Tai­wan life in­sur­ers fac­ing higher forex risks

The China Post - - LOCAL -

Tai­wan’s life in­sur­ance com­pa­nies are likely to face higher risks than Tai­wanese banks, as life in­sur­ers here gen­er­ally hold larger amounts of as­sets de­nom­i­nated in for­eign cur­ren­cies, ac­cord­ing to a Tai­wan Rat­ings Corp. re­port.

In the re­port ti­tled “Tai­wan’s Life In­sur­ers Face Higher For­eign Ex­change Risks than Banks,” Tai­wan Rat­ings said that as in­ter­est rates in Tai­wan re­main low and the lo­cal fi­nan­cial sec­tor’s prof­its have stayed stag­nant, many banks and life in­sur­ers have been look­ing for as­sets over­seas.

Eye­ing higher earn­ings from the for­eign mar­kets, Tai­wanese fi­nan­cial in­sti­tu­tions, in par­tic­u­lar life in­sur­ers, have led the way to raise their for­eign cur­rency po­si­tions un­der un­fa­vor­able con­di­tions in the lo­cal mar­ket, Tai­wan Rat­ings said.

Mar­ket an­a­lysts said that Tai­wanese life in­sur­ance com­pa­nies are gen­er­ally sit­ting on mas­sive cash and cash equiv­a­lents from fat pre­mium in­come, so they are ea­ger to buy in­vest­ment in­stru­ments to rake in earn­ings.

“Un­der our base-case sce­nario for forex risk, the ma­jor­ity of the is­land’s life in­sur­ers can sus­tain their forex risk ex­po­sures, but they have min­i­mal mar­gins to ab­sorb un­fa­vor­able for­eign fluc­tu­a­tions over the next year,” Tai­wan Rat­ings an­a­lyst Serene Hsieh said in the re­port.

“The sec­tor’s forex risk is ap­proach­ing the borderline for a neg­a­tive as­sess­ment un­der our cri­te­ria, and any fu­ture de­te­ri­o­ra­tion could ul­ti­mately lead us to lower our rat­ings,” Hsieh said.

Tai­wan Rat­ings said that life in­sur­ance com­pa­nies in Tai­wan have been gear­ing up to in­crease their po­si­tions in for­eign cur­rency as­sets in re­cent years.

As a re­sult, the credit rat­ing agency said that as of the end of 2014, for­eign cur­rency-de­nom­i­nated as­sets ac­counted for 50 per­cent of their to­tal in­vested as­sets, much higher than the 21 per­cent ra­tio claimed by their bank coun­ter­parts.

Tai­wan

Rat­ings

said

that credit pro­files of banks tend to be less sen­si­tive to for­eign cur­rency risks than life in­sur­ers, since banks have ben­e­fited from strong liq­uid­ity to fund their for­eign cur­rency as­sets and al­ready have a more man­age­able ex­po­sure to cut their in­vest­ment risks sig­nif­i­cantly.

How­ever, Tai­wan Rat­ings said, Tai­wanese banks’ over­seas ex­pan­sion strate­gies could con­tinue to strain their credit pro­files over the long term if they re­main short of suf­fi­cient risk man­age­ment.

Still, com­pared with banks, the credit rat­ings agency said, life in­sur­ers in Tai­wan are ex­pected to face more im­me­di­ate rat­ing pres­sure from their over­seas in­vest­ments.

Tai­wan Rat­ings is a lo­cal sub­sidiary of U.S.-based credit rat­ing agency Stan­dard & Poor’s.

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