Fitch lowers the ratings of Taiwan's life insurance companies.
Taiwan's Major Life Insurers Feeling the Heat from New Taiwan Dollar Appreciation
By Crystal Hsu / Staff reporter
Here's the skinny on Taiwan's life insurers scrambling due to the New Taiwan dollar (NT$) surging against the US dollar. It's all because of a hefty exposure to foreign currency assets, most notably US dollar-denominated investments.
Life Insurers in a Pinch
The swift NT$ appreciation, about 8% in just a couple of days, has stirred up trouble for these life insurers. You see, they've been investing heaps of their NT$ liabilities in US dollar assets, creating a substantial currency mismatch. This disconnect now threatens their financial well-being.
The international rating agency, Fitch, has put five Taiwanese life insurers - Cathay Life Insurance Co, Fubon Life Insurance Co, KGI Life Insurance Co, Nan Shan Life Insurance Co, and Taiwan Life Insurance Co - on "rating watch negative." This move signals potential cracks in their capital adequacy, earnings, and overall business profiles.
But don't think the insurers are taking it lying down. Fitch has yet to observe a surge in policy surrenders, but they're warning that such a move could happen—potentially putting more stress on the insurers' credit profiles.
Dealing with the Dilemma
The NT$ strengthening shrinks the NT$ value of insurers' US dollar-denominated assets and puts pressure on their capital buffers and risk profiles. Fitch expects to resolve the negative credit watch within three to six months after sizing up the outlook for foreign exchange volatility and the insurers' strategic responses, including changes in capitalization and earnings profiles.
The insurers currently have buffer rooms full of capital to absorb a 10% NT$ appreciation against the US dollar without falling below downgrade thresholds. However, sustained capital ratio declines accompanied by continued NT$ strength and weaker earnings could trigger negative rating moves.
The increased NT$ value comes with a higher price tag, as foreign exchange hedging costs rise, and the possibility of more appreciation remains. Harder still, the insurers' hedging strategies may strain under the weight of the soaring hedging costs and unprecedented currency fluctuations, leaving them exposed to further hardships.
What's next for the Insurers and the Market?
The NT$ appreciation stirs up a whirlwind of investment complications for insurers, making it challenging to manage risk and staggering returns. This volatility may lead to losses if insurers are forced to sell assets or hedge at unfavorable exchange rates.
There's also a difference in the hedging strategies Taiwanese life insurers employ, from intensifying efforts to shield against currency fluctuations to choosing to hold onto riskier positions. The lack of consensus on the appropriate approach to manage the currency risk adds to the guessing game.
If Fitch goes ahead and downgrades the insurers, their borrowing costs could soar, undermining investor confidence and casting a shadow on the Taiwanese insurance sector. The added instability in the sector could seep into broader financial markets and negatively impact overall investor sentiment.
So, buckle up, folks—there's a bumpy ride ahead!
The unexpected strength of the New Taiwan dollar could impact not only the life insurers but also the broader business and finance industry, as the currency mismatch threatens the capital adequacy and earnings of Taiwanese life insurers like Cathay Life Insurance Co, Fubon Life Insurance Co, KGI Life Insurance Co, Nan Shan Life Insurance Co, and Taiwan Life Insurance Co. Higher foreign exchange hedging costs and potential downgrades from international rating agencies could strain the banking-and-insurance sector, affecting investor sentiment across industries.
