Last month, Transglobe Life Insurance unexpectedly won the bidding for the loss-making Kuo Hua Life Insurance in an auction, ending the government’s more than three-year receivership of the latter. News about the deal in the following days showed it was not the end of Kuo Hua, but it was the beginning of concerns about the buyer.
Under the agreement that Transglobe signed with the semi-official Taiwan Insurance Guaranty Fund –– which took over Kuo Hua in August 2009 under the instruction of the Financial Supervisory Commission (FSC), Transglobe will receive a record government subsidy of NT$88.37 billion (US$3.04 billion) to cover losses at Kuo Hua, making it the biggest government bailout ever in Taiwan. The commission also agreed to provide flexible administrative oversight for the next 20 years, setting another record for the financial industry.
The deal, expected to close in March next year, has raised concerns about Transglobe’s financial strength. The company has a net value of NT$7.65 billion, total assets of NT$234.2 billion and about 800 employees, versus Kuo Hua’s negative net worth of NT$75.33 billion, NT$300.1 billion in total assets, 2 million policy holders and more than 4,000 employees as of the end of June. Some media reports have likened Transglobe’s acquisition to a “snake trying to swallow an elephant.” Lawmakers are also concerned over alleged conflicts of interest between Transglobe and one of its major shareholders, the Meifu Property Development Group, after investigators raided Transglobe offices late last month due to a real-estate kickback scandal involving Meifu.
In response to several lawmakers’ demands that the FSC suspend the deal, commission Chairman Chen Yuh-chang (陳裕璋) last week said at the legislature’s Finance Committee that the Kuo Hua acquisition would go ahead because suspending the deal would disrupt the market and financial stability. Chen said that the commission would closely monitor Transglobe’s finances and operations and that he would resign if the government had to serve as custodian of the cash-strapped insurer for a second time.
Even though Chen has put his job on the line for the deal, the dispute over the acquisition has raised public concern about whether the government should continue using taxpayers’ money to bail out struggling life insurance companies, as well as over how Transglobe will improve its capital structure and operate.
At present, Global Life Insurance, Singfor Life Insurance and Chaoyang Life Insurance have also seen their net value fall into negative territory. The commission should closely monitor their progress and urge them to merge with stronger rivals if necessary. The financial watchdog should also consider handing out punishment for their failure to obtain fresh capital. Government receivership, although possible, should be a last resort.
Moreover, the commission should be consistent in its financial supervision of life insurers, as it is with banks. Last month, the commission raised concerns over Chinatrust Financial Holding’s involvement in the purchase of Next Media Group’s Taiwanese operations, saying its major shareholders could not have control over companies in both banking and media sectors.
The commission ought to maintain the same high standard for the Transglobe deal. Even if the commission has not intended to favor Transglobe in the Kuo Hua deal, it has delivered a message to the public that it wants the acquisition to go through. It would be a serious blow to the commission’s credibility and a setback for its effort to create an exit mechanism for troubled insurance companies if Transglobe’s major shareholders were found to be involved in financial scandals that cause the deal to fall through. There is no guarantee that this will happen, but it should not be taken for granted that it will not.