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Taiwan Life Insurance Sector Outlook Revised To Stable From Negative
Taiwan Ratings today revised its outlook on the Taiwan life insurance sector to stable from negative. The revised outlook reflects the expectation that the sector's financial strength is unlikely to deteriorate over the medium term, as domestic life insurers' operating results have now stabilized at more satisfactory levels following recent regulatory and market changes. As a result of a low interest rate environment, however, the negative spread between the sector's liability costs and its investment returns remains a burden, but to a lesser extent than previously. Moreover, the financial strength of individual life insurers varies and the companies themselves face continuing challenges in coping with intense competition and a changing market. The likelihood of a more stable performance by the sector stems from an altered business mix in favor of less risky business, an increased focus on asset and liability management, and possible market growth. A key driving force behind the improved outlook is the industry regulator, which in recent years has allowed the sale of less interest-rate sensitive products, encouraged more adequate reserving, and relaxed restrictions on investments. Taiwan Ratings estimates that the average guarantee rate on existing liabilities within the life insurance sector remains at between 5% and 6%, but is likely to gradually narrow amid continuing growth of new business, including lower guaranteed-rate (about 2.5%) and investment-linked insurance products. In 2004, new business (first year premiums) grew by a strong 30% year-on-year to NT$446 billion, while in-force premiums grew by 16% year-on-year to NT$1.3 trillion. New business growth was supported by the introduction of new products and new distribution channels such as bancassurance. The development of less interest-rate sensitive products--including investment-linked and variable-rate insurance products, and participation policies--has enabled companies to diversify their business portfolios and offset their interest rate risks. Nevertheless, the ability of individual companies to manage the risks associated with such new products and the acquisition of new clients has yet to be tested. A recent recovery
in investment conditions in Taiwan, together with proactive asset allocation
adjustment and industry deregulation, is expected to provide some relief
for domestic life insurers, given that their investment yields have fallen
since the late 1990s in an environment of declining interest rates and
sluggish investment conditions. While recent changes in asset allocation
have been primarily aimed at maximizing investment returns, most life
insurance companies have adopted an increasingly prudent approach by accumulating
less risky securities with stable investment income such as interest income
or cash dividends. For instance, overseas investments increased to 29%
of domestic life insurers' combined investment portfolio at the end of
October 2004 from 5% at the end of 2000. These investments were mainly
comprised of fixed-income securities of good asset quality, while up to
80% of the sector's combined overseas exposure was hedged against foreign
currency risk. Some recently purchased securities may, however, be subject
to drops in market value if interest rates continue to rise, unless they
are held to maturity, in which case asset-liability management will be
a key factor. While stronger companies with more focused management and
strategies are likely to maintain satisfactory financial strength, