Fubon Insurance, Taiwan’s biggest non-life insurer, has seen significant deterioration in capitalisation, profitability and reserve adequacy due to substantial losses from its COVID-related policies, notes Moody’s Investors Service.
The retained claims payment and reserve set aside for these policies rose from NT$19.9bn ($646m) as of 31 August 2022 to NT$59.5bn as of 31 December 2022, which exceeded the NT$15bn capital injection from Fubon Financial Holding completed in August 2022. Fubon Insurance is a wholly-owned subsidiary of Fubon Financial.
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 capitalisation 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 a one-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 capitalisation back to its historically strong level over the next 2-3 years.
Ratings
Based on its analysis of the developments at Fubon Insurance, Moody’s has downgraded the company’s insurance financial strength rating (IFSR) to ‘A2’ from ‘A1’ and changed the outlook to ‘Negative’ from ‘Stable’.
Moody’s has also affirmed the ‘Baa1’ IFSR of Xiamen-headquartered Fubon Property & Casualty Insurance (Fubon P&C) and maintained the ‘Stable’ outlook. The ratings and outlooks of Fubon Financial (‘Baa1’, ‘Stable’) and Fubon Life Insurance (IFSR ‘A3’, ‘Stable’) are not affected by these rating actions.
What’s ahead
Moody’s says that Fubon Insurance’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-related 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 capitalisation, 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.
Fubon Insurance underwrites various property & casualty insurance business lines, including motor, fire, accident and health, and marine.
