Higher interest rates will have mixed impacts on life insurance companies, because they will raise bond yields for new money investments, but lower the price of existing bond portfolios, Taiwan Ratings Corp (中華信評) said in a report.
The local arm of US ratings agency Standard & Poor’s issued the report after bond yields at home and abroad gained significantly after the US Federal Reserve signaled plans in June to taper off its quantitative easing.
“Local life insurers will require at least adequate asset-liquidity management to make the most from rising interest rates, while tackling the associated risks,” Taiwan Ratings credit analyst Serene Hsieh (謝雅瑛) said in the report.
Higher interest rates would raise bond yields for new money investments and improve long-term earnings, but higher yields on new bonds would lower the price of existing bond portfolios and weaken equity levels because yields and prices move in opposite directions, she said.
Taiwan Ratings forecast a gradual and moderate hike of between 50 and 100 basis points in interest rates over the next two years.
The expected increase could enhance insurers’ earnings and capital, but not in a drastic fashion, because it would take some time for the companies to adjust their fixed-income portfolios for better yields, Hsieh said.
A more rapid rise in interest rates, though unlikely, could create liquidity problems for some insurers, she added.
This could occur if policyholders cash in old policies for higher-yielding ones at competing financial institutions, and insurers have to sell their devalued bond holdings at a loss to meet demand from surrenders, the report said.