The nation’s life insurance companies and banks have emerged from recent bond price corrections unscathed despite some net worth losses, thanks to risk-hedging measures and income from product sales, the Financial Supervisory Commission (FSC) said yesterday.
The financial regulator made the comments after concluding an interest sensitivity test on domestic life insurers and banks in the event that the US Federal Reserve starts to wind down quantitative easing (QE) and bond prices fall.
Life insurers stake a bulk of their investment funds in bonds and funds at home and abroad to generate a fixed income, raising concerns over their financial health in the wake of significant rises in US and local bond yields.
Bond yields are negatively related to the movement of bond prices.
“Overall, domestic life insurance companies are able to absorb the recent market volatility, though it does weigh on their net worth,” an insurance official said by telephone on condition of anonymity.
The recent rallies in bond yields wiped out about NT$112.6 billion (US$3.76 billion) from the sector’s net worth, which stood at NT$623 billion as of June 30, compared with NT$735.6 billion on April 30, FSC data showed.
Yields for benchmark 10-year government bonds gained 100 basis points during the past two months and the yields for local bonds picked up 40 basis points, the commission said.
Together, the yield hikes could weaken the sector’s net worth by NT$226 billion in the absence of response measures, FSC vice chairwoman Jennifer Wang (王儷玲) said on Thursday.
As for stock holdings, losses of 100 points in the TAIEX could reduce the sector’s net worth by an extra NT$10.7 billion, Wang said.
“The commission will not introduce governance forbearance, as the turnaround in interest rates is favorable for life insurers in the long run,” Wang said, adding that all except five insurers meet the minimum capital adequacy requirement of 200 percent.
“We did not see much difference in capital adequacy levels after reports of the QE exit from a quarter earlier,” Wang said.
The sector raked in NT$32.7 billion in earnings in the first half of the year, approaching NT$36.3 billion for the whole of last year, the commission said.
Still, major life insurers cut more than NT$150 billion worth of bond and fund holdings in the last two months to curb losses and continue to adjust portfolios this month, according to their stock filings.
“The nation’s banks are less susceptible to bond price volatility because lenders usually hold onto their debts until they mature,” said Jean Chiu (邱淑貞), deputy director-general of the FSC’s banking bureau.
An interest hike of 50 basis points would cause a decline of NT$27.5 billion in the banking sector’s net worth, Chiu said, citing the test results.