Taiwan’s life insurance companies swung into profit last month, thanks to new measures by the Financial Supervisory Commission allowing insurers to access extra policy reserves to offset exchange rate losses, as well as the contribution of capital gains and dividend income, and the stabilization of the New Taiwan dollar.
Based on regulatory filings released earlier this month, the nation’s six biggest life insurers — Cathay Life Insurance Co, Nan Shan Life Insurance Co, Fubon Life Insurance Co, Taiwan Life Insurance Co, KGI Life Insurance Co and Shin Kong Life Insurance Co — posted combined profits of NT$31.2 billion (US$1.06 billion) for last month, reversing May’s losses of NT$34.9 billion amid the sharp appreciation of the NT dollar against the US dollar.
Many local life insurers hold large portfolios of US dollar-denominated fixed-income assets while funding liabilities in NT dollars. The currency mismatch leaves them vulnerable to a rapid appreciation of the local currency. In early May, the NT dollar surged 8 percent against the US dollar, driving up insurers’ hedging costs and depleting their policy reserves. That month alone, the NT dollar spiked 6.98 percent against the greenback — the largest monthly increase since April 1989 — which caused the valuation of insurers’ US dollar-denominated assets to shrink substantially and affected their profits.
Despite an improvement in profits last month and reduced pressure from foreign-exchange losses, as the NT dollar appreciated just 0.09 percent against the US dollar, the six life insurers still registered a significant decline in profits in the first half of this year, down 78 percent year-on-year to NT$36.04 billion. If not for a 31.77 percent annual increase in first-year premiums to NT$302.13 billion in the first six months, the big insurers would have posted an even larger drop in profits, data released last week by the Life Insurance Association showed.
Insurers’ improved bottom lines might help calm the market while giving firms a breather from the volatile foreign exchange environment, but it is by no means a sign of peace ahead, as long as uncertainty remains about potential US tariffs on Taiwan. For all financial institutions — including banks, insurers, securities and futures brokerages, and investment trusts — the effects of exchange rate fluctuations are the most difficult change to grasp and pose a major risk to their operations.
With the NT dollar’s 3.64 percent appreciation in April and 6.98 percent in May against the greenback, the resulting foreign exchange losses almost wiped out most of the profits they made in the first five months of this year.
Data released at the end of last month showed that financial institutions’ combined pretax profits decreased 51.9 percent to NT$232.78 billion from a year earlier, which far exceeded expectations. It has especially become more difficult for financial institutions to predict the long-term trend of the local currency, as its price fluctuations versus the US dollar has been more frequent and dramatic over the past few years.
An urgent challenge facing Taiwan’s life insurers is the serious currency mismatch problem, which is not common in other countries. A mismatch between the currencies in which insurers’ assets and liabilities are held can put pressure on their capital and earnings. The root cause is that there are too few options to invest in Taiwan, prompting insurers to move funds abroad, mostly investing in US dollar-denominated assets.
In the short term, insurers could increase sales of US dollar-denominated policies, as they provide another form of natural hedging to ease potential risks. Over the longer term, insurers must still adjust their risk management strategies and diversify their investment portfolios, as the risk of the local currency rising further still exists.
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