December 8, 2016 / 1:07 AM / 7 months ago

Fitch: Low Interest Rates Pressure China Life Insurers' Profitability

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: 2017 Outlook: China Life Insurers here HONG KONG, December 07 (Fitch) The low interest rates in China place pressure on the profitability of life insurers, which rely on interest spreads for profits, Fitch Ratings says in a new report. Chinese life insurers have priced insurance policies more aggressively following the China Insurance Regulatory Commission's (CIRC) full removal of the 2.5% cap on guaranteed returns for policyholders, effective October 2015. This may squeeze their spreads further. The insurers have shifted to investing in riskier assets to sustain investment yields. This makes their credit profiles more vulnerable to unfavourable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown. Alternative investments (including debt investment plans, project asset-backed plans, trust schemes, and wealth management products), long-term equities, properties and overseas investments account for larger shares of Chinese life insurers' assets. Alternative investments are generally less liquid than straight bonds, and are focused on the infrastructure and real estate sectors. The CIRC's crackdown on high cash-value products will constrain the life sector's premium growth in 2017 and pose challenges to Chinese life insurers' liquidity management. Pressure will be more pronounced for insurers exposed to significant asset-liability duration mismatches. These insurers mainly source revenues from short-term insurance policies while allocating assets to investments with long horizons. Liquidity strain can be significant if they are unable to sustain sufficient new premiums for insurance claims or payments. Fitch is maintaining its Rating and Sector Outlooks at Stable for the Chinese life insurance sector as it believes that the insurers' ratings are support by resilient market positions, adequate capitalisation and external funding capabilities. Earnings volatility, asset risks and fierce competition among insurers to sell homogenous, savings-type products are key rating constraints. The report, "2017 Outlook: China Life Insurers", is available at www.fitchratings.com or by clicking on the link in this media release. Contacts: Joyce Huang Director +852 2263 9595 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Terrence Wong Director +852 2263 9920 Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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