Hong Kong, October 07, 2016 -- Moody's Investors Service has affirmed the insurance financial strength
rating (IFSR) of Cathay Century Insurance Co Ltd (Cathay Century) at A3.
At the same time, Moody's has changed the outlook on the rating
to positive from stable.
RATINGS RATIONALE
The change in outlook to positive reflects the improving trend in Cathay
Century's profitability and the expectation of a more stable loss
development trend going forward.
Cathay Century has delivered higher return on capital in the past few
years, from 3.0% in 2013 to 6.7% in
2015, underpinned by strong investment returns and stable underwriting
profit with a combined ratio of 93.2% for its business written
in Taiwan (Aa3 stable). In particular, the underwriting profits
of its major product lines, such as motor and accident & health,
have been stable and gradually improved, which partly offset the
underwriting losses in China (Aa3 negative). We expect this trend
to continue.
Moody's views the recent increase in stake by Zhejiang Ant Small
and Micro Financial Services Group Co., Ltd. (Ant
Financial, unrated) into Cathay Insurance Co., Ltd.
(China) (unrated), in which Cathay Century now would own 24.5%,
as credit positive. It will enhance its product suite and customer
reach by leveraging the Internet platform and databases of Ant Financial,
thereby increasing its profitable growth prospects in the country.
Cathay Century's level of adverse loss development has reduced in the
past few years. Moody's expects the firm's loss development
trend to stabilize on the back of its increasing focus on personal lines
such as motor and accident, which have short-tail risk profiles.
The firm also has a comprehensive reinsurance arrangement in place and
sizable special reserves that have strengthened its reserve adequacy against
catastrophic risks.
The affirmation of Cathay Century's A3 rating reflects its low-risk
product mix, comprising mostly short-tail business.
While the firm's investment portfolio carried a moderate level of
risk due to its equity exposure, the liquidity risk is largely mitigated
by its very high cash ratio, at 31% of total investments
at end-2015.
As a wholly-owned property & casualty insurance subsidiary
of Cathay Financial Holding Co., Ltd (issuer rating Baa2
stable), Cathay Century enjoys a strong brand, and a well-established
franchise with support from Cathay Life Insurance Co., Ltd
(Cathay Life, financial strength Baa1 stable) whose agent channels
contributed 55% of Cathay Century's gross premiums written
in 2015.
These strengths are partially offset by its high expense ratio relative
to global peers with a similar product mix, considering the granular
and commoditized nature of its business amid a very competitive industry.
In addition, even though Cathay Century remains well capitalized,
its gross underwriting leverage ratio increased to 3.3x at end-2015
as a result of strong premium growth. The capital needs of Cathay
Financial's overseas expansion strategy -- specifically
with regard to Cathay United Bank Co., Ltd (deposits A2 stable,
BCA baa2) and Cathay Life -- could also pressure on Cathay
Century's financial flexibility.
RATING DRIVERS
Cathay Century's rating could be upgraded if it: (1) significantly
improves its profitability with return on capital above 6% and
combined ratio of its Taiwan portfolio below 95% on a sustained
basis; (2) consistently reports a more stable loss reserve development
trend; and/or (3) maintains its gross underwriting leverage at around
the current level.
On the other hand, the rating outlook could return to stable if:
(1) the company's capitalization weakens, with gross underwriting
leverage consistently above 4x, which could be driven by catastrophe
losses; (2) its profitability deteriorates, with the combined
ratio of its Taiwan book consistently above 100%; (3) there
is a significant adverse loss reserve development; and/or (4) the
ratings of other subsidiaries are downgraded, as a weakening in
the credit profiles of one or more of its affiliates could raise contagion
risk.
The principal methodology used in this rating was Global Property and
Casualty Insurers published in June 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Cathay Century Insurance Co Ltd is the second largest non-life
insurer in Taiwan with a market share of 13.3% by gross
premiums as of FY2015. It is 100% owned by its parent,
Cathay Financial Holding Co., Ltd, a holding company
of subsidiaries with life insurance, banking and other financial
services operations primarily in Taiwan, Mainland China and Hong
Kong. As of end-June 2016, Cathay Century reported
total assets and shareholders' equity of TWD45.0 billion
and TWD7.7 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
SUBSCRIBERS: (852) 3551-3077
Sally Yim
Senior Vice President
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
