Last week, the semi-official Taiwan Insurance Guaranty Fund (TIGF) announced that four financial institutions were qualified to bid for Kuo Hua Life Insurance Co at an auction to be held on Tuesday, which marks yet another attempt at public sale of the loss-making insurer. Whether or not the insolvent company is auctioned off next week, it is time for the government to consider structural reforms of financial industry bailouts so taxpayers no longer have to rescue collapsing companies.
Cash-strapped Kuo Hua was officially taken over by the TIGF in August 2009 after the Financial Supervisory Commission found the insurer’s weak capitalization and consistent operating losses had seriously hurt the rights and interests of its policyholders. Since then, the government receivership — the first of its kind among the nation’s life insurers in more than 40 years — has been extended four times, with the current extension due to expire in August next year. The commission continues the process of finding a new owner for Kuo Hua after its previous efforts failed due to discrepancies over acquisition terms.
According to the TIGF — which is funded by an industry premiums tax — Mercuries Life Insurance Co, Chinatrust Life Insurance Co, Taiwan Life Insurance Co and Transglobe Life Insurance Inc will be eligible to bid for 49-year-old Kuo Hua. Based on industry estimates, the TIGF is likely to subsidize the successful bidder by as much as NT$120 billion (US$4.1 billion) if Kuo Hua is sold as a whole (including its assets and liabilities), whereas the amount may be reduced to NT$74.63 billion, Kuo Hua’s accumulated net losses as of March 31, if it is sold as separate packages.
In either case, this deal is likely to become the highest bailout settlement by the government after the now-defunct Chung Hsing Bank cost the nation’s Financial Restructuring Fund — modeled after the US’ Resolution Trust Corp in the 1980s — as much as NT$58.5 billion before its sale to the Union Bank of Taiwan in 2004. Moreover, in order to attract potential buyers, given Kuo Hua’s weak business and financial fundamentals, the commission has reportedly also agreed to provide flexible administrative oversight for the new owner over the next 20 years, setting yet another record for the local financial industry.
In fairness, the low interest rate environment is hurting all insurance companies in Taiwan, but the problems at Kuo Hua are unrepresentative of the capabilities and strengths of others in the industry.
Nonetheless, the government’s persistent reliance on taxpayers to bail out failed financial companies has put increased burdens on the nation. At a time when the government has agreed to reform the public-sector pension system in light of more than NT$5 trillion of national debt as of last month, it is now time for a decision on whether public money should remain available for bailouts in the event of a financial crisis.
Another concern is that since the government established the Financial Restructuring Fund in June 2001, it has not only spent nearly NT$289 billion cleaning up ailing firms, it has also created a sense of moral hazard in the financial industry. Some in the industry now feel they can do whatever they want, because the government will eventually bail them out. To stop financial companies from gambling recklessly, the government should change its thinking regarding rescue of ailing companies that are “too big to fail.” That losses at Kuo Hua under TIGF custodianship have risen to NT$74.63 billion from NT$55.9 billion over the past three years indicates that such companies are both too complicated to manage and too weak to survive.
Certainly, the government has a responsibility to help protect the rights of employees and the interests of investors when financial companies get into trouble. It is also entitled to use any means necessary to stop financial distress turning into a broader meltdown of the entire system. However, the point remains that the government needs to safeguard public interest and mitigate moral hazard. It must make the right decisions for the economy as a whole.