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Announcement:

Moody's changes Chung Kuo Insurance's rating outlook to stable

Global Credit Research - 22 Nov 2010

Hong Kong, November 22, 2010 -- Moody's Investors Service has affirmed its A3 insurance financial rating on Chung Kuo Insurance Co Ltd (CKI) and changed the outlook to stable from negative.

"The change in outlook to stable reflects CKI's strong, restored capitalization, which improved from NT$4.1 billion at end-2008 to NT$4.7 billion as of end-September 2010," says Sally Yim, Moody's Vice President/Senior Analyst.

"The improvement was attributable mainly to a recovery in the value of the company's equity investments and hence a reduction of unrealized losses, in addition to organic capital growth resulting from satisfactory profitability in 2009."

"The stable outlook also takes into account CKI's very conservative investment portfolio, with over 70% of its total investments in cash and cash equivalents and a low proportion of equity investments," says Yim.

"Hence, the impact of investment volatility on capitalization is low."

Furthermore, the rating incorporates a certain amount of implicit support from CKI's parent Mega Financial Holding Company Ltd (issuer rating A3, stable). CKI will thus have access to liquidity or capital in the event of stress, which allows it good financial flexibility.

Nonetheless, CKI's profitability was very poor for the first ten months of 2010, as the company recorded a net loss of NT$96.6 million (unaudited), mostly because of a number of large underwriting losses due to industrial fires, as well as catastrophes such as the Jiaxian earthquake and Typhoon Fanapi.

Although a number of its domestic peers also suffered large underwriting losses, CKI's profitability was weaker due to the concentration in underwriting large commercial fire risk and lower investment income. Given CKI's underwriting and investment profiles, Moody's believes that external reinsurance coverage is crucial for protecting the company's capitalization and profitability.

Given CKI's current market position and weak profitability, Moody's sees little likelihood of an upgrade over the near term to medium term.

However, if CKI's profitability were to improve significantly (for a net combined ratio consistently below 95% and adjusted return on capital consistently above 8%) and its market position strengthens (for a relative market share ratio above 0.7x), the rating could be upgraded.

The rating could be downgraded on (1) a significant decline in its capitalization, with gross underwriting leverage above 2x; (2) a significant loss of external reinsurance coverage; or (3) a more aggressive investment strategy with high risk assets rising above 40% of shareholders' equity (including special reserves).

Previous Rating Action & Methodology

The last rating action on CKI took place on June 2, 2009, when Moody's changed the rating outlook to negative from stable.

The principal methodology used in rating CKI is "Moody's Global Rating Methodology for Property & Casualty Insurers," published in May 2010.

Chung Kuo Insurance Co Ltd, headquartered in Taipei, is the property & casualty insurance subsidiary of Mega Financial Holding Co Ltd. As of September 30, 2010, its shareholders' equity was NT$ 4.7 billion, and its total assets were NT$ 15.1 billion.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, please visit www.moodys.com/insurance.

Hong Kong
Sally Yim
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Singapore
Deborah Schuler
Senior Vice President
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)

Moody's changes Chung Kuo Insurance's rating outlook to stable
No Related Data.
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