The nation’s life insurers are drawing red flags from credit-rating firms as increased overseas investments leave them vulnerable to gains by Asia’s best-performing currency.
Foreign holdings climbed to 52 percent of their assets at the end of April from 50 percent in December last year and 38 percent in 2011. Fitch Ratings and Moody’s Investors Service have negative outlooks on the industry as the lowest bond yields in Asia outside of Japan prompt Taiwanese insurers to look abroad.
The New Taiwan dollar has advanced 1.8 percent against the US dollar and jumped 9.6 percent against the euro this year.
Standard & Poor’s (S&P’s) local unit says the NT dollar’s strength is a risk to an industry with NT$18.97 trillion (US$606.8 billion) of assets.
Life insurers have scaled back hedging to maximize gains from the currency’s weakness over the past two years and its rebound erodes reserves they have set aside to cover exchange-rate losses.
“We’ll be quite concerned if insurers maintain the pace of increase in their overseas positions,” said Serene Hsieh (謝雅瑛), a Taipei-based analyst at Taiwan Ratings Corp (中華信評), S&P’s local arm. “In the past couple of years, the incentive to hedge has been relatively weak. If the Taiwan dollar continues to gain, then the reserves will be used up by quite a lot.”
Taiwan Ratings estimates insurers hedged 70 percent of their foreign-currency investments in 2013 and last year, down from 75 percent previously.
Higher foreign holdings are pushing the nation’s life insurers closer to a lowering of their average risk assessment, boosting the chance of credit ratings of individual companies being downgraded, Hsieh said.
The local industry’s risk level is ranked moderate, the third-lowest on S&P’s scale for insurers. Only Jamaica’s insurers are assessed riskier.
Unhedged foreign-exchange positions at Cathay Life Insurance Co (國泰人壽), Taiwan’s largest, rose to 22 percent last year from 17 percent a year earlier, according to Moody’s. Cathay Life said that while its hedging ratio has declined, the company is using derivatives for protection and also maintains currency reserves.
Insurers’ so-called foreign-exchange volatility reserves amounted to NT$54.8 billion at the end of last year, less than 1 percent of their overseas investments, Financial Supervisory Commission data showed.
Overseas assets of Taiwanese insurers rose to NT$8.9 trillion as of April 30, from NT$8.3 trillion on Dec. 31 last year and NT$4.3 trillion at the end of 2011, the commission’s data showed.
Bonds make up the majority of the holdings, according to Moody’s, and Fitch estimates about 90 percent of the foreign assets are denominated in the US currency.
Besides investing in fixed-income assets, local insurers have been buying real estate and investing in financial institutions overseas.
The industry’s 3.8 percent weighted average liability cost was significantly higher than its recurring investment yield of 2.8 percent in 2013, according to a presentation in June last year by the commission. Fitch estimates the cost is as high as 4 percent.
Though Moody’s has a negative outlook on the nation’s life insurance industry, some companies are faring better. The assessor has a positive outlook on Cathay Life, which is rated at “Baa2,” the second-lowest investment grade. Fubon Life Insurance Co (富邦人壽), the nation’s second-largest and ranked “A3,” two levels above Cathay, is assessed as stable.
Taiwan Ratings ranks Cathay Life “AA+,” its second-highest grade, with a negative outlook. Fubon has the same rating with a stable outlook. Fitch ranks CTBC Life Insurance Co (中國信託人壽) at “A,” its third-highest, with a negative outlook.
While hedging costs eat into returns on overseas investments, insurers’ positions need to be fully protected to avoid exchange-rate losses, Hong Kong-based Fitch analyst Joyce Huang (黃佳琪) said.
“We’ll have to see how they manage risk given the currency mismatch between their assets and liabilities,” she said.
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