Taiwan's life insurance companies are likely to face higher risks than Taiwanese banks, because the island's life insurers generally hold larger amounts of assets denominated in foreign currencies, according to a report by Taiwan Ratings report, a local subsidiary of international credit rating agency Standard & Poor's.
In a 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 life insurers and banks have been looking for assets overseas.
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. The life insurers have been gearing up to increase their positions in foreign currency assets in recent years. As a result, as of the end of 2014, foreign currency-denominated assets accounted for 50% of their total invested assets, much higher than the 21% ratio of their bank counterparts.
Taiwan Ratings said that credit profiles of banks tend to be less sensitive to foreign currency risks than that of 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.
The credit profiles of life insurers are under growing pressure, particularly in terms of rising unhedged positions and investment concentration in financial institutions.
Life insurers’ unhedged positions have grown noticeably over the past few quarters due to an increase in yuan-denominated investments and expectations of continued appreciation in the US dollar, Taiwan Ratings said. Furthermore, the concentration correlates with increased positions in foreign currency-denominated bonds issued in Taiwan by foreign financial institutions, as well as mergers and acquisitions involving overseas financial institutions.
“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 unfavourable foreign fluctuations over the next year,” Taiwan Ratings analyst, Ms Serene Hsieh, said in the report.