This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 TAIPEI 004739 
 
SIPDIS 
 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Taiwan Insurance Firm Ordered Closed 
 
¶1.  Summary:  Taiwan's Financial Supervisory Commission 
(FSC) has ordered Kuo Hua Insurance to cease operations due 
to insolvency and has requested the state-owned Taiwan 
Insurance Institute (TII) to liquidate Kuo Hua.  Outstanding 
claims against Kuo Hua may exhaust Taiwan's Insurance 
Stabilization Fund (ISF).  End Summary. 
 
Liquidation of Insurance Firm for the First Time 
--------------------------------------------- --- 
 
¶2.  On November 18, the FSC ordered Kuo Hua Insurance (not 
the similarly named Kuo Hua Life Insurance Company) to 
suspend operations due to insolvency.  The FSC also 
suspended Kuo Hua's board of directors and all board 
members.  According to the FSC order, Kuo Hua may no longer 
sell insurance products.  Meanwhile, the FSC instructed the 
TII to prepare Kuo Hua for liquidation.  In response, TII 
has assumed control of Kuo Hua's headquarters and eight 
branch offices and has begun reviewing outstanding policies, 
claims, and personnel data. 
 
Insolvency 
---------- 
 
¶3.  According to the FSC Insurance Bureau (IB), Kuo Hua 
suffered a pretax loss of NT$1,073 million last year, 
sending its net worth to negative NT$515.8 million.  In its 
audit last year, the IB detected problems in Kuo Hua's 
financial status and ordered it to increase its capital 
reserves.  However, Kuo Hua failed to meet the IB directive, 
and in September the FSC referred Kuo Hua Chairman Wang Jing- 
biao to the prosecutor's office for accounting fraud. 
 
Market Stabilization 
-------------------- 
 
¶4.  The FSC has assured Kuo Hua customers that their 
interests will be protected and has urged them not to cancel 
their insurance contracts, which would result in only 
partial refunds.  There are about 1.02 million outstanding 
Kuo Hua insurance policies, including 660,000 compulsory 
automobile liability insurance policies, 19,000 earthquake 
insurance policies, and 130,000 other kinds of insurance 
policies, such as fire, marine, credit, and discretionary 
automobile liability insurance.  The insurance company- 
funded ISF will pay 100% of claims for automobile liability 
insurance and earthquake insurance and 90% of claims on 
other kinds of policies.  The IB told AIT/T that the ISF has 
NT$2.68 billion on hand, which would probably be sufficient 
to meet the payment obligations. 
 
Likely Acquisition 
------------------ 
 
¶5.  Both local and foreign non-life insurance companies are 
interested in Kuo Hua because of its extensive market 
network.  FSC officials told AIT that payments to acquire 
the Kuo Hua network and clients are expected to offset part 
of the liquidation cost. 
 
COMMENT 
------- 
 
¶6.  No Taiwan insurance company has previously ceased 
operation.  The FSC-ordered suspension of Kuo Hua's 
operations tests a market retreat mechanism for insurance 
firms and is a reassuring sign of the FSC's commitment to 
improving the health of Taiwan's financial sector.  However, 
the ISF may be unable to fund any additional insolvency 
cases unless the Taiwan government injects funds to 
supplement insurance companies' contributions or raises the 
contribution amount. 
 
PAAL