Fitch Ratings yesterday said that it has placed Taiwan’s major life insurers on negative credit watch, citing concerns that the sharp appreciation of the New Taiwan dollar against the US dollar could undermine their financial strength, given their significant holdings of US dollar-denominated assets.
The “rating watch negative” designation reflects heightened risks to the insurers’ capital adequacy, earnings and overall business profiles, following the local currency’s abrupt 8 percent surge earlier this month, the international agency said.
The affected insurers are Cathay Life Insurance Co (國泰人壽), Fubon Life Insurance Co (富邦人壽), KGI Life Insurance Co (凱基人壽), Nan Shan Life Insurance Co (南山人壽) and Taiwan Life Insurance Co 台灣人壽), it said.
Photo: AFP
Foreign exchange hedging costs have soared, and the possibility of further appreciation remains, it said.
Taiwanese life insurers have invested a sizeable share of their NT dollar liabilities in US dollar assets, resulting in a substantial currency mismatch, it said.
“While life insurers have hedged a majority of their balance sheet mismatches, we believe this strategy will come under pressure due to the spike in hedging costs, while un-hedged positions continue to expose them to wild currency swings,” Fitch said.
While Fitch has not observed a surge in policy surrenders, it warned that such a scenario remains a potential risk to the insurers’ credit profiles.
The agency said it expects to resolve the negative credit watch within three to six months, after assessing the outlook for foreign exchange volatility, especially in the context of the current trade and economic conditions, as well as the insurers’ strategic responses, and corresponding changes in their capitalization and earnings profiles.
The insurers currently have sufficient capital buffers to absorb a 10 percent appreciation of the NT dollar against the US dollar without breaching downgrade thresholds, the agency said.
However, it cautioned that a moderate decline in capital ratios — if accompanied by continued NT dollar strength and markedly weaker earnings — could still trigger negative rating actions, it added.
“We expect the insurers to record significant losses due to the unfavorable currency movement ... Rising hedging costs and a more volatile NT dollar will also pressure their earnings,” it said.
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