Low interest rates place insurance companies in bind

Declining interest rates are hurting the investment returns of insurance companies, prompting the Ministry of Finance to require nearly half of them to raise new capital by the end of this year.

An official at the ministry's Department of Insurance yesterday confirmed local media reports that 24 companies -- including nine domestic and three foreign-owned life insurers, as well as six domestic and six foreign property insurers -- are required to raise their capital this year to meet government regulations.

There are 57 local and foreign insurers operating in Taiwan.

Based on existing insurance regulations, the difference between an insurer's assets and liabilities must be more than 45 percent of its paid-in capital.

But due to the double blow of multiple Central Bank interest rate cuts and massive losses in securities investments in the past few years, 24 insurers will fail to meet the capital requirements, the ministry said.

While reasons behind the capital shortfalls vary, an analyst said the insurance sector fundamentals do not look good.

"The sector is fragmented and competitive. There are some 50 companies in the industry but most of them just have 2 percent to 3 percent of market share," William Fong (方偉昌), a banking analyst at Primasia Securities Co, said yesterday.

Fong said the sector has been experiencing low single digit growth in recent years, indicating the maturity of the sector. But the biggest impact came from the Sept. 11 terrorist attacks on the US last year, he noted.

"After last September, reinsurance premiums rose and profit margins for insurance companies were squeezed. The situation is especially tough for smaller players who cannot bare the risk," Fong said.

Though the government's action may help improve the financial conditions for the small players in an environment where interest rates are low and investment returns are poor, Fong said.

The government should also try to shake up the sector by encouraging mergers and acquisitions industry-wide.

"But it will not be easy [to achieve consolidation]. It seems a difficult task due to the nature of the business and its fragmented market," Fong said.

According to the ministry, the capital required ranges from several million NT dollars to some NT$3 billion each, depending on individual financial conditions, with Kuo Hua Life Insurance Co (國華人壽) needing to raise around NT$3 billion.

Other insurers ordered by the government to increase capital include: Global Life Insurance Co (國寶), Mingtai Fire & Marine Insurance (明台), South China Insurance Co (華南), Mercuries Life Insurance Co (三商), Sinon Life Insurance Co (興農), Hontai Life Insurance Co (宏泰), Far Glory Life Insurance Co (遠雄), Sing for Life Insurance Co (幸福), Allianz President Life Insurance Co (統一安聯), ING Antai Life Insurance Co (安泰), and Taiwan branches of Manufacturers Life Insurance Co of America and Prudential Life Assurance Co, Zurich Insurance Co, Cardif SA and AXA Assurances IARD.