in June 2009. Based on International Financial Reporting Standard 4 (the Taiwanese regulator plans to implement phase 1 of the Standard in 2011), the acquisition would pose significant capital pressure given the high guaranteed rates offered in PCA Life's legacy policies. As PCA Life mainly allocated its assets in low-yield (but low-risk) government bonds, Fitch expects the negative interest spread carried on PCA Life's insurance policies to weigh on the combined entity's profitability in 2009, and likely in 2010. China Life plans to reallocate the acquired assets mainly overseas to improve investment returns.
On the other hand, Fitch views the acquisition of PCA Life as positive in enhancing China Life's franchise and business diversification in light of the former's expertise in selling investment-linked products. Cost synergies arising from the consolidation could be significant, although there would be execution risks associated with the process.
On a standalone basis, China Life's capitalisation has been restored to an adequate level in H109, thanks to the capital injection of TWD2bn in Q109, its resilient earnings performance and the strong rebound of Taiwan's stock market.
China Life has demonstrated strong discipline in controlling credit and currency risks and successfully enhanced its investment returns through offshore investments. Despite the challenging environment, the company reported a net profit of TWD1.1bn (compared with a net loss of TWD3.1bn for the overall life sector) and an annualised ROA of 1.4% in Q109. Nonetheless, Fitch remains concerned about the sensitivity of China Life's capitalisation to the valuation changes of its equity investments, although the enlarged capital base following the acquisition of PCA Life will dilute the impact to some extent.
Contacts: Joyce Huang, Jonathan Lee, Taipei, Tel: +886 2 8175 7600.
Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6796 7215,
Email:
shivani.sundralingam@fitchratings.com.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable.
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