HONG KONG--(BUSINESS WIRE)--AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “a” (Excellent) from “a+” (Excellent) and affirmed the Financial Strength Rating of A (Excellent) of Fubon Insurance Co., Ltd. (Fubon Insurance) (Taiwan). Concurrently, AM Best has placed these Credit Ratings (ratings) under review with negative implications.
The ratings reflect Fubon Insurance’s balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, favourable business profile and appropriate enterprise risk management. The ratings also reflect the support that the company receives from its ultimate parent, Fubon Financial Holding Co., Ltd. (Fubon Financial Holding).
The Long-Term ICR downgrade reflects the material deterioration in Fubon Insurance’s risk-adjusted capitalisation to the very weak level as of year-end 2022 from the strongest level in 2021, as measured by Best’s Capital Adequacy Ratio (BCAR). The risk-adjusted capitalisation is expected to improve over the short term, as per the company’s capital plan.
The deterioration in capitalisation is mainly due to the significant claims amount arising from pandemic insurance products, which has grown at a faster-than-expected rate and exceeded the capital injection of TWD 15.0 billion by Fubon Financial Holding in August 2022. The company’s investment portfolio shrank as it sold some investments to pay out the sizeable insurance claims. AM Best notes that the company is equipped with adequate liquidity to fulfil any short-term surge in claims. The company has arranged short-term collateralised financing with financial institutions. In addition, the company recently announced its plan to raise funds via a subordinated debt issuance. The good level of financial flexibility is a positive rating factor to the adequate balance sheet strength assessment. Going forward, AM Best expects Fubon Insurance’s capital and surplus to resume growth through the retention of net profits derived from non-pandemic insurance underwriting and investment results, although it is unlikely to recover to its pre-COVID-19 level over the short to intermediate term.
The under review with negative implications reflects the uncertainty in the company’s capital position, which depends on its pandemic insurance loss development and the amount of further capital support from Fubon Financial Holding. Moreover, Fubon Insurance is subject to heightened exposure to reinsurer credit risk due to its sizeable reinsurance recoverable. In the event of potential major disputes in reinsurance contracts, the company’s capital position and liquidity may be subject to exacerbated pressure.
Based on unaudited financial statements, Fubon Insurance reported a significant net loss of TWD 40.0 billion for fiscal-year 2022, compared with a net profit of TWD 6.9 billion in fiscal-year 2021. Notwithstanding, AM Best considers the pandemic insurance loss as a one-off event, and that the company should be able to return to profitability going forward via the traditionally profitable non-pandemic insurance underwriting and investment results, given its historical track record of adequate operating performance.
Fubon Financial Holding is the second-largest listed financial holding company in Taiwan in terms of total assets. Fubon Insurance plays a strategic role in the parent group’s financial platform and receives long-term operating and capital commitments provided by Fubon Financial Holding, as evidenced by the aforementioned capital injection. It also continues to leverage the parent group’s brand recognition and business network in Taiwan to cross-sell its products through affiliated companies within the financial group. The lift assessment reflects AM Best’s expectation that the parent will remain committed in providing additional financial support to Fubon Insurance in a timely manner to replenish the company’s balance sheet strength if needed.
AM Best will continue to hold discussions with Fubon Insurance’s management team on claims development and potential further contingency capital plans and executions to assess the impact to the company’s credit profile.
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