Despite a good performance in the third quarter thanks to the recovery in the equities market and income from cash dividends, local life insurers are not as favored by investors as their banking peers in the near-to-medium term, analysts at credit ratings and foreign brokerage firms said.
The still-low interest rates in Taiwan compared with other regional economies, the strengthening NT dollar against the US dollar and the unstable recovery in global capital markets are likely to impact on life insurers’ earnings prospects in the years ahead, analysts said.
“Life insurers’ profitability is likely to remain volatile for the foreseeable future, despite business growth opportunities,” Patty Wang (王珮齡), an analyst at Taiwan Ratings Corp (中華信評), in an e-mailed statement yesterday said.
Wang said the nation’s gradual economic recovery, improved market confidence and continuing business growth would offer a firm support for insurers in terms of capital strength over the next one to two years.
Moreover, the financial regulator’s additional measures, such as raising insurers’ overseas investment limits, are likely to provide players in this sector an opportunity to increase profits over the next few years.
“However, we believe it will be several years before Taiwan’s life insurers can fully restore their credit quality and raise their profitability to a level comparable with other regional peers in Thailand and Japan due to prevailing low interest rates,” Wang said in the statement.
Citigroup analyst Bradford Ti (鄭溫煌) said the brokerage was still cautious about life insurers’ shares, even though the sector began to show a turnaround in the third quarter after experiencing losses in the first half of the year.
“Despite a good third quarter, we remain cautious on insurers, as a prolonged low interest rate environment is an overhang on both investment yields and embedded value expectations,” Ti wrote in a client note on Tuesday.
Embedded value refers to the present value of insurance firms, while appraisal value incorporates expected profits.
Instead, Citigroup viewed banks as its preferred investment targets within the financial sector due to steady growth in loans, net interest margins and wealth management fees.
Ti recommended “buy” ratings on stocks of Chinatrust Financial Holding Co (中信金控) and Taishin Financial Holdings Co (台新金控) among private banks and Mega Financial Holdings Co (兆豐金控) and First Financial Holding Co (第一金控) among government banks.
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