Related Market Sector:
Fitch Ratings-Taipei/Hong Kong/Singapore-10 July 2009: Fitch Ratings has today said, in a just published commentary, that the global financial crisis and subsequent severe economic recession in Taiwan have heightened the lingering and substantial risk of large negative interest carry for Taiwanese life insurers. Weak capitalisation, impaired by poor investment results, has undermined systemic stability.
In "Taiwanese Life Insurers' Weak Capitalisation Undermines Systemic Stability", the agency provides an update on the latest capital levels of Taiwanese life insurers and elaborates on its concerns about their vulnerability to likely disruptive capital market developments and a prolonged low interest-rate environment.
"The substantial decline in Taiwan's stock market, volatility of foreign exchange rates and deterioration of the credit quality of structured securities in 2008 caused substantial losses in the life sector," notes Joyce Huang, Associate Director on Fitch's Insurance team. "This led to a sharp deterioration in most companies' capital strength," adds Ms. Huang.
Aggregate shareholders' equity decreased to TWD230bn at end-April 2009 (representing only 2.6% of total assets) from TWD433bn at end-2007, and five companies (out of 30) had negative net worth of TWD90bn in aggregate at end-2008.
Fitch considers the much reduced capital level as fragile to withstand potential equity price declines and foreign exchange rate fluctuations given the significant domestic equity exposures (around 2x shareholders' equity on average at end-April 2009), and large offshore investments for most life insurers. In addition, the prevailing low interest rate has exacerbated the negative interest spreads, further pressuring their weak capitalisation.
"Given the generally long duration of a life insurer's insurance liabilities, the impact of the negative interest spread on its capitalisation would be significant if the interest rate continues to stay at this low level," says Huang.
According to certain major local life insurers' disclosures (such as Cathay Life, Shin Kong Life, ING Life and Fubon Life), the assumptions they used for calculating embedded value was a rising investment return of 3.5%-5% over the life of in-force policies. This return target looks challenging compared with the 10-year government bond yield of only 1.6%, while the sensitivity analysis shows that a 25 bp fall in the assumed investment return could cause a 15%-43% drop in a life insurer's embedded value.
Without an appropriate exit mechanism in place, Fitch notes that the sector's weak capitalisation has undermined systemic stability. In particular, Fitch notes that some severely weakened capitalised companies still price aggressively to gain new business. The global financial crisis has also forced some foreign companies to dispose of their Taiwanese operations (acquired by local companies) to relieve their capital pressure. The agency considers the acquisitions would potentially add burdens to these acquirers' capitalisation in view of the current difficult operating environment.
The commentary, "Taiwanese Life Insurers' Weak Capitalisation Undermines Systemic Stability", is available at www.fitchresearch.com.
Contacts: Joyce Huang, Jonathan Lee, Taipei, +886 2 8175 7600/
joyce.huang@fitchratings.com &
jonathan.lee@fitchratings.com.
Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6796 7215,
Email:
shivani.sundralingam@fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
