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Rating Action:

Moody's affirms Fubon Life and Fubon Financial's ratings with stable outlook

20 Dec 2017

Hong Kong, December 20, 2017 -- Moody's Investors Service has affirmed the A3 insurance financial strength rating (IFSR) of Fubon Life Insurance Co Ltd (Fubon Life) and the Baa1 issuer rating of Fubon Financial Holding Co., Ltd (Fubon Financial).

The outlook on the ratings remains stable.

The ratings and outlook of Fubon Insurance Co., Ltd. (Insurance financial strength A1, stable), Fubon Property & Casualty Insurance Co., Ltd. (Insurance financial strength A3, stable), Taipei Fubon Commercial Bank Co Ltd (TFCB, LT deposits A2 stable, baseline credit assessment baa2), Fubon Bank (China) Co., Ltd. (LT deposits Baa1 stable, baseline credit assessment ba2) and Fubon Securities Co., Ltd. (LT issuer rating Baa1 stable) are not affected by this rating action.

RATINGS RATIONALE

FUBON LIFE

The affirmation of Fubon Life's A3 IFSR reflects the insurer's strong market presence, good profitability and good liquidity profile.

Fubon Life has a track record of good profitability with an average return on capital (ROC) above 14% for the past 5 years. Moody's expects its earnings quality to further improve, with a continued decline in its average cost of liabilities. The insurer has been diversifying its distribution channels and strengthening its agency force.

This development will facilitate a further improvement in its product mix, with a higher contribution of premiums from products with longer premium terms. Nonetheless, the company's product mix is still heavily weighted towards interest-sensitive products. Hence, its source of profits will still be dependent on spread gains.

The insurer also holds a liquid investment portfolio, with only limited duration mismatches between its assets and liabilities.

These strengths are offset by Fubon Life's elevated high-risk assets (mainly equities and real estate investments) and higher leverage ratio. Its risky assets exposure has continued to rise in 2017 as the insurer increased its domestic equities holdings to achieve higher investment yields amid a low interest rate environment. In addition, Fubon Life has been increasing its overseas investments, which expose it to higher foreign currency risk. While most of this exposure is hedged, the recent increase in hedging costs has affected its profitability.

The insurer's risk-based capital (RBC) ratio was solid at 284% at the end of June 2017, but its underlying capitalization has been sensitive to volatility in the capital markets, owing to revaluation gains on its available-for-sale securities.

Fubon Life's rating could be upgraded if: (1) its RBC ratio above 350% and adjusted capital to assets ratio above 8% on a sustained basis; or (2) its product mix becomes less spread-dependent with a further decline in its average cost of liabilities; or (3) its exposure to high-risk assets falls below 150% of its shareholders' equity on a sustained basis.

Fubon Life's rating could be downgraded if: (1) its profitability erodes, with its ROC below 8% on a consistent basis; or (2) its high-risk asset exposure rises above 350% on a sustained basis; or (3) its capital strength substantially deteriorates, with its adjusted capital to assets ratio below 4% and local RBC ratio below 250%; or (4) Fubon Financial's adjusted financial leverage materially rises above 30% and earnings coverage falls below 8.0x.

FUBON FINANCIAL

The affirmation of Fubon Financial's Baa1 issuer rating reflects the consideration that the credit profiles of the company's insurance, banking and securities subsidiaries remain solid, and that its domestic subsidiaries in Taiwan have very strong franchises. The company's financial leverage, double leverage and earnings coverage ratios are still within our expectations for the current rating level. Liquidity at Fubon Financial and its major subsidiaries also remains adequate.

Fubon Financial's financial leverage gradually increased from 13.8% in 2012 to 23.3% in 2016, partly due to the issuance of preference shares of TWD36 billion in 2016. In addition, Fubon Financial has planned for another round of issuance of preference shares of TWD40 billion in 2018.

The issuances will decrease its earnings coverage to around 10x on a pro forma basis (assuming all things equal) from 23.1x in 2016, but will also lower its double leverage ratio as these securities contain equity-like features. We note that the proceeds of the issuances would be used to strengthen the capitalization of its subsidiaries.

Fubon Financial's issuer rating also reflects the aggregate weighted-average financial strength of its main subsidiaries and the structural subordination of the holding company to its operating subsidiaries. The rating also incorporates some degree of potential government support for TFCB.

An upgrade of the financial strength ratings of its key operating subsidiaries, mainly Fubon Life and TFCB, could lead to an upgrade of Fubon Financial's rating.

Fubon Financial's rating could be downgraded if: (1) the ratings of its key operating subsidiaries, in particular Fubon Life or TFCB, are downgraded; (2) its financial leverage ratio rises substantially above 30% and earnings coverage falls below 8x on a sustained basis; or (3) its business mix of life and non-life insurance and banking operations becomes less diversified; or (4) it engages in significant acquisitions or expansion that significantly strain the holding company's financial profile.

PRINCIPAL METHODOLOGIES

The principal methodologies used in rating Fubon Financial Holding Co., Ltd were Global Life Insurers published in April 2016, Banks published in September 2017, and Global Property and Casualty Insurers published in May 2017. The principal methodology used in rating Fubon Life Insurance Co Ltd was Global Life Insurers published in April 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Fubon Life Insurance Co Ltd is the second-largest life insurer in Taiwan. As of 30 September 2017, its total assets stood at TWD3.6 trillion and shareholders' equity was TWD258.7 billion.

Fubon Financial Holding Co., Ltd., listed on the Taiwan Stock Exchange, is one of the largest financial holding companies in Taiwan. As of 30 September 2017, its total assets and shareholders' equity (on a consolidated basis) were TWD6.7 trillion and TWD471.8 billion, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Wing Kei Frank Yuen
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Yat Man Sally Yim
Senior Vice President
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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