The shares in Taiwan’s life insurance firms and parent companies rose sharply yesterday after accounting rule changes on Wednesday, but analysts adopted neutral views about their earnings outlook and called for capital consolidation to buffer drastic external risks.
The shares in Cathay Financial Holding Co (國泰金控), parent of Cathay Life Insurance Co (國泰人壽); China Life Insurance Co (中國人壽) and Taiwan Life Insurance Co (台灣人壽) closed up by the 7 percent daily limit yesterday after the Financial Supervisory Commission (FSC) approved the establishment of a special reserve to absorb foreign exchange losses.
Under the accounting rule adjustments, which take effect next quarter, domestic life insurers can cut expenses on hedging foreign-currency financial assets and set up provision instead for foreign exchange losses.
The companies have said not all hedging costs are necessary, because their foreign financial assets are intended for long-term investment and can emerge unscathed from short-term currency volatility.
Andy Chang (張書評), a financial ratings analyst at Taiwan Ratings Corp (中華信評), the local arm of Standard & Poor’s, said the policy change would give life insurance firms greater flexibility in dealing with foreign exchange risks.
“Life insurance companies that choose to cut hedging costs will be more vulnerable to foreign exchange volatility,” Chang said by telephone.
In essence, life insurance companies may move foreign exchange losses from the expense row in their income statements to their balance sheet, he said.
While the New Taiwan dollar has been relatively stable in recent years, there is no guarantee of perpetual stability, Chang said.
“The Japanese yen’s strong pickup beat all forecasts,” he said.
Life insurance firms could better use saved costs to strengthen their capitalization because many of them are still battling negative interest spread from policies sold years ago, Chang said.
The low interest rate environment for the past decade and the lack of investment tools has driven Taiwanese insurers to increase their holdings in foreign-currency assets in the pursuit of fixed income, Chang said, adding the trend gives birth to and underscores the need for hedging costs.
“In the end, companies with successful business and risk management strategies will benefit from the accounting rule adjustments,” he said.