Hong Kong, June 11, 2010 -- Correction to text as follows: substitute 7.9% for
9.7% in sixteenth paragraph, first sentence,
"Cathay Century achieved a return on capital of..."
Revised release follows.
Moody's Investors Service has downgraded to A3 from A2 the insurance financial
strength (IFS) rating on Cathay Life Insurance Co Ltd. The outlook
of the rating remains negative.
Moody's has also affirmed the Baa1 issuer rating on Cathay Financial Holding
Co Ltd and maintained its negative outlook.
In addition, Moody's has affirmed the A2 IFS rating on Cathay Century
Insurance Co Ltd and changed the outlook to stable from negative.
CATHAY LIFE INSURANCE CO LTD
"The downgrade to Cathay Life was driven mainly by its weak capitalization,
its high income volatility, and its weak profitability over the
past 18 months. Cathay Life's financial profile is weaker than
most of its other "A" peers," says Sally Yim, a Moody's VP/Senior
Cathay Life's capitalization continues to be weak for its rating category,
as measured by Moody's ratio of adjusted capital to total assets of 3.2%
at end-2009. While there was some improvement in 2009,
this was due mostly to a recovery of the stock market --
which has since reversed -- rather than concrete actions
by the company to strengthen its equity base.
Moreover, because of its weak profitability in 1Q2010 and the recent
fluctuations in the equity market, its local regulatory RBC (Risk-based
capital) ratio declined to a level that is not significantly above the
regulatory minimum at end-May 2010. Hence, its weak
capital base provides a very limited cushion for Cathay Life in the event
of stress, such as a significant correction in the equity or fixed
Since Cathay Life's profitability remains weak, its organic capital
growth will be limited. Moody's believes that, because of
the company's high asset leverage (as measured by the ratio of equity
investments to capital), its capitalization will fluctuate considerably,
in tandem with fluctuations in the securities markets.
Cathay Life has a certain amount of real estate revaluation gains that
it has not recognized on its balance sheet as capital. While Moody's
believes that these could provide some cushion to its capitalization,
we are mindful of the liquidity and pricing risk associated with this
In addition, Cathay Life reported a net loss (unconsolidated) of
NTD4.0 billion in 1Q2010, compared to net income of NTD3.6
billion in 1Q2009. Some of the decline was driven by higher hedging
costs for the company's overseas investment portfolio. This highlights
Cathay Life's significant exposure to foreign exchange risk.
Given the large size of its investment portfolio, Moody's notes
that Cathay Life has some inflexibility with regard to managing its foreign
exchange risk exposures.
Cathay Life continues to enjoy a very strong franchise as the largest
life insurance company in Taiwan, a key support for its A3 rating.
However, Moody's continues to carry a negative outlook on Cathay
Life's rating to reflect our concerns that it does not have a clear strategy
for restoring its capital to a level more in line with the rating.
CATHAY FINANCIAL HOLDING CO LTD (CFHC)
"Moody's affirmation of CFHC's Baa1 issuer rating is based on group's
increased diversification in earnings, mainly attributed to the
earnings growth at Cathay United Bank. This diversification has
become more beneficial to CFHC, considering the weaknesses in capital
and profitability at Cathay Life," says Yim.
"The affirmation also considered the strong franchise and brand recognition
of CFHC, its reasonable double leverage and its good earnings coverage
of interest," says Yim.
The outlook on CFHC is negative, reflecting the negative pressure
on the group's capitalization, earnings power and financial flexibility
because of weakness at Cathay Life.
CATHAY CENTURY INSURANCE CO LTD
"Moody's has changed Cathay Century's rating outlook to stable in light
of the improvement in profitability, as well as its strong capitalization,"
Because of an increase in realized investment gains and good underwriting
results, Cathay Century achieved a return on capital of 7.9%
in 2009, up from 5.2% in 2008. Even though
its higher combined ratio was 89.4% in 2009 --
for a 4.7 point increase over 2008 due to higher catastrophe-related
losses -- it was still favorable given the company's product
Furthermore, the asset quality of Cathay Century's secured loan
portfolio has held up well over the past year. Its delinquency
rate was very low in 2009 and 1Q2010, and hence did not adversely
affect the company's profitability.
Because of the improvement in profitability and an increase in unrealized
investment gains, Cathay Century's capitalization was still strong,
with an RBC ratio above 400% at end-2009. Its 2009
adjusted gross underwriting leverage of 1.5x was also favorable
compared to global peers.
The affirmation of Cathay Century's A2 IFS rating also takes into account
the company's solid market position, stable business growth through
crossing-selling by Cathay Life's agents, and short-tail
product risk profile.
Nonetheless, in light of the weak capital position of Cathay Life,
any substantial dividend payout or significant de-capitalization
plans from Cathay Century to support its life affiliate's capital needs
would be negative for its rating.
The following rating has been downgraded with a negative outlook:
Cathay Life Insurance Co Ltd -- insurance financial strength
rating to A3 from A2.
The following rating has been affirmed with a negative outlook:
Cathay Financial Holding Co Ltd -- issuer rating at Baa1.
The following rating have been affirmed with outlook changed to stable
Cathay Century Insurance Co Ltd -- insurance financial strength
rating at A2.
PREVIOUS RATING ACTIONS AND RATING METHODOLOGIES
Moody's last rating actions with respect to Cathay Life, CFHC and
Cathay Century were taken on March 23, 2009.
The principal methodologies used in rating Cathay Life and Cathay Century
are "Moody's Global Rating Methodology for Life Insurers" and "Moody's
Global Rating Methodology for Property & Casualty Insurers,"
published in May 2010.
The principal methodology used in rating CFHC is "Taiwanese Financial
Holding Companies: Moody's Rating Approach and Outlook", published
in February 2003.
These are available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating these companies can also be found in the Rating Methodologies
sub-directory on Moody's website.
Cathay Life Insurance Co Ltd is the largest life insurance company in
Taiwan. Its total assets came to NTD2.8 trillion,
its shareholders' equity, NTD102.9 billion, as of March
31, 2010 (both on an unconsolidated basis).
Cathay Financial Holding Co Ltd, based in Taiwan and listed on the
Taiwan Stock Exchange, is one of the island's largest financial
holding companies. Its consolidated total assets amounted to NTD4.3
trillion at March 31, 2010.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Christine S. Kuo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Correction to Text, June 11, 2010 Release: Moody's takes rating actions on Cathay FHC and insurance subs