Cathay Life Insurance Co, Taiwan's largest insurer by life market premiums in 2023, established a special purpose vehicle (SPV), Cathaylife Singapore Pte Ltd, in Singapore on 5 June 2024.
The move makes the life insurer the first to take advantage of the Financial Supervisory Commission's measure announced in March 2024 that allows Taiwanese insurers to issue bonds that count towards capital through the setting up of SPVs overseas, says Fitch Ratings.
This will diversify insurers' capital-raising channels to strengthen their regulatory solvency positions. Cathay Life, as the guarantor, unconditionally and irrevocably guarantees full payment, when due, of the principal and interest of the bonds.
Ratings assigned
Fitch has assigned Cathay Life's (Insurer Financial Strength (IFS) Rating: ‘A/Stable’, Long-Term Issuer Default Rating: ‘A-/Stable’) proposed offshore US-dollar Tier 2 subordinated dated capital bonds a 'BBB+' rating.
The proposed bonds will represent the insurer's direct, unsecured and subordinated obligations. The net proceeds will be used to supplement and strengthen Cathay Life's regulatory capital adequacy ratio.
The proposed 10-year bonds due 2034 are rated one notch below Cathay Life's IDR to reflect Fitch's 'Below Average' recovery assumption for subordinated debt issued at an operating company. Should the company be wound up, the subordinated bonds will rank junior to the present and future claims of all senior creditors, but pari passu to the claims of holders of any parity obligations of the insurer and in priority to claims of holders of any share capital of the insurer, including ordinary shares and preferred shares, and any other junior obligations of the issuer.
There is no additional notching for non-performance risk, because Cathay Life does not have discretion to defer interest payments.
Fitch applies a "regulatory override" to the extent that the proposed securities are afforded equity credit for regulatory solvency purposes, and similarly classifies the same extent of these bonds as 100% equity capital in the capital-adequacy assessment. However, the proposed securities are classified as 100% debt for Fitch's financial leverage calculations, as they are dated bonds.
Solvency
The debt issuance will strengthen Cathay Life's solvency position in preparation for the transition to Taiwan Insurance Capital Standards, which have more stringent capital requirements than the current risk-based capital (RBC) regime. Cathay Life's RBC ratio was 323% at end-2023, against the regulatory minimum of 200%.
Fitch expects Cathay Life's financial leverage ratio to remain commensurate with its ratings following the proposed issuance of not more than NT$30bn ($921m) equivalent in subordinated bonds. The insurer issued NT$50bn equivalent in subordinated debt collectively in April and May 2024. The financial leverage ratio was low, at 9%, at end-1Q24.
The insurer's capital score, as measured by the Fitch Prism model, was 'Strong' at end-2023. Its strategic focus is on the sale of protection-type products to improve the value of new business growth and contractual service margin accumulation. Nonetheless, net profit plunged by 51% from 2022 due to soaring traditional hedging costs on continued US rate hikes and increasing foreign-exchange losses due to the year-end appreciation of the Taiwan dollar.
Cathay Life is a wholly owned subsidiary of Cathay Financial Holding Co which is Taiwan's largest financial holding company by assets.