S&P: Cathay Century Insurance Co. Ltd. Ratings Affirmed At 'A-' On Satisfactory Financial Profile; Outlook Stable
"We affirmed the rating to reflect Cathay Century's strong competitive position, mainly stemming from its close association with the Cathay Financial Holding Co. group (Cathay FHC) and a high level of controlled distribution channels," said S&P Global Ratings credit analyst Eunice Fan. "We believe the insurer's satisfactory financial risk profile has improved over the past few quarters, with prudent reinsurance protection."
In our view, Cathay Century has a good track record of maintaining sufficient reinsurance protection including catastrophe risk coverage. The insurer also has a good capital buffer and manageable foreign exchange risk. We expect Cathay Century to maintain its moderately strong capital and earnings over the next two to three years, after considering its above-average growth strategy and potential dividend payout to its parent.
Cathay Century's risk position is a neutral factor to the overall ratings, reflecting the manageable foreign exchange risk and satisfactory asset quality. This is despite the fact that the insurer's investments are concentrated in the financial sector (including bank deposits), which is typical among industry participants in Taiwan. Almost all of Cathay Century's U. S. dollar-denominated investments are fully hedged, but some of its Chinese renminbi-denominated investments are unhedged. Taiwan is a catastrophe-prone area, but we believe the company's adequate risk management over catastrophe risks and its existing reinsurance protection temper these risks.
Cathay Century has a strong competitive position, in our view, mainly stemming from its close association with the Cathay FHC group and a high level of controlled distribution channels. The insurer benefits from the strong brand value of its parent group. About 62% of Cathay Century's total premiums were contributed by its group members in 2015, and have consistently good quality.
"The stable outlook reflects our expectation that Cathay Century will remain a core entity of the wider Cathay FHC group in providing a full range of insurance services," said Ms. Fan. As a core entity, the ratings on Cathay Century will move in tandem with the ratings on the group's core units over the coming one to two years.
We could lower the ratings on Cathay Century if the Cathay FHC group's credit profile weakens as a result of a deterioration in the credit profile of another core unit, Cathay Life Insurance Co. Ltd. The potential factors that would trigger such deterioration include:
Cathay Life's capitalization weakens to less than adequate due to: (1) unexpected financial market volatilities, with sizable losses on the insurer's investment portfolio; (2) overly aggressive business growth or growth of value in-force materially lower than our current forecast; or (3) failure to complete capital-raising initiatives at both the holding company and Cathay Life as planned. The effectiveness of Cathay Life's hedging mechanism materially weakens or hedging policies become more aggressive, resulting in higher forex risks, as indicated by a ratio of forex risk exposure to total liability (including shareholders' equity), as defined by our criteria, consistently exceeding 10% in a material and consistent manner. Significantly heightened concentration risks in financial sector investments result in weaker investment diversification. Capital and earnings weaken at the group's core banking entity, Cathay United Bank Co. Ltd.
We view the likelihood of an upgrade to be remote over the next two years. Such action would require a significant increase in capital to raise Cathay Life's capital adequacy to a strong level. This would also have to be accompanied by a superior operating performance compared to its peers with stable credit profiles for the other core entities of the Cathay FHC group.