Fitch Ratings Ltd maintained its negative outlook on Taiwan’s life insurance sector on expectations that the sector would remain under pressure from negative interest spreads, a Hong Kong-based analyst said yesterday.
“Negative interest spreads arising from past high-guaranteed rate policies will remain significant and weigh on profitability,” Hong Hong-based insurance analyst Joyce Huang (黃佳琪) told a media briefing in Taipei.
Such legacy policies keep cost of liabilities at an average of 3.5 percent to 4 percent, well above market interest rates of 1.7 percent for 10-year government bonds, Huang said.
The international ratings agency will not consider revising its outlook for domestic life insurers unless the benchmark interest rate rises to 2.5 percent, which is unlikely in the coming one to two years, Huang said.
“We will stand by our estimate,” even if the US Federal Reserve winds down its quantitative easing operations next year, thereby pushing up interest rates around the world, Huang said.
This is because long-term fixed income securities account for 70 percent of the sector’s invested assets, the analyst said.
Most local and foreign research houses have predicted that the central bank would hold interest rates steady at 1.875 percent when it holds its quarterly meeting on Thursday next week.
The central bank is expected to maintain its easy monetary stance through the first half of next year or longer depending on the pace of economic recovery, analysts have said.
The coming accounting change — under which life insurers may book unrealized gains in property value — will have little influence over their earnings capability, Huang said.
Tightening requirements for sales of quasi-savings insurance policies may weaken overall premiums for some insurers, as regulators are seeking to discourage such policies in favor of protection-type products, Huang said.
Fitch Ratings has a stable outlook on non-life insurers, as they maintain adequate capital buffers and have increased retention of profitable product lines in response to fierce price competition, Huang said.