Hong Kong , August 30, 2021 Moody's Investors Service has affirmed the A3 insurance financial strength rating (IFSR) of Fubon Life Insurance Co Ltd (Fubon Life) and the Baa1 issuer rating of Fubon Financial Holding Co., Ltd. (Fubon Financial, or the group). At the same time, Moody's has changed the outlook on these entities to stable from negative.

Moody's has also affirmed the A1 IFSR of Fubon Insurance Co., Ltd. (Fubon Insurance). The outlook remains stable.

Besides, Moody's has downgraded the IFSR of Fubon Property & Casualty Insurance Co., Ltd. (Fubon P&C) to Baa1 from A3. The outlook on Fubon P&C is stable. Its previous outlook was negative.

RATINGS RATIONALE

Fubon Life

The change in Fubon Life's outlook to stable from negative reflects Moody's expectation that Fubon Life's profitability and capitalization have improved as capital market volatilities subsided and it will continue to maintain solid profitability and stable capitalization over the next 12-18 months despite low interest rates.

Fubon Life's proactive product and investment management help mitigate profitability strain even when interest rates remain relatively low. The insurer has reduced its crediting rates offered to policyholders in response to lower bond yields. This has quickened the decline in the cost of liabilities and will alleviate negative spread risks.

Declining hedging costs also benefit Fubon Life in mitigating strain on its recurring yields. In addition, the insurer continues to realize gains on its equity and bond holdings to supplement its investment income. Driven by large disposal gains, the insurer's net income grew strongly and it reported positive investment spreads in 2020 and the first half of 2021.

Fubon Life's capitalization has also improved, mainly reflecting higher unrealized gains on equities as the equity market rebounds. The insurer's disciplined dividend policy to retain its earnings and slowing new business growth will also support its capitalization. Moody's expects the insurer's local risk-based capital (RBC) ratio (end-June 2021: 333%) to stay well above the regulatory minimum of 200% over the next 12 months.

In addition, Fubon Life's business and financial performance has not been affected much by the surge in the number of coronavirus cases between May and July 2021.

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 and equity investments, which expose its earnings and capitalization to higher volatility than global peers.

Fubon Financial

The change in Fubon Financial's outlook to stable is in line with the outlook change at the group's main subsidiary, Fubon Life. The affirmation of the group's Baa1 issuer rating reflects the strong domestic franchises of the group's life insurance, property and casualty (P&C) insurance and banking subsidiaries.

Fubon Financial maintains stable capitalization and earnings, supported by solid capitalization and strong earnings at both Fubon Life and Taipei Fubon Commercial Bank Co Ltd (TFCB, deposits A2 stable, Baseline Credit Assessment baa2). The liquidity at Fubon Financial and its major subsidiaries is also adequate because of committed bank credit lines from major local banks and a large liquid investment portfolio at Fubon Life.

The issuer rating of the group continues to reflect the aggregate weighted average financial strength of its main subsidiaries and the structural subordination of the holding company to its operating subsidiaries. The group also benefits from the diversification of its earnings sources through its various subsidiaries across the financial services industry. Its rating also incorporates a certain degree of government support for its banking subsidiary, which has a well-established franchise with a decent market share of loans and deposits in the domestic market.

The affirmation and outlook change to stable also reflects Moody's assumption that the proposed transaction to acquire Jih Sun Financial Holding Co Ltd is worth TWD49 billion and that it would all be ultimately funded by new shares placement in common shares and preferred shares. If Fubon Financial significantly increases the ultimate price or significantly changes its funding mix, Moody's will reassess the credit impact on Fubon Financial.

Fubon Insurance

The affirmation of Fubon Insurance's A1 IFSR reflects its market-leading position, strong profitability and capitalization. These strengths are offset by the insurer's significant gross catastrophe exposure and high equity holdings.

Fubon Insurance is the largest non-life insurer in the domestic market. The insurer's strong brand recognition and extensive distribution network underpin its strong market position. Despite the industry has low growth, the insurer has still managed to gain market share in the past few years.

