China Life Insurance Co (中國人壽) yesterday said it would reclassify its financial assets under the International Financial Reporting Standards 9 (IFRS 9) to improve its financial strength, following in the footsteps of its peers to cushion itself against rapidly rising interest rates.
The asset reclassification would boost China Life’s shareholders’ equities by about NT$30 billion (US$932 million) and raise its equity-to-asset ratio by 1.3 percentage points, parent company China Development Financial Holding Corp (中華開發金控) said in a filing with the Taiwan Stock Exchange on Thursday.
China Life’s equity-to-asset ratio, a gauge of a life insurer’s capital adequacy, stood at 4.03 percent at the end of June, higher than the Financial Supervisory Commission’s (FSC) threshold of 3 percent, company data showed.
Photo courtesy of China Life Insurance Co
China Life is the fifth local life insurer to reclassify its financial assets, after Nan Shan Life Insurance Co (南山人壽), Cathay Life Insurance Co (國泰人壽), Taiwan Life Inasurance Co (台灣人壽) and Shin Kong Life Insurance Co (新光人壽).
By reclassifying their assets, these insurers have been able to raise their shareholders’ equities by about NT$650 billion in total.
The commission on Oct. 11 said that local life insurers can use one of three accounting methods to recalculate the value of their investments: amortized cost (AC), fair value through comprehensive income (FVOCI) and fair value through profit and loss (FVTPL).
Unlike the AC method, the FVOCI and FVTPL methods reflect changes in bond prices, so life insurers the latter two methods are vulnerable to plunges in bond prices when the market rate goes up.
Reclassification allows insurers to change to amortized cost, thereby protecting their investment value from rate hikes.
However, FSC Chairman Thomas Huang (黃天牧) on Wednesday expressed disapproval over a proposal by life insurers to change the accounting method for liabilities.
“There should be a consistency in the way financial reports are made. Thus, we still have concerns about such a proposal,” Huang told a meeting in Taipei.
For example, changing the accounting method for liabilities might seem beneficial when interest rates rise, but it would not be favorable when interest rates fall, he said, adding that accounting principles should not be changed frequently.
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