Foreign investment poses potential risk for insurance firms

By Crystal Hsu  /  Staff reporter

Thu, Mar 19, 2015 - Page 13

Taiwanese life insurance companies have adequate systems to manage overseas investment risks, but a surge in foreign exchange exposure or uncontrolled growth in investment concentration could spell downward action for weaker insurers, Taiwan Ratings Corp (中華信評) said yesterday.

The lure of higher returns and longer tenor securities encouraged many of the nation’s life insurers to divert their investments away from Taiwan’s financial markets over the past few years, the local arm of Standard & Poor’s Financial Services LLC said.

The ratio of insurers’ overseas investments to their combined investment portfolio rose to 50 percent last year, from 44 percent in 2013, the ratings agency said.

The trend has raised insurers’ foreign exchange risks and investment sector concentration, as well as weakened credit profiles, Taiwan Rating said.

“The majority of life insurers have an intermediate risk position, which represents manageable investment risks,” credit analyst Patty Wang (王珮齡) said.

Nonetheless, credit profiles are under growing pressure, particularly in terms of rising unhedged positions and investment concentration in financial institutions, Wang said.

Life insurers’ unhedged positions have grown noticeably over the past few quarters due to an increase in yuan-denominated investments and expectations of continued appreciation in the US dollar, Wang said.

Furthermore, the concentration correlates with increased positions in foreign currency-denominated bonds issued in Taiwan by foreign financial institutions, as well as mergers and acquisitions involving overseas financial institutions, the analyst said.

The investment strategy could drive Taiwan Ratings to downgrade an insurer’s risk position if it fails to come up with proper risk management measures, Wang said.

The concern is evident and present for insurers with weak capitalization once ratings triggers are breached, Wang added.