Moody's also expects Fubon Insurance to continue to deliver stable and strong earnings. It has a strong track record of underwriting profitability with a combined ratio below 93% in both 2019 and 2020 for its domestic business, thanks to its stringent risk selection and economies of scale. The insurer's profitability has also benefited from its strong investment income.

Moody's also expects Fubon Insurance to continue to maintain its strong capitalization which would support its premium growth. Its RBC ratio was high at above 500% as of the end of June 2021.

These strengths are offset by the insurer's significant gross catastrophe risks, primarily from earthquakes and typhoons, which could increase earnings volatilities. That said, the insurer enters into comprehensive reinsurance programs to reduce its net catastrophe exposure to a manageable level relative to capital.

The insurer's equity investment exposure is high compared with that of its global peers, with concentration in several large Taiwanese corporates. This exposes its profitability and capitalization to single-name shocks.

The stable outlook on Fubon Insurance reflects Moody's expectation that the insurer will maintain its leading market position, strong capitalization and strong underwriting profitability over the next 12-18 months.

Fubon P&C

The downgrade of Fubon P&C's IFSR reflects a weakened market position and very weak profitability.

Fubon P&C's market share has declined over the past few years, primarily because it has cut unprofitable motor business. Constrained by its weak franchise and relatively small branch network, the insurer is keen to grow non-motor reinsurance inward business to support its premium growth. However, we expect that it would be challenging for the insurer to grow in the Chinese market given the intense competition. In fact, the insurer's premiums declined by over 30% in the first half of 2021, mainly because it lost a significant portion of its assumed business from a major cedant.

Fubon P&C has yet to turn into profit because of its very weak underwriting profitabilty and investment losses on Shenzhen Teng Fu Bo Investment Co. Ltd, an investment in affiliate. Its underwriting profitability deteriorated again in H1 2021, with combined ratio increased to over 115% in H1 2021 from 94.6% in H1 2020. Although disposal gains from Fubon P&C's proposed transfer of part of its stake in Teng Fu Bo to its affiliate within Fubon Financial would boost the insurer's earnings in 2021, Moody's expects that its overall earnings would remain weak for the next 12-18 months given the challenges to underwriting profiability from its high expense ratio resulting from its small scale, motor pricing reform and volatile profitability from its non-motor business.

Fubon P&C's Baa1 IFSR also reflects the strong financial and operational support from Fubon P&C's two major shareholders, Fubon Insurance and Fubon Life. The insurer also has a liquid investment portfolio and product mix with low reserving risks.

Fubon P&C's Baa1 IFSR also incorporates a two-notch uplift from its standalone credit profile of baa3, reflecting (1) its ownership by, and implied support from, its indirect parent Fubon Financial, which aids its business growth and financial flexibility including a track record of capital injections; (2) its experienced management team and ability to leverage the strong underwriting knowledge of Fubon Insurance; and (3) the insurer's close integration with the risk management of Fubon Financial.

Fubon P&C's outlook is stable, reflecting Moody's expectation that the insurer's market position and profitability will not further deteriorate significantly over the next 12-18 months. In addition, the level of support from its major shareholders is unlikely to change.

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

Fubon Life

Moody's could upgrade Fubon Life's rating if: (1) its exposure to high-risk assets falls below 150% of its shareholders' equity on a sustained basis while its unhedged overseas investments significantly reduces; (2) its RBC ratio remains above 350% and adjusted capital/assets remains above 8% on a sustained basis; and/or (3) product mix becomes less spread dependent, with a further decline in its average cost of liabilities.

On the other hand, Moody's could downgrade Fubon Life's rating if (1) its profitability erodes, with the return on capital remaining below 7%, or it reports a negative investment spread on a consistent basis; (2) its capital strength deteriorates substantially, with Moody's adjusted capital/assets remaining below 5% and the local RBC ratio below 250%; (3) it significantly increases its holdings of risky assets, including equity and unhedged overseas investments; and/or (4) Fubon Financial's adjusted financial leverage rises significantly above 30% and earnings coverage falls below 8.0x.

