Cathay Financial Holding Co (國泰金控), the nation’s biggest financial services provider, yesterday urged the government to lower the risk-based capital (RBC) requirement ratio to help insurance companies cope with volatility in the equity market.
The company said that prior to the TAIEX’s precipitous downturn throughout last week, it had increased its overall equity portfolio by about NT$40 billion (US$1.21 billion) during June and July, as it prefers buying high-dividend yield stocks such as telecommunication shares.
Investments in international equities also increased as part of the company’s overseas expansion strategy, Cathay Financial told an investors’ conference.
As of the end of the first half, Cathay Life Insurance Co’s (國泰人壽) RBC ratio stood at 295 percent, higher than many of its peers, Cathay Financial said.
RBC is a method of limiting the amount of risk an insurer can take. It requires companies to hold an amount of capital appropriate for their risk profiles.
However, Cathay Financial president Lee Chang-ken (李長庚) said that relaxing the RBC requirement would give insurers greater flexibility in generating profits and allow them to capitalize on value investment opportunities while prices are low.
“Although we have little difficulty in meeting the government’s RBC requirements, we are aware that some of our peers have been compelled to trim their portfolio holdings to conform to [RBC] guidelines as the [stock] market downturn widens,” Lee said, adding that the situation is not ideal for insurers that typically hold long positions.
“The system creates a downward spiral where insurers are forced to sell stocks, which exacerbates market volatility,” he said.
Lee proposed that the government ease its RBC requirements and adopt an alternative countercyclical design, where the ratio is raised as the TAIEX rises and lowered during market slumps.
“During market downturns, RBC requirements should reflect diminished price risk, as stock buying by insurers would contribute to stabilizing the market,” Lee said.
As the TAIEX plunged 4.84 percent, or 376.58 points to close at, 7410.34 points yesterday, Cathay Financial shares tumbled to an intraday low of NT$38.60 before rebounding to close at NT$41, down 3.53 percent.
Lee said that the market had overreacted, and that its share price does not truly reflect the company’s performance. He added that the company is mulling a stock repurchase program.
The company reported a net income of NT$50.42 billion, or NT$3.98 per share, in the first seven months of the year. That compares with NT$38.33 billion and NT$3.03 in the same period last year.
“We do not consider the current market situation a crisis,” Lee said, urging investors to have faith in the Taiwanese market.
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