Fitch Ratings has revised the Outlook on BOCOM MSIG Life Insurance Company Limited's Insurer Financial Strength (IFS) Rating to Negative from Stable, and affirmed the rating at 'A' (Strong).

Key Rating Drivers

Outlook Revision: The Negative Outlook reflects BOCOM MSIG Life's weakened risk-based capitalisation and leverage. An increasing exposure to risky assets, mainly stocks and equity-type investments, weighs on its capital strength, as measured by the Fitch Prism Model. The risk-based capital score was lowered to the 'Adequate' level at end-1H22 from the 'Strong' level at end-2021. The comprehensive solvency ratio stood at 207% as of end-2Q22, following CNY4.8 billion of capital supplementary bonds issued in 2021. The financial leverage ratio of 38% was above the guideline for IFS 'A' rated insurers.

High Risky Assets Ratio: BOCOM MSIG Life's increasing equity-type investments makes its earnings and capitalisation more vulnerable to weak and volatile equity market. The risky assets, with adjustment for loss sharing of the participating life business, were equivalent to 146% of shareholders' equity at end-2021, escalating from 76% at end-2020. Fitch expects the ratio to stay high in the near term.

Strong Parental Support: The rating affirmation takes into consideration BOCOM MSIG Life's operational and financial support from Bank of Communications Co., Ltd. (BOCOM, A/Stable), which owns 62.5% of the insurer. The remaining 37.5% stake is held by MS&AD Insurance Group Holdings. BOCOM MSIG Life's is rated one notch above its standalone credit quality, reflecting our expectation that BOCOM will continue to support its only life insurance subsidiary.

Resilient Financial Performance with Challenges: Fitch assesses the insurer's financial performance as 'Strong', underpinned by an average return on equity (ROE) of 9.4% during 2019-2021 (2021: 11.5%). The insurer reported a spread loss in 1H22 amid unfavourable investment environment. Profitability has been largely reliant on investment returns, considering single-pay savings premiums continue to drive its new business growth. Single premium accounted for 81% of new business premiums, up from 73% in 1H21.

We expect BOCOM MSIG Life's earnings to be challenged in the volatile investment environment. The new business value margin by annual premium equivalent fell, even though sales of single-pay savings products through bancassurance increased. These savings products carry low margins.

'Moderate' Company Profile: This reflects a 'Moderate' business profile and a 'Moderate/Favourable' corporate governance compared with that of other life insurers in China. BOCOM MSIG Life has a moderate operating scale and an adequate business franchise. The insurer benefits from tapping BOCOM'S established distribution network with bancassurance generating 97% of its premiums in 2021, despite limited channel diversity. Its business risk profile makes it sensitive to interest-rate movements, which could lead to higher surrender risk.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on BOCOM, or a significant change in the shareholding structure that results in the bank losing its controlling stake in the insurer;

Fitch's view of support from BOCOM has diminished;

Failure in improving its Fitch Prism Model score to the 'Strong' category, as a result of a continual rise in the Fitch-calculated risky asset ratio;

The financial leverage ratio is consistently above 35%;

Weakening profitability, such that ROE is below 6% on a sustained basis.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch Prism Model score sustained well into the 'Very Strong' category or higher, and the financial leverage ratio consistently below 28%;

Stronger profitability, including ROE persistently above 8% alongside a consistent and substantial increase in new business margin;

A significant improvement in the company profile, including more balanced premium mix and distribution capabilities.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

BOCOM MSIG Life Insurance Company Limited

Ins Fin Str

A

Affirmed

A

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

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