(The following statement was released by the rating agency)
Jan 09 - Fitch Ratings has upgraded Taiwan-based Union Insurance Company’s (Union) Insurance Financial Strength (IFS) Rating to ‘BBB’ from ‘BB+’ and its National IFS Rating to ‘A+(twn)’ from ‘A-(twn)'. The Outlook is Stable.
The upgrade reflects demonstrated stability in Union’s underwriting performance and its consistently strong capitalisation since its largest shareholder Won Won Group took a controlling stake in the company in 2007. The Won Won Group is committed to support the company through the refocusing of its business to achieve a more sustainable profitability profile. The Won Won Group completed several capital injections into Union, totalling TWD1.9bn between 2008 and 2010, and now owns 66.7% of the company. It also drove a series of reforms, including a reorganisation of the board to include independent Directors, IT infrastructure re-engineering, and the establishment of an actuarial databank. This has largely addressed Fitch’s previous concerns over the change in the shareholder structure.
The company’s restructuring to increase business with favourable loss experiences (such as in commercial motor) has helped contain its combined ratio at around 100% between 2008 and 9M12, except in 2010 due to a number of unusually large-loss events. Union would have reported small underwriting profits in 2011 and 9M12 if the impact of compulsory motor insurance were excluded.
Union’s statutory risk-based capital ratio was sound at above 300% at end-H112, compared with the regulatory minimum of 200%. Its capital position provides a strong buffer against adverse reserve developments, particularly in view of its low underwriting leverage with net written premiums to adjusted shareholders’ surplus (including shareholders’ fund and claims equalisation reserve) at around 1x between 2008 and 9M12.
Investments remain prudent and liquid, with cash and cash equivalents accounting for 57% of invested assets at end-Q312, comfortably supporting insurance claims. Fixed-income portfolios are of sound credit quality (mainly government bonds), while equity exposures are manageable at 8% of total investments or 11% of its equity at end-Q312.
The rating is constrained by Union’s still weak profitability as a result of persistently low interest rates in Taiwan and its moderate business scale. A further upgrade in the near term is unlikely, in Fitch’s view. Union’s annualised investment yields were below 2% between 2010 and 9M12, partly reflecting its conservative asset allocation. The company’s return on average equity was low at 1.7% in 9M12 and -1.4% in 2011, respectively.
Key rating triggers that could lead to a rating upgrade include an improvement in insurance underwriting performance with a combined ratio consistently below 100%, containment of large losses and continued prudent capitalisation, given Taiwan’s susceptibility to catastrophe risks such as typhoons, earthquakes, and flood.
Conversely, substantial underwriting losses or poor investment performance resulting in a fall in its statutory capital ratio to below 250% on a sustained basis are key factors for a downgrade.