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Rating Action:

Moody’s changes outlook to negative on Cathay Financial and Fubon Financial and a few of their subsidiaries

20 April 2020


Hong Kong , April 20, 2020 - Moody's Investors Service has affirmed the A3 insurance financial strength ratings (IFSR) of Cathay Life Insurance Co., Ltd and Fubon Life Insurance Co Ltd. In addition, Moody's has affirmed the Baa1 issuer ratings of Cathay Financial Holding Co., Ltd, Fubon Financial Holding Co., Ltd. and Fubon Securities Co., Ltd.

At the same time, Moody's has changed the outlooks on these entities to negative from stable.

The ratings and outlooks of Cathay Century Insurance Co Ltd (IFSR A2 stable), Cathay United Bank Co., Ltd. (deposits A2 stable, baseline credit assessment baa2), Fubon Insurance Co., Ltd. (IFSR A1 stable), Fubon Property & Casualty Insurance Co., Ltd. (IFSR A3 negative), Taipei Fubon Commercial Bank Co Ltd (TFCB, deposits A2 stable, baseline credit assessment baa2) and Fubon Bank (China) Co., Ltd. (deposits Baa1 negative, baseline credit assessment ba2) are not affected by this rating action.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The Taiwanese life insurance industry has been one of the sectors affected by the shock given its relatively high equity exposure, and the insurers' reliance on investment income and their high cost of liabilities. We regard the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on the companies of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.

Cathay Life and Fubon Life

The change on Cathay Life's and Fubon Life's outlooks to negative from stable reflect that the prolonged low interest rate environment will challenge both insurers' profitability, considering their high reliance on investment income. Both insurers have sizable allocations to USD-denominated bonds and the recent rate cuts by the US will add pressure on their bond investment yield. They will have to reinvest their matured bonds at lower yields amid reinvestment needs from their international bond holdings.

These developments elevate both insurers' negative spread risks. Their cost of liabilities are high compared to their global peers and are slightly below or at the same level as their post-hedging investment returns in 2019. Nonetheless, both insurers' efforts around reducing their cost of liabilities via lowering crediting rates will alleviate some of the pressure.

In addition, Cathay Life's and Fubon Life's capitalization is vulnerable to equity market movements because of their relatively high holdings of equity investments. The current volatility in the capital markets would put pressure on their capitalization.

The affirmation of Cathay Life's A3 IFSR reflects its strong and stable business profile as the largest life insurer in Taiwan. It also has strong channel control because its products are mainly distributed by its tied agency with good productivity. However, the insurer holds significant overseas investments, which are partly unhedged and expose the insurer's earnings to exchange rate volatility.

The affirmation of Fubon Life's A3 IFSR reflects its strong market presence and diversified channel mix. The insurer's customer reach and brand recognition benefit from its affiliation with Fubon Financial. These strengths are offset by the insurer's sizable overseas investments, which are partly unhedged and exposes the insurer's earnings to exchange rate volatility.

Cathay Financial and Fubon Financial

The change in Cathay Financial's and Fubon Financial's rating outlooks to negative from stable reflects the change of the outlook to negative from stable for Cathay Life and Fubon Life, respectively. The two latter entities are their respective groups' largest subsidiaries as measured by assets, shareholders' equity and net income.

The affirmation of both groups' Baa1 issuer ratings reflects that the subsidiaries of these groups, including life insurance, property & casualty insurance, and banking, have very strong franchises in Taiwan.

The issuer ratings of Cathay Financial and Fubon Financial continue to reflect the aggregate weighted average financial strength of their main subsidiaries and the structural subordination of the holding company to its operating subsidiaries. Both groups also benefit from the diversification of their earnings sources through their various subsidiaries across the financial services industry. Their ratings also incorporate a certain degree of government support for their banking subsidiaries which have well-established franchise with sizable market share of loans and deposits in Taiwan.

Moody's expects that both groups will continue to manage their dividend policy prudently to maintain adequate capital at their subsidiaries and at the holding company level. Liquidity at both the groups and their major subsidiaries also remains adequate.

Fubon Securities

The change of Fubon Securities' rating outlook to negative from stable reflects the negative outlook on Fubon Financial, which is Fubon Securities' parent company.

Fubon Securities' Baa1 issuer rating takes into account the company's Baa3 standalone assessment and two notches of affiliate support uplift – per Moody's assumption that the company will receive a very high level of support from Fubon Financial in times of need. Therefore, the potential weakening of the holding company's ability to support, as considered in the potential deterioration in Fubon Life's credit profile as described above, drive our negative outlook on Fubon Securities.

Fubon Securities' Baa3 standalone assessment reflects the company's conservative balance sheet leverage, with total assets amounting to 3.7x its tangible common equity at the end of 2019.

In the past two years, the company has been investing in more fixed income investments to earn a higher yield via the use of short-term funding. Its securities holdings mainly comprise of investment-grade bond securities, which would help lower its credit and liquidity risk exposure.

Moreover, the company's lines of credit from Taiwanese commercial banks could partially mitigate the concerns over market volatility and the company's reliance on wholesale funding.

