Insurance stocks up on US Fed cut

Insurance closed higher yesterday as the US Federal Reserve's first rate cut in four years prompted market speculation that prices of insurers' NT dollar-dominated assets could rise while insurers may shift focus from US-dollar assets to local assets.

Shares Cathay Financial Holding Co (國泰金控), which owns Cathay Life Insurance Co (國泰人壽), the nation's largest life insurer, rose NT$3.2 -- or 4.31 percent -- to NT$77.4 yesterday on the Taiwan Stock Exchange.

Rival Shin Kong Financial Holding Co (新光金控), which controls Shin Kong Life Insurance Co (新光人壽), the nation's third-largest life insurer, saw its shares climb NT$0.35, or 1.16 percent, to NT$30.4.

The Fed lowered its benchmark lending yesterday by an unexpected 50 basis points, sparking a rally in global equities.

"For life insurers, the short-term effect from the Fed's rate cut is a lower hedge risk, if our central bank maintains its rate hike move unchanged," Lee Chang-ken (李長庚), chief strategy officer at Cathay Financial, said in a telephone interview last night.

Most of Taiwan's life insurers have in the past few years increased their overseas investments for higher yields and longer duration, Lee said. In doing so, they have also encountered a higher level of foreign exchange risk, he said.

"In the long term, we may adjust their investment portfolios ... but that will depend on how the Fed's reduction in the federal funds rate -- a short-term market rate -- will ripple through the system and affect the longer-term rates on which most of our different duration assets are based," Lee said.

Cathay Financial will invest more in local assets only if there are matches between its expectations of stable cash flows, high yields and balanced asset-and-liability management, he said.

The nation's central bank is expected to announce today whether it will adjust its interest rates to address concerns over slow exports, rising commodity prices and financial market worries.

In a report released yesterday titled Life Insurance Industry Risk Analysis: Taiwan, Taiwan Ratings Corp (中華信評) gave Cathay Life and other local life insurers a stable business outlook and a moderate industry risk.

"Stable economic conditions and improved operational flexibility have enabled insurers to manage themselves more proactively in terms of products, channels and investments, and to diversify their ventures,'' Susan Chu (朱素徵), director of Taiwan Ratings' financial services ratings, said in the report.

"Strong competition and a volatile investment environment are likely to be key sensitive factors affecting the sector's performance," she said.

Although the life insurance industry had a mediocre performance in recent years, the increasing shift away from these traditional products is expected to show improvement in the medium to long term, Taiwan Ratings associate Steven Chen (陳智誠) said in the report.