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April 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Taiwan-based Union Insurance Company’s (Union) Insurer Financial Strength (IFS) Rating to ‘BBB+’ from ‘BBB’ and its National IFS Rating to ‘AA-(twn)’ from ‘A+(twn)'. The Outlook has been revised to Positive from Stable.
The ratings upgrade reflects improvement in Union’s underwriting performance following efforts over several years to restructure products and its consistently strong capitalisation. The Positive Outlook takes into account Fitch’s expectation that the improved business quality will support Union in delivering steady underwriting profits.
Union’s profitability has improved with annualised ROAE of 12.3% in 9M13 compared with -2.2% in 2012. This mainly reflects its focus on expanding business segments with favourable loss ratios (such as in the commercial motor insurance segment). The commercial motor insurance segment accounted for 45% of direct-written premiums in 9M13 compared with 33% in 2009. The change in product mix has resulted in improvement in its combined ratio to 89.8% in 9M13 from 98.6% in 2012, excluding the impact of compulsory motor insurance.
Union’s statutory risk-based capital ratio was sound at above 300% at end-1H13, 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/adjusted shareholders’ surplus (including shareholders’ fund and claims equalisation reserve) at around 1x from 2010-9M13.
Investments remain prudent and liquid, with cash and cash equivalents accounting for 49% of invested assets at end-3Q13, comfortably supporting its insurance claims. Credit quality in fixed-income portfolios remained sound as they were mainly government bonds. Equity exposures increased to 16% of total investments at end-3Q13 from 6% at end-2012, but remained manageable, with equity exposures representing a moderate 23% of shareholders’ equity.
Key rating triggers for an upgrade include consistently sustained profitability with the combined ratio at 95% or below (all business lines included) in the long run. Continued strong capitalisation and maintenance of a liquid balance sheet are also key considerations for a higher rating, considering Taiwan’s susceptibility to catastrophes such as typhoons, earthquakes, and floods. Deterioration in underwriting performance or substantial underwriting/investment losses resulting in a fall in Union’s statutory capital ratio to below 250% on a sustained basis are key triggers for a rating downgrade.