Kuo Hua told to stop writing policies

Debt-ridden Kuo Hua Insurance (國華產險), the nation's smallest property insurer by capitalization, has been ordered to immediately cease writing new policies, the Financial Supervisory Commission (FSC) said yesterday.

The order marks the nation's first shutdown in the insurance industry in 35 years.

The FSC said the action was a pre-emptive move to protect the interests of Kuo Hua's policyholders.

"The insurer is seriously cash-strapped ... and is deemed to have no chance of restructuring or recovery," FSC spokesman Lin Chung-cheng (林忠正) told reporters yesterday.

The financial regulator ordered Kuo Hua to cease operations and said it has commissioned the Taiwan Insurance Institute (保險事業發展中心) to rehabilitate and clean up the company's assets, starting yesterday, Lin said.

The assets could eventually be auctioned off, he said.

Kuo Hua was established in 1962 with paid-in capital of NT$1.4 billion (US$41.6 million) and eight branches nationwide. The insurer's business is heavily concentrated in auto insurance, including both voluntary and compulsory lines.

The company has faced serious operational difficulties with vulnerable capitalization. It currently has only NT$11 million cash in hand, which is not even enough to meet the NT$14 million payroll figure for its more than 400 employees.

Kuo Hua currently has a negative net worth, according to the commission.

The FSC's decision came after the insurance firm failed to raise bailout funds of NT$200 million in June. Kuo Hua managed to complete the previous cash injection of NT$100 million last year.

To protect the interests of Kuo Hua's policyholders, the commission said it will create a stabilization fund worth more than NT$2.6 billion specifically for property insurance, which will be used to compensate Kuo Hua's more than 1 million policyholders.

Kuo Hua policy holders with compulsory auto-insurance and residential earthquake insurance policies will be able to claim full compensation, while those who hold policies such as fire and flood insurance can only obtain 90 percent compensation, with an upper limit of NT$3 million. The total compensation amount will be limited to NT$3 million per person.

The commission has asked local district prosecutors to place restrictions on the company's board directors and superintendents leaving the country and demanded that they bear unlimited compensatory obligations in a bid to prevent possible embezzlement, Lin added.

Standard & Poor's Ratings Services said yesterday that it had revised its financial strength and counterparty credit ratings on Kuo Hua to "R" from "CCCpi" following the latest development, meaning the insurer is under regulatory supervision owing to its financial condition.

Separately, the FSC on Thursday ordered Taiwan International Futures Corp (金鼎期貨) to suspend business for six months, from Dec. 1 until May 31 next year, after an employee at the brokerage defrauded clients of over NT$2 billion through unauthorized trading.

The FSC also rejected the application of Taiwan International Securities Corp (金鼎證券), the futures broker's parent company, to merge with its smaller rivals Global Securities Finance Corp (環華證券金融公司), First Securities Co (第一綜合證券) and Far East Securities (遠東證券).

Taiwan International Securities should evaluate the impact and potential losses the deal could create and recalculate the share-swap ratio before lodging another application for the merger deal, the commission said.