Fitch Ratings lowers assessment of Taiwan's life insurance companies.
Hey there! Let's talk about the financial woes facing Taiwan's major life insurers.
Fitch Ratings has put these key players under the spotlight, giving them a negative credit watch. Why though? Well, it seems the New Taiwan Dollar's sudden surge against the US Dollar is the culprit.
Here's the lowdown: The Titans of Taiwanese insurance, including Cathay Life Insurance Co, Fubon Life Insurance Co, KGI Life Insurance Co, Nan Shan Life Insurance Co, and Taiwan Life Insurance Co, have a sizable chunk of their NT Dollar liabilities invested in US Dollar assets, creating a hefty currency mismatch.
This mismatch has become a significant issue due to the NT Dollar's recent 8% lunging spree against the US Dollar. This swift move has sent foreign exchange hedging costs soaring and opened the door for further increases, according to Fitch Ratings.
Despite no noticeable surge in policy surrenders yet, Fitch warned that this scenario remains a potential threat to the insurance giants' credit profiles. They say that if this situation continues, the insurers might record significant losses due to the unfavorable currency movement, face rising hedging costs, and experience a more volatile NT Dollar, which could take a toll on their earnings.
The insurers presently boast sufficient capital buffers to withstand a 10% NT Dollar surge against the US Dollar without facing a downgrade. But, a moderate decline in capital ratios, coupled with continued NT Dollar strength and notably weaker earnings, could still trigger negative rating actions, Fitch warns.
Rest assured, Fitch expects to make a decision on the negative credit watch within 3 to 6 months after evaluating the outlook for foreign exchange volatility, the insurers' strategic responses, and any corresponding changes in their capitalization and earnings profiles.
Enrichment Data
- Overall: The sudden NT Dollar appreciation has caused financial stress for many Taiwanese life insurers, primarily due to the currency mismatches in their balance sheets.
- Currency Appreciation Impact: The rapid increase in the NT Dollar against the US Dollar has significantly increased the cost of hedging for insurers with large US Dollar-denominated assets.
- Asset-Liability Currency Mismatch: Many Taiwanese insurers have substantial US Dollar investments and liabilities in NTD, creating an unfavorable mismatch between the two currencies and exposing them to financial risks.
- Rising Hedging Costs: Increased expenses from hedging have reduced the earnings for insurers, posing a concern for their financial strength.
- Unhedged Exposures: Some insurers still have unhedged currency positions, leaving them vulnerable to further sharp currency swings.
- Credit Rating Watch: Fitch placed five Taiwanese life insurers under Rating Watch Negative (RWN) due to their increased capital and earnings pressure from the developments. Shin Kong Life Insurance was given a Rating Watch Evolving (RWE) status but also faces similar challenges.
In the face of the financial industry, Taiwan's major life insurers are grappling with potential credit profile issues due to the escalating foreign exchange hedging costs resulting from the recent currency mismatch between their NT Dollar liabilities and US Dollar assets in the business world. This unfavorable situation, precipitated by the New Taiwan Dollar's appreciation, may lead to significant losses and a more volatile NT Dollar for these insurance giants, as cautioned by Fitch Ratings.
