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Hong Kong , March 8, 2023
Moody’s Investors Service has downgraded the insurance financial strength rating (IFSR) of Fubon Insurance Co., Ltd. (Fubon Insurance) to A2 from A1 and changed the outlook to negative from stable.
Moody’s has also affirmed the Baa1 IFSR of Fubon Property & Casualty Insurance Co., Ltd. (Fubon P&C) and maintained the stable outlook.
The ratings and outlooks of Fubon Financial Holding Co., Ltd. (Fubon Financial, Baa1 stable) and Fubon Life Insurance Co Ltd (IFSR A3 stable) are not affected by these rating actions.
RATINGS RATIONALE
Fubon Insurance
The downgrade of Fubon Insurance’s IFSR to A2 reflects the insurer’s significant deterioration in capitalization, profitability and reserve adequacy due to substantial losses from its Covid-related policies.
The retained claims payment and reserve set aside for these policies rose from TWD19.9 billion as of 31 August 2022 to TWD59.5 billion as of 31 December 2022, which exceeded the TWD15 billion capital injection from Fubon Financial completed in August 2022. As a result, the insurer’s risk-based capital (RBC) ratio has declined substantially from around 300% as of 31 August 2022, which has weakened significantly its capacity to withstand potential large claims and capital market volatility.
Moody’s expects Fubon Financial to inject capital into Fubon Insurance to support its capitalization in the next 12-18 months. Meanwhile, the insurer’s earnings pressure will ease from the second quarter of 2023, because most in-force Covid-related policies carry 1-year term and will mature by then after the insurer stopped selling the product in April 2022. However, the potential capital injection and the recovery of retained earnings generation are unlikely to boost the insurer’s capitalization back to its historically strong level over the next 2-3 years.
The insurer’s A2 IFSR reflects its leading market position as the largest non-life insurer in the domestic market, and Moody’s expectation that the insurer’s profitability will gradually recover, backed by the strong underwriting margin in its key business lines outside of Covid-relate policies and good investment income. In addition, the insurer’s financial flexibility benefits from Fubon Financial’s good access to domestic capital markets and strong franchises in the banking and life insurance sectors.
These strengths are offset by the insurer’s weakened capitalization, significant gross catastrophe exposure given its geographic concentration and its relatively high exposure to equities with single-name concentration.
The rating action also considers the moderately negative governance risks arising from the insurer’s shift to a more aggressive financial and capital management policy. The insurer intends to maintain a lower capital buffer to support its underwriting and investment activities over the next few years. Further, significant losses from Covid-related policies exposes weaknesses in the insurer’s product risk management.
Moody’s has changed Fubon Insurance’s governance issuer profile score to G-3 from G-2 and its environmental, social and governance (ESG) credit impact score to moderately negative (CIS-3) from neutral-to-low (CIS-2).
The change in outlook to negative reflects Moody’s view that the ultimate impact on the insurer’s capital and earnings remains uncertain, which will depend on the loss development of Covid-related policies as well as the extent and timeliness of capital injections from Fubon Financial.
Fubon P&C
The affirmation of Fubon P&C’s Baa1 IFSR with a stable outlook reflects Moody’s expectation that the level of support from Fubon P&C’s major shareholders, including Fubon Life, Fubon Insurance, and its indirect parent Fubon Financial, will remain largely unchanged, despite the weakening credit profile of Fubon Insurance. Fubon P&C is 40% owned by Fubon Insurance and 40% owned by Fubon Life as of 31 December 2022 Both Fubon Insurance and Fubon Life are wholly owned subsidiaries of Fubon Financial.
Moody’s expects financial resources available at Fubon Insurance, Fubon Life and Fubon Financial relative to the modest operating scale of Fubon P&C will anchor their capacity to support Fubon P&C, in times of need. Moody’s support assumption also considers Fubon P&C’s strategic importance to the group as its only majority-owned insurer operating in mainland China, where Fubon Financial is keen to expand its presence.
Therefore, Moody’s continues to incorporate two-notch support uplift above Fubon P&C’s standalone credit profile of baa3, which reflects (1) operational and financial support from Fubon Insurance and Fubon Life, (2) its ownership by, and implied support from Fubon Financial, which aids its business growth and financial flexibility, including a track record of capital injections; (3) its experienced management team and ability to leverage the strong underwriting knowledge of Fubon Insurance; and (4) the insurer’s close integration with the risk management of Fubon Financial.
The insurer’s standalone credit profile remains solid, which reflects its liquid investments with a focus on bank deposits and fixed income investments. Moreover, the insurer has a diversified and short-tail focused business mix with low reserving risks.
These strengths are offset by its weak profitability and market position. Its small business scale not only limits a meaningful expense ratio improvement in the next 12-18 months but also increases volatility in its non-motor profitability. Its lack of nationwide presence also results in its insignificant market share.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Fubon Insurance
Given the negative outlook, an upgrade is unlikely. However, Moody’s could change the outlook back to stable if (1) the insurer’s RBC ratio stays above 230% or its gross underwriting leverage (GUL) drops below 5x on a consistent basis; (2) its profitability improves, such that its return on capital (ROC) rises above 6% consistently or its combined ratio excluding losses from Covid-related policies stays below 96% consistently; or (3) the insurer successfully collects most of its claims recoverable related to Covid-related policies and reduces its stand-alone financial leverage to below 30% on a consistent basis.
On the other hand, Moody’s could downgrade Fubon Insurance’s rating if: (1) the insurer’s RBC ratio falls below 220% or its GUL rises above 6x on a consistent basis; (2) its profitability deteriorates substantially, such that its ROC falls below 4% or its combined ratio excluding losses from Covid-related policies exceeds 98% consistently; (3) its financial leverage rises consistently above 40%; or (4) its impairment losses on claims recoverable meaningfully increase because it fails to collect the recoverable from reinsurers.
Fubon P&C
Moody’s could upgrade the rating if (1) its underwriting profitability improves significantly with a combined ratio of less than 105% while the insurer reports net profit on a sustained basis; (2) its market position improves significantly while its profitability does not deteriorate; or (3) its capital adequacy strengthens significantly, with its gross underwriting leverage (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 rating if (1) there are signs that the level of support from Fubon P&C’s shareholders weakens; (2) its underwriting profitability further deteriorates significantly; (3) its market position further diminishes significantly; or (4) its capital adequacy deteriorates significantly, with its GUL exceeding 8x or its comprehensive solvency ratio falling below 120% on a sustained basis.
PRINCIPAL METHODOLOGIES
The principal methodology used in these ratings was Property and Casualty Insurers Methodology in January 2023 and available at https://ratings.moodys.com/api/rmc-documents/397707 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Fubon Insurance Co., Ltd. underwrites various property & casualty insurance business lines, including motor, fire, accident and health, and marine. As of the end of 2021, its total assets and shareholders’ equity totaled TWD131.6 billion and TWD45.4 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 2021, its total assets and shareholders’ equity totaled RMB2.3 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 on https://ratings.moodys.com/rating-definitions .
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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
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Kelvin Kwok, CFA
AVP-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
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Chen Huang
Associate Managing Director
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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