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September 20, 2017

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Taiwan life insurers facing higher forex risks

TAIPEI--Taiwan's life insurance companies are likely to face higher risks than Taiwanese banks, as life insurers here generally hold larger amounts of assets denominated in foreign currencies, according to a Taiwan Ratings Corp. report.

In the report titled "Taiwan's Life Insurers Face Higher Foreign Exchange Risks than Banks," Taiwan Ratings said that as interest rates in Taiwan remain low and the local financial sector's profits have stayed stagnant, many banks and life insurers have been looking for assets overseas.

Eyeing higher earnings from the foreign markets, Taiwanese financial institutions, in particular life insurers, have led the way to raise their foreign currency positions under unfavorable conditions in the local market, Taiwan Ratings said.

Market analysts said that Taiwanese life insurance companies are generally sitting on massive cash and cash equivalents from fat premium income, so they are eager to buy investment instruments to rake in earnings.

"Under our base-case scenario for forex risk, the majority of the island's life insurers can sustain their forex risk exposures, but they have minimal margins to absorb unfavorable foreign fluctuations over the next year," Taiwan Ratings analyst Serene Hsieh said in the report.

"The sector's forex risk is approaching the borderline for a negative assessment under our criteria, and any future deterioration could ultimately lead us to lower our ratings," Hsieh said.

Taiwan Ratings said that life insurance companies in Taiwan have been gearing up to increase their positions in foreign currency assets in recent years.

As a result, the credit rating agency said that as of the end of 2014, foreign currency-denominated assets accounted for 50 percent of their total invested assets, much higher than the 21 percent ratio claimed by their bank counterparts.

Taiwan Ratings said that credit profiles of banks tend to be less sensitive to foreign currency risks than life insurers, since banks have benefited from strong liquidity to fund their foreign currency assets and already have a more manageable exposure to cut their investment risks significantly.

However, Taiwan Ratings said, Taiwanese banks' overseas expansion strategies could continue to strain their credit profiles over the long term if they remain short of sufficient risk management.

Still, compared with banks, the credit ratings agency said, life insurers in Taiwan are expected to face more immediate rating pressure from their overseas investments.

Taiwan Ratings is a local subsidiary of U.S.-based credit rating agency Standard & Poor's.

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