However, if the company continues to increase its securities investment and short-term funding, leading to higher risk appetite and liquidity risk, it could negatively weigh on Fubon Securities' credit profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Cathay Life

Given the negative outlook, an upgrade is unlikely. The rating outlook could return to stable if: (i) its profitability remains stable, with its return on capital (ROC) staying above 6%; (ii) its capitalization does not deteriorate further, with its local risk-based capital (RBC) ratio remaining above 250% or adjusted capital/total assets remaining above 4% (4.5%, excluding separate account assets); (iii) its average cost of liabilities further declines, while it continues to shift toward less spread-dependent products; and/or (iv) there is a significant reduction in its equity and unhedged overseas investments.

Moody's could downgrade the rating if (i) its profitability deteriorates, with its return on capital staying below 6% or reporting negative investment spread on a sustained basis; or (ii) its capitalization further weakens, with its local RBC ratio declining below 250% and adjusted capital/total assets declining below 4% (4.5%, excluding separate account assets) on a sustained basis; (iii) its holdings of risky assets, including equity and unhedged overseas investments, rise significantly, and /or (iv) Cathay Financial's adjusted financial leverage increases above 30% and earnings coverage drops below 8.0x on a sustained basis.

Fubon Life

Given the negative outlook, an upgrade is unlikely. The rating outlook could return to stable if (i) its profitability remains stable, with its return on capital (ROC) staying above 7%; or (ii) its capitalization does not deteriorate further, with its local risk-based capital (RBC) ratio remaining above 250% or adjusted capital/total assets exceeding 4% (4.5% excluding separate account assets); (iii) its product mix becomes less spread dependent, with a further decline in its average cost of liabilities; and/or (iv) its exposure to equities or unhedged overseas investments significantly declines.

Moody's could downgrade the rating if: (i) its profitability erodes, with its ROC remaining below 7% or reporting negative investment spread on a consistent basis; or (ii) its capital strength substantially deteriorates, with its adjusted capital/total assets remaining below 4% and local RBC ratio staying below 250%; or (iii) its high-risk asset exposure rises above 350% on a sustained basis; and/or (iv) Fubon Financial's adjusted financial leverage materially rises above 30% and earnings coverage falls below 8.0x.

Cathay Financial and Fubon Financial

Given the negative outlook, an upgrade is unlikely. Their rating outlooks could return to stable if the outlook on their key life subsidiaries returns to stable, while the outlooks on their key banking and non-life subsidiaries remain stable.

Moody's could downgrade the ratings if: (i) the groups' key life or banking subsidiaries are downgraded or (ii) the groups' double leverage rises significantly or financial leverage rises above 30% and earnings coverage falls below 8x on a sustained basis; or (iii) there are significant acquisitions or expansions that exert significant pressure on the groups' financial profile; and/or (iv) the diversification of the groups' business mix of life and non-life insurance and banking operations decreases.

Fubon Securities

Given the negative outlook, an upgrade of Fubon Securities' Baa1 long-term issuer rating is unlikely. The outlook on the entity could be changed to stable if the holding company's outlook is changed to stable.

Fubon Securities' standalone assessment could improve if (1) its funding and liquidity profiles improve; and (2) the company develops a business model with more stable revenues to offset the potential decline in its brokerage commission, without incurring material additional market and credit risks.

Fubon Securities' rating will be downgraded if the holding company's rating is downgraded and there is a material deterioration in the credit profiles of its banking and insurance affiliates, which in turn weakens the holding company's ability and capacity to support Fubon Securities.

Fubon Securities' standalone assessment could move down if it (1) further expands into high-risk assets and investments; (2) significantly increases its balance-sheet leverage; (3) demonstrates material weakness in risk controls, especially in terms of market and operational risk; or (4) experiences weakened profitability.

The principal methodology used in rating Cathay Life Insurance Co., Ltd, and Fubon Life Insurance Co Ltd was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . The principal methodologies used in rating Cathay Financial Holding Co., Ltd, and Fubon Financial Holding Co., Ltd. were Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 , Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 , and Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865 . The principal methodology used in rating Fubon Securities Co., Ltd. was Securities Industry Market Makers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187332 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Cathay Life Insurance Co., Ltd is the largest life insurer in Taiwan. At the end of 2019, its total assets stood at TWD7.1 trillion and shareholders' equity at TWD594.5 billion.

Cathay Financial Holding Co., Ltd, listed on the Taiwan Stock Exchange, is one of the largest financial holding companies in Taiwan. At the end of 2019, its total assets and shareholders' equity on a consolidated basis measured TWD10.1 trillion and TWD782.0 billion, respectively.

Fubon Life Insurance Co Ltd is the second-largest life insurer in Taiwan. At the end of 2019, its total assets stood at TWD4.9 trillion and shareholders' equity at TWD349.1 billion.

Fubon Financial Holding Co., Ltd., listed on the Taiwan Stock Exchange, is one of the largest financial holding companies in Taiwan. At the end of 2019, its total assets and shareholders' equity on a consolidated basis measured TWD8.5 trillion and TWD619.7 billion, respectively.

Fubon Securities Co., Ltd. is headquartered in Taipei with consolidated assets of TWD139 billion at the end of 2019. The lead analyst for Fubon Securities Co., Ltd. is Sean Hung, +852-3758-1503.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

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.

Kelvin Kwok, CFA
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

Sally Yim, CFA
MD-Financial Institutions
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

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