Fubon Financial

An upgrade of the ratings of Fubon Financial's key operating subsidiaries, mainly Fubon Life and TFCB, could lead to an upgrade of Fubon Financial's rating.

Moody's could downgrade Fubon Financial's rating if (1) the ratings of its key operating subsidiaries, mainly Fubon Life and TFCB, are downgraded; (2) its double leverage increases significantly or financial leverage rises above 30% and earnings coverage falls below 8x on a sustained basis; (3) it undertakes significant acquisitions or expansions that materially strain the group's financial profile; and/or (4) there is a decrease in the diversification of the group's life and non-life insurance, and banking operations.

Fubon Insurance

Fubon Insurance's credit profile is correlated with, and constrained by, that of Fubon Financial. This is because of the links between the group's and its subsidiaries' credit profiles, particularly in terms of financial flexibility and because Fubon Insurance has the strongest standalone credit profile among all the group's subsidiaries. Therefore, an upgrade of Fubon Insurance's rating is unlikely unless the ratings of other key subsidiaries within the group are also upgraded.

Other the other hand, Moody's could downgrade Fubon Insurance's rating if there is (1) a sustained deterioration in capital strength, for example, gross underwriting leverage (GUL) rising above 3x; (2) an erosion of profitability so that its ROC falls consistently below 8% or a significant increase in the combined ratio of domestic business above 95%; (3) rating downgrades of other key subsidiaries within the group.

Fubon P&C

Moody's could upgrade Fubon P&C's rating if (1) its underwriting profitability improves meaningfully with a combined ratio of below 105% while the insurer reports net profit on a sustained basis; (2) its market position improves meaningfully while its profitability does not deteriorate; (3) its capital adequacy strengthens significantly, with its GUL dropping below 4x or its comprehensive solvency ratio rising above 200% on a sustained basis.

On the other hand, Moody's could downgrade the insurer's rating if (1) its underwriting profitability further significantly deteriorates; (2) its market position further diminishes significantly; (3) its capital adequacy deteriorates significantly, with its GUL exceeding 8x or its comprehensive solvency ratio falling below 100% on a sustained basis; and/or (4) there are signs of weakening support from its shareholders, or a downgrade of Fubon Insurance's or Fubon Life's ratings.

PRINCIPAL METHODOLOGIES

The principal methodology used in rating 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 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 July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625 . The principal methodology used in rating Fubon Insurance Co., Ltd. and Fubon Property & Casualty Insurance Co., Ltd. was Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Fubon Life Insurance Co Ltd offers traditional savings, annuities, accident and investment-linked insurance products. At the end of 2020, its total assets and shareholders' equity totaled TWD5.3 trillion and TWD498.1 billion, respectively, on a consolidated basis.

Fubon Financial Holding Co., Ltd., offers life insurance, non-life insurance and banking services through its wholly owned operating subsidiaries. As of the end of 2020, its total assets and shareholders' equity totaled TWD9.2 trillion and TWD776.8 billion, respectively, on a consolidated basis.

Fubon Insurance Co., Ltd. underwrites various property & casualty insurance business lines, including motor, fire, accident and health, and marine. As of the end of 2020, its total assets and shareholders' equity totaled TWD117.8 billion and TWD40.8 billion, respectively, on a consolidated basis.

Headquartered in Xiamen, China, Fubon Property & Casualty Insurance Co., Ltd. provides various insurance products, including motor, commercial property, liability, accident and health. As of the end of 2020, its total assets and shareholders' equity totaled RMB2.2 billion and RMB0.3 billion respectively.

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 .

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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
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China (Hong Kong S.A.R.)
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Sally Yim, CFA
MD-Financial Institutions
Financial Institutions Group
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Client Service : 852 3551 3077

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Moody's Investors Service Hong Kong Ltd.
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