AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” (Excellent) of Cathay Century Insurance Company Limited (Cathay Century) (Taiwan). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Cathay Century’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
Cathay Century’s consolidated adjusted capital and surplus shrank 17% to TWD 13.5 billion in 2022 from TWD 16.2 billion in 2021, primarily driven by very large claims arising from pandemic insurance products, unfavourable capital losses from investments and a dividend payout, despite partially offset by two rounds of capital injection totalling TWD 20 billion from its ultimate parent, Cathay Financial Holding Co., Ltd. (Cathay Financial Holding) during the year. Cathay Century’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), was at the very strong level at year-end 2022 and is expected to strengthen gradually over the short to intermediate term and be commensurate with the pre-pandemic level through earnings retention. Other supportive factors of the balance sheet strength assessment include the company’s diversified investment portfolio that focuses on low-risk fixed-income securities, good liquidity, and comprehensive reinsurance arrangements.
Cathay Century reported a significant net loss of TWD 19.6 billion in 2022, predominantly due to pandemic insurance claims. AM Best views the pandemic insurance loss as a one-off event and Cathay Century should be able to return to profit making going forward via the traditionally profitable non-pandemic insurance underwriting and investment results. The company has started to report positive monthly underwriting results since April 2023, with a net profit of TWD 181 million during the first half of 2023. In particular, Cathay Century’s major business line of voluntary motor has contributed to an improving underwriting margin supported by better pricing and its ongoing efforts to refine the risk quality and product composition.
Cathay Century remains the second-largest insurer in Taiwan’s non-life sector, with a market share of 12.8% in terms of direct premiums written (DPW) in 2022. The company’s underwriting portfolio is diversified moderately with motor being a major line of business, accounting for over half of the company’s DPW in 2022, followed by fire, accident and health businesses. The portfolio is skewed toward personal lines insurance products. The company continues to leverage the comprehensive business network of its parent group and affiliated distribution channels to grow its underwriting portfolio. In addition, Cathay Century has refined and strengthened its risk management by reviewing product design and underwriting control, following the significant pandemic insurance claims. Cathay Financial Holding also has collaborated with Cathay Century to provide risk oversight support and resources.
Negative rating actions could occur if there is a substantial decline in Cathay Century’s risk-adjusted capitalisation, for example, due to a higher-than-expected ultimate loss from pandemic insurance arising from reinsurance contract disputes or due to significant investment losses, and without timely capital support from its ultimate parent, Cathay Financial Holding. Negative rating actions also could occur if Cathay Century exhibits material and sustained deterioration in its operating performance, particularly in its non-pandemic traditional underwriting portfolio and investment results. A deterioration in the parent company’s credit profile, or a diminished level of parental support also may pose a negative impact on Cathay Century’s ratings.
Although the likelihood is relatively low, positive rating actions could occur if Cathay Century achieves sustained improvement and stability in its operating performance while maintaining a robust level of risk-adjusted capitalisation. An improvement in the parent company’s credit profile, or an enhanced level of parental support also may have a positive impact on Cathay Century’s ratings.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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