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Fitch sees little impact from US woes on insurers

Despite rising concerns worldwide over fallout from the US credit crisis, Taiwanese life insurers face limited impact from their exposure to collateralized debt obligation (CDO) investments, Fitch Ratings said yesterday.

"While local life insurers face a total of around NT$30 billion [US$927.4 million] CDO exposure linked to US subprime mortgage products, those CDOs are generally highly rated," Jonathan Lee (李信佳), a senior director who tracks financial institutions at Fitch Ratings Ltd's Taiwan branch, told a media briefing.

Lee made the remarks as the ratings agency released its latest industry report on the local life insurance sector entitled "Taiwan Life Sector: Trends in Products and Investments."

While the local market is the fourth largest in Asia and has attracted more attention from global players lately, concerns about the potential impact of the US credit crunch on domestic life insurers persist.

Lee addressed these concerns by saying that local life insurers posted NT$50 billion in pre-tax profits in the first half of the year and not all of the NT$30 billion in CDO exposure would end up as losses on their books as insurers tend to hold these investments to maturity.

"The direct impact from the US credit crisis is still manageable," he said.

The NT$30 billion in CDO exposure is equivalent to 0.4 percent of the industry's investments or 6.2 percent of shareholders' equities as of the end of June, the ratings agency said.

Even in the event of a liquidation for debt recovery, local insurers also face no capitalization problem as many of the top-tier players have a risk-based capital ratio of 250 percent to 300 percent -- higher than the regulatory requirement of 200 percent, Lee said.

RBC is a measurement of an insurer's or a bank's financial strength, which takes into account capital reserves for loans, investments and certain other items off the balance sheet.

Although some life insurers recently disclosed their exposure to, or writedown on, certain NT dollar-denominated collateralized bond obligations (CBOs) linked to US subprime instruments, their impact is still under control, said Joyce Huang (黃佳琪), an associate director who covers financial institutions at Fitch Ratings.

Fitch estimated the amount of NT dollar-denominated CBOs totaled NT$200 billion and the writedowns represented a manageable percentage of the sector's shareholders' equity, Huang said.

However, second-tier, smaller life insurers face the challenge of recapitalizing as requested by the financial regulator to improve their financial structure, Huang said.

As of the end of June, three smaller life insurers reported negative shareholders' equity and are in need of fresh capital, Fitch Ratings said in the report.

Looking ahead, the sector's long-term growth prospects remain good, while its short-term business outlook may be affected by cyclical factors, such as changes in interest rates and equity prices, the report said.

On the product front, insurers' focus will shift from traditional products to interest-sensitive and investment-linked products, it said.

"Compared to CDOs and CBOs, Taiwanese life insurers are becoming more sensitive to changes in interest rates as well as to movements in the NT dollar/US dollar exchange rate," Lee said.

The nation's central bank has raised interest rates for 13 straight quarters since September 2004, while the US Federal Reserve recently adjusted down its benchmark rates to boost economic growth, resulting in a narrowed interest spread that's helpful to local life insurers as compared to what they faced three to four years ago, he said.

With overseas assets accounting for more than 30 percent of local insurers' total investment, foreign currency exposure has created a "long-term mismatch" between life insurers' assets and liabilities, Fitch said, adding that hedging has become one of the most challenging tasks facing the sector.

"The risk of Taiwanese dollar appreciation has to be dynamically managed by the insurers," the report said.

"Among the factors Fitch analyzes, the companies' risk mitigation procedures are particularly important," it said.

Overall, the ratings agency said the nation's aging population, the growing popularity of wealth management products and tax incentives offered by the government are all viewed positive to the sector's long-term development.
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