Cathay Life Insurance, Taiwan's biggest life insurer, has been issuing debt to strengthen its regulatory capital buffer in preparation for the implementation of the Taiwan Insurance Capital Standard in 2026, notes Fitch Ratings.
The insurer’s pro forma financial leverage ratio was 14%, up from 9% at end-1Q2024, including the NT$50bn ($1.54bn) equivalent in subordinated debt issued collectively in April and May 2024.
Cathay Life's capital score, as measured by the Fitch Prism model, was 'Strong' at end-2023, while its risk-based capital ratio remained robust at 323%, against 316% in 2022, which was above the regulatory minimum of 200%.
Fitch has affirmed Taiwan-based Cathay Life's Insurer Financial Strength (IFS) Rating of 'A' (Strong), National IFS Rating of 'AA+(twn)', Long-Term Issuer Default Rating of 'A-' and National Long-Term Rating of 'AA(twn)'. The outlook is ‘Stable’. Simultaneously, Fitch has affirmed the insurer's Taiwanese-dollar subordinated bonds at 'AA-(twn)'.
The affirmation reflects Cathay Life's 'Strong' risk-based capitalisation, 'Most Favourable' company profile, and resilient underlying margin. These strengths are partially offset by its exposure to significant overseas investments, which could cause volatility in its financial position due to exchange-rate movements.
Apart from 'Strong' capitalisation and low leverage, other factors driving Cathay Life’s ratings include:
Resilient Underlying Margin: Fitch expects Cathay Life to maintain its value-driven and lower capital-burden strategy. The insurer's strategic focus is on the sale of long-term regular-premium and protection-type products to improve the value of new business growth and contractual service margin accumulation. The new business margin on first-year premiums (FYP) was 21% in 2023, while accident and health FYP rose by 13%. Nonetheless, its profitability remains susceptible to spread gains, since traditional saving products represented 42% of new business annualised premium equivalent.
Return on equity averaged 8% in 2021-2023 (2023: 3%), while net profit plunged by 51% in 2023, due to soaring traditional hedging costs on continued US rate hikes and increasing foreign-exchange losses resulting from the year-end appreciation of the Taiwan dollar.
High Risky-Asset Ratio: Risky assets, mainly stocks, and equity-type investments, stood at 166% of equity and loss-absorbing reserves at end-2023, down from 187% at end-2022. The decline was driven by a larger amount of total equity. High exposure to equity investments leaves earnings and capital vulnerable to volatile equity markets. The considerable overseas investments expose the insurer to swings in hedging cost and foreign-exchange risk; foreign-currency investments accounted for 67% of total cash and invested assets at end-1Q2024.
Dynamic Asset-Liability Management: The insurer reclassified some of its foreign bonds with higher interest-rate sensitivity and lower market liquidity to assets measured at amortised costs from assets measured at fair value through other comprehensive income, to reduce volatility in its financial results caused by interest rate risk. A portion of its overseas bond investments is used to back up the Taiwan-dollar-denominated policies, leaving it exposed to interest rate and currency mismatches between Taiwan and the US.
'Most Favourable' Company Profile: Fitch assesses Cathay Life's business profile as 'Most Favourable' and corporate governance as 'Neutral', compared with that of other life insurers in Taiwan. It is Taiwan's largest life insurer, with a 21.3% share of the life market by premiums in 2023. Fitch believes the insurer will retain its market leadership, supported by strong brand recognition, competitive advantage, a diversified business mix, and various distribution channels, including the largest agency sales force in the sector.