Fitch Ratings has affirmed China Life Insurance Company Limited's Insurer Financial Strength (IFS) Rating at 'A+' (Strong) and Long-Term Issuer Default Rating (IDR) at 'A'.

The Outlook is Stable.

The affirmation reflects China Life's standalone credit quality of 'a+', driven by the insurer's 'Most Favourable' company profile, 'Strong' capitalisation and leverage, and 'Very Strong' financial performance record. This is despite weaker earnings in 1H22 due to challenging insurance industry conditions as well as a weak and volatile equity market. The rating also reflects the ownership by the Chinese government (A+/Stable).

Key Rating Drivers

State Ownership: Fitch regards the ownership of China Life as positive for its IFS Rating. We believe there is a high probability of the Chinese government providing financial or operational support in times of stress. This considers China Life's effective ownership by the Ministry of Finance through its majority shareholder, China Life Insurance (Group) Company, its large policyholder base and significant role in China's insurance sector. Our perception of government support eases any pressure on China Life's standalone credit fundamentals, if any.

Resilient Financial Results: Fitch assesses China Life's profitability as 'Very Strong' in view of the average return on equity (ROE) of 13% in 2019-2021 (2021: 11%), although the net profit attributable to equity holders fell by 38% yoy in 1H22. This was mainly because of lower spread income of available-for-sale stock investments.

New business value (NBV) was 13.8% lower than in 1H21, as the insurer scaled down the sales force of its individual agency business. The NBV margin from this channel contracted to 30.4%, from 36.5%, by annual premium equivalent, yet outperformed some major life peers in China. Sales of single-pay saving products through bancassurance surged in 1H22 from a low base in response to market demand. However, this was not sufficient to improve NBV as the products have low margins.

Increased Investment Risk: China Life's risky assets, mainly stocks, equity-type funds and long-term equity investments, reached 2.3x of capitalisation at end-1H22. The increase in risky assets made the insurer's earnings vulnerable to rising volatility in the equity market. Its equity investment in China Guangfa Bank Co., Ltd. (IDR: BB+/Stable) made up 17.7% of total equity at end-2021, exposing the insurer to single-name concentration risk.

'Strong' Capitalisation and Leverage: The risk-based capital score was within the 'Adequate' category at end-1H22, as measured by the Fitch Prism Model. However, the buffer was thinner due to increased equity investments. The financial leverage ratio remained low, at 6.7%, and we expect it to stay well below the guideline for IFS 'A' rated insurers at end-2022. China Life's core solvency was the strongest among top-tier life peers, at 169% as of end-2Q22, under the China Risk-Oriented Solvency System phase 2, implemented in 2022. The comprehensive solvency ratio was at 236% (end-2021: 262%).

'Most Favourable' Company Profile: Fitch ranks China Life's company profile as 'Most Favourable', underpinned by a 'Most Favourable' business profile and 'Moderate/Favourable' corporate governance compared with that of other life insurers in China. The ranking reflects China Life's 'Most Favourable' operating scale, leading market position and well-diversified business and distribution in the country. The insurer has the largest agency sales force in the local industry, even though the number of agents in the individual agent business sector shrunk to 746,000 by end-1H22, from 820,000 at end-2021.

RATING SENSITIVITIES

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

An adverse change in Fitch's view of the willingness of the Chinese government to support China Life, including a significant change in the shareholding structure that results in the Ministry of Finance losing its controlling stake in China Life's majority shareholder or a downgrade of China's sovereign rating.

Diminishing perceived significance of China Life in the domestic life insurance sector, in Fitch's view.

Factors that could, individually or collectively, lead to the standalone credit quality being revised lower:

A significant rise in the Fitch-calculated risky asset ratio on a sustained basis.

Failure in maintaining the insurer's Prism Model score well within the 'Adequate' category.

Weakening in profitability, with ROE consistently below 8%.

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

An upgrade of China's sovereign rating.

Factors that could, individually or collectively, lead to the standalone credit quality being revised higher:

A sustained improvement in capital strength, with China Life's Prism Model score within the 'Very Strong' category or higher.

A significant improvement in the company profile in terms of greater geographical diversification in overseas markets, alongside strengthening in or maintenance of ROE.

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

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