Hong Kong, January 19, 2012 -- Moody's Investors Service has changed the outlook of the A1 insurance
financial strength (IFS) rating of Fubon Insurance Co, Ltd (Fubon
Insurance) to negative from stable.
In addition, Moody's has affirmed A3 the IFS rating on Fubon
Life Insurance Co, Ltd (Fubon Life) and the Baa1 issuer rating of
Fubon Financial Holding Co Ltd (FFHC) with a stable outlook.
This action does not affect the ratings and outlook of Taipei Fubon Commercial
Bank Co Ltd and Fubon Securities Co Ltd.
RATINGS RATIONALE
FUBON INSURANCE CO LTD (Fubon Insurance)
The rating action follows the announcement of a proposed repatriation
of NTD 5 billion from Fubon Insurance to its parent, FFHC,
and which is to be completed during Jan-Mar 2012 and is currently
pending regulatory approval.
The outlook revision reflects the expected weakening in the absolute capitalization
level of Fubon Insurance following this proposed capital reduction.
FFHC plans to use the funds to support growth at Fubon Life.
The NTD 5 billion represents 22.5% of Fubon Insurance's
consolidated shareholders' equity at June 30, 2011.
Moreover, Fubon Insurance's local risk-based capital
ratio is estimated to, as a result, decline significantly
to about 450% from 606% at end-2010. Meanwhile,
pro forma gross underwriting leverage (GUL) for 2011 would rise to 1.4x,
compared to 1.0x for the prior year, although this new expected
level would still be conservative.
Moody's notes that Fubon Insurance's combined ratio has trended
upwards during past years, notwithstanding the fact that its underwriting
performance is considered good.
In fact, its combined ratio is anticipated to have increased to
92% for 2011 from 84% for 2008, mainly driven by a
higher loss ratio. In view of the modest 3%-4%
business growth expected in the foreseeable future, continued rate
liberalization in Taiwan, and ongoing competition, Moody's
believes that Fubon Insurance's underwriting margin is likely to
remain under pressure.
Fubon Insurance maintains a relatively high level of holdings in equity
and real estate investments, accounting for more than 40%
of total invested assets as of 1H 2011. Moreover, its equity
portfolio is somewhat concentrated in certain large Taiwanese corporates.
Partially offsetting these negative factors are Fubon Insurance's
excellent and well-established business profile, along with
its good product diversification with its short-tail focus.
Fubon Insurance is the market leader in the local property & casualty
insurance sector, supported by a diversified distribution network.
Furthermore, as a wholly-owned subsidiary of FFHC,
one of the largest financial holding companies in Taiwan, Fubon
Insurance benefits from operational synergies, including business
generation and risk management.
For the outlook to return to stable, Fubon Insurance will have to
enhance its capitalization -- while keeping GUL below 1.3x
-- and avoid any further deterioration in its underwriting profitability
from 2011.
In contrast, there is a potential downward pressure on the rating
if its high dividend payout ratio continues, its GUL rises consistently
above 2x and/or its profitability deteriorates, e.g.
return-on-capital falls below 8% or its combined
ratio consistently increases to 93% or above.
FUBON LIFE INSURANCE CO LTD (Fubon Life)
The affirmation of Fubon Life's A3 rating with a stable outlook reflects
the company's strong brand recognition and the effective distribution
channels it enjoys as a unit of FFHC. The company is the second
largest player in the local life market by premium income. It is
expected to remain well positioned through its well-established
distribution platform and diversified products.
The affiliation with FFHC has provided financial flexibility to Fubon
Life, allowing it easier access to new capital when need arises.
Further, Fubon Life expects to have increased net income in 2011
compared to 2010.
Business generated from the banking channel has strengthened over the
past two years. The company distributed nearly 50% of its
first-year premium through third-party banks as of 1H2011.
This could however, make its distribution vulnerable to disruption,
especially since financial holding companies in Taiwan are expanding their
insurance businesses.
Partially offsetting these strengths are the negative spread resulting
from high-guarantee policies and exposure to high-risk assets.
