Hong Kong, December 20, 2017 -- Moody's Investors Service has affirmed the Baa1 insurance financial
strength rating (IFSR) of Cathay Life Insurance Co., Ltd
(Cathay Life), and the Baa2 issuer rating of Cathay Financial Holding
Co., Ltd (Cathay Financial).
At the same time, Moody's has changed the outlook on both
Cathay Life's and Cathay Financial's ratings to positive from
stable.
The ratings and outlook of Cathay Century Insurance Co Ltd (Insurance
financial strength A3, positive) and Cathay United Bank Co.,
Ltd (Cathay United Bank, LT deposits A2 stable, baseline credit
assessment baa2) are not affected by this rating action.
RATINGS RATIONALE
CATHAY LIFE
The positive outlook on Cathay Life reflects Moody's expectation
that the insurer's profitability will improve, driven by its increasing
focus on non-spread-dependent products, a declining
average cost of liabilities, and a lower expense ratio.
Its 5-year average return on capital (ROC) improved to 7.3%
in 2016 from 5.8% in 2015. The stability of its profitability
has also improved, with its Sharpe ratio of ROC rising to 209%
from 123% over the same period.
We expect the improvement to continue, given the insurer's
continued focus on traditional life regular-pay policies with longer
premium terms and investment-linked products, which generate
higher margins and stronger insurance fee income.
This will support a consistent 5-10-basis-point year-on-year
decline in its cost of liabilities, which stood at 4.14%
at the end of September 2017. In addition, the insurer has
continued to demonstrate good cost controls, which lowered its expense
ratio to 8.6% for the first nine months of 2017 from 10.1%
a year ago.
Cathay Life has also maintained a solid capital position with its risk-based
capital (RBC) ratio at 308% at the end of June 2017, well
above the regulatory minimum. Its adjusted capital-to-total
assets ratio gradually rose to 5.4% (6.0%
if excluding separate account assets) at the end of June 2017 from 5.1%
(5.6% if excluding separate account assets) at year-end
2015. Moody's expects the insurer's improving earnings
prospects and its increasing focus on investment-linked policies
to also help its capitalization.
The affirmation of Cathay Life's Baa1 IFSR reflects the structural
improvement in its profitability, its solid capital position,
and its strong and stable business profile.
These strengths are offset by Cathay Life's elevated high-risk
asset leverage when compared with global peers. Cathay Life has
invested in high-risk assets, mainly real estate and equities,
with a relatively high concentration in several large Taiwanese corporates,
even though these stocks provide stable dividend income. Therefore,
Cathay Life's balance sheet strength is closely tied to the performance
of the domestic equity markets.
Furthermore, Cathay Life faces significant foreign-exchange
risk from the unhedged portion of its overseas investment portfolio,
although the situation is partly mitigated by its foreign currency reserves.
Cathay Life's rating could be upgraded if: (1) its earnings stabilize
with ROC consistently above 8%; or (2) its local RBC ratio
stays above 300% and the ratio of adjusted capital to total assets
exceeds 5.5% (6% if excluding separate account assets)
on a sustained basis; or (3) its product mix continues to improve,
with a higher portion of regular-premium products, while
its average cost of liabilities continues to decline.
However, the rating outlook could return to stable if: (1)
its profitability erodes with ROC below 5% on a consistent basis;
or (2) its local RBC ratio stays below 250% and the ratio of adjusted
capital to total assets falls below 5.0% (5.5%
if excluding separate account assets) on a sustained basis; or (3)
the insurer engages in material acquisitions, which significantly
weakens its capital strength; or (4) its adjusted financial leverage
increases to above 30% on a sustained basis.
CATHAY FINANCIAL
The change of Cathay Financial's rating outlook to positive reflects the
change of positive outlook for Cathay Life -- the group's
largest subsidiary as measured by assets, shareholders' equity and
net income.
The affirmation of Cathay Financial's Baa2 issuer rating reflects
the consideration that the credit profiles of its major subsidiaries,
including Cathay Life, Cathay Century and Cathay United Bank,
remain solid, and that these subsidiaries have very strong franchises
in the domestic market in Taiwan.
Cathay Financial also maintained a moderate level of financial leverage
of 14.6% at the end of June 2017, with widening interest
coverage over the past few years.
With a relatively low adjusted double leverage ratio of 111% at
the end of June 2017, Cathay Financial and its subsidiaries have
demonstrated good access to the domestic capital markets, having
issued long-term securities at relatively low costs of 3%-4%
over the past two years. Liquidity at Cathay Financial and its
major subsidiaries remains adequate.
Cathay Financial's rating reflects the aggregate weighted-average
financial strength of its main subsidiaries and also the structural subordination
of the holding company to its operating subsidiaries. Our rating
also incorporates certain degrees of government support for Cathay United
Bank, which has a well-established franchise and sizable
market share of loans and deposits in a mature market.
Moody's expects Cathay Financial to continue to manage its dividend policy
prudently so as to maintain adequate capital at its subsidiaries and at
the holding company level.
An upgrade of the financial strength ratings of its key operating subsidiaries,
mainly Cathay Life and Cathay United Bank, could lead to an upgrade
of Cathay Financial's rating.
However, the rating outlook could return to stable if: (1)
the outlook on Cathay Life's rating returns to stable from positive;
(2) Cathay Financial's financial leverage rises above 30%,
and its double leverage -- including preferred stock investments
in subsidiaries -- exceeds 115% on a consistent basis;
or (3) Cathay Financial engages in significant acquisitions or expansion
that would put significant negative pressure on the Group's financial
profile; or (4) its business mix of life and non-life insurance
and banking operations becomes less diversified.
PRINCIPAL METHODOLOGIES
The principal methodologies used in rating Cathay 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 Cathay 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 this methodology.
Cathay Life Insurance Co., Ltd is the largest life insurer
in Taiwan. As of 30 September 2017, its total assets stood
at TWD6.0 trillion and shareholders' equity was TWD428.8
billion.
Cathay Financial Holding Co., Ltd, listed on the Taiwan
Stock Exchange, is one of largest financial holding companies in
Taiwan. As of 30 September 2017, its total assets and shareholders'
equity (on a consolidated basis) were TWD8.7 trillion and TWD593.7
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
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
