Taiwanese life insurers wanting to improve their capital structure face strong headwinds this year, given prolonged low interest rates and economic impacts derived from trade protectionism and the COVID-19 pandemic, Taiwan Ratings Corp (中華信評) said on Friday.
The local life insurance sector also still has high asset risks and such risks are susceptible to market volatility, the local arm of Standard & Poor’s Global Ratings said.
Since last year, major financial holding companies — including CTBC Financial Holding Co (中信金控), Cathay Financial Holding Co (國泰金控) and Shin Kong Financial Holding Co (新光金控) — have announced plans to raise fresh capital to bolster the financial strength of their banking and insurance subsidiaries.
This came as financial holdings were faced with increased market volatility due to the US-China trade dispute and implementation of new International Financial Reporting Standards.
Cathay Life Insurance Co (國泰人壽), for instance, reported that its capital position was solid, with a risk-based capital ratio of 346 percent as of Dec. 31 last year, up from 292 percent at the end of 2018, and that its risk-bearing ability improved with the net worth-to-assets ratio rising to 9.2 percent last year from 2.6 percent a year earlier.
While stronger economic activity and greater stability in capital markets had helped life insurers shore up their capital buffers last year, the sector’s average capitalization remains slightly weaker than in 2017, Taiwan Ratings said, adding that there are more challenges this year for insurers given increased credit risk due to COVID-19.
“We expect increased downside risk for Taiwan life insurers, given the likelihood of greater capital market volatility over the coming few months,” Taiwan Ratings credit analyst Patty Wang (王珮齡) said in a news release. “Tough operating conditions, weak investment returns and continued high asset risk pose significant headwinds for insurers to sustain the improvement in capital and earnings made in 2019.”
The ratings agency said that capitalization has long been a key rating weakness for the life insurance sector, whereas insurers still carry significant asset risks.
Meanwhile, the long-term mismatch between insurers’ assets and liabilities is a legacy issue, which could lead to higher losses if market prices experience larger fluctuations, hindering their efforts to restore capital levels, it said.
“Despite legacy issues affecting the sector’s capitalization, we believe insurers’ efforts to slow business growth and employ more rigid capital rules could somewhat offset these downside risks,” Wang said. “Nonetheless, the very low likelihood of improving investment returns over the coming two years poses a significant challenge for insurers to improve their capitalization.”
Taiwan Ratings said that its assessment of the life insurance sector’s capitalization and earnings ranges from fair to satisfactory for this year and next year.
However, this means that businesses in the sector are lagging behind most of their Asia-Pacific peers, it said.
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