The negative spread generated from the company's legacy high-guarantee
policies continues to have a negative impact on profitability, particularly
in the current low interest rate environment.
Fubon Life's equity and real estate investment exposures remain
high when compared to its global peers. Moreover, it has
concentrated holdings in certain large Taiwanese corporates. In
the current uncertain financial market environment, its high-risk
asset holdings could lead to volatility in earnings, and hence capitalization.
Upward rating pressure could emerge if there is a 1) reduction in both
high-risk assets and concentration in large equity exposures;
2) greater diversification of its distribution platform; and 3) sustained
improvement in capital adequacy, such that it is more in line with
international standards.
Nonetheless, the rating could be downgraded if 1) there is a significant
deterioration in capitalization with capital-to-assets ratio
below 4%; 2) profitability is significantly impaired;
and 3) there is a further significant increase in high-risk assets,
which could prompt volatility in its investment earnings and capital position.
FUBON FINANCIAL HOLDING CO LTD (FFHC)
Moody's affirmed FFHC's Baa1 issuer rating with a stable outlook
as we do not expect any net capital reductions at the holding company
level following the proposed transactions. As such, the group's
double leverage would remain unchanged.
In addition, although Fubon Insurance's capital adequacy would
weaken slightly because of the capital reduction, its overall credit
profile is not expected to change significantly. Hence, FFHC's
overall credit profile would only be modestly affected. Moody's
also notes that FFHC's preliminary unaudited earnings for 2011 are
strong.
If there is an upgrade of the financial strength ratings of the key operating
subsidiaries of FFHC, then FFHC's rating could also be upgraded.
On the other hand, FFHC's rating could be downgraded if there
is 1) a downgrade of the financial strength ratings of key operating subsidiaries;
2) a reduction in the diversification currently provided by the mix of
business among life, P&C and banking; 3) a substantial
increase in financial leverage to above 25% and in double leverage
above 120%; and/or 4) aggressive expansion or acquisition
plans that could raise overall risk, including financial leverage
and fixed-charge needs.
RATING LIST
The following rating has been affirmed with outlook changed to negative
from stable:
Fubon Insurance Co., Ltd -- insurance financial
strength rating at A1
The following rating has been affirmed with a stable outlook:
Fubon Life Insurance Co Ltd -- insurance financial strength
rating at A3
Fubon Financial Holding Co Ltd -- issuer rating at Baa1
RATING METHODOLOGIES
The principal methodologies used in these ratings were "Moody's
Global Rating Methodology for Property & Casualty Insurers"
published in May 2010, and "Moody's Global Rating Methodology
for Life Insurers" published in May 2010. Please see the
Credit Policy page on www.moodys.com for a copy of these
methodologies.
Fubon Insurance Co Ltd, headquartered in Taipei, is the largest
property & casualty insurance company in Taiwan. The company
underwrites various businesses lines including motor, fire,
accident and health, and marine. As of June 30, 2011,
its consolidated assets and shareholders' equity (excluding minority
interests) were NTD 71.1 billion and NTD 22.3 billion respectively.
Fubon Life Insurance Co Ltd is the second largest life insurer in Taiwan,
offering traditional savings, annuities, accident and investment-linked
products. As of June 30, 2011, its total assets came
to NTD 1.7 trillion, and shareholders' equity,
NTD 102.6 billion.
Fubon Financial Holding Co Ltd. based in Taiwan, is a diversified
financial holding company with subsidiaries that include Taipei Fubon
Commercial Bank, Fubon Life, Fubon Insurance, Fubon
Securities, and Fubon Asset Management. As of June 30,
2011, its total consolidated assets were NTD 3.5 trillion,
and shareholders' equity (excluding minority interests), NTD 223.3
billion.
REGULATORY DISCLOSURES
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
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.
Sally Yim
VP - Senior Credit Officer
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
Stephen Long
MD - Financial Institutions
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
Moody's changes Fubon Insurance's outlook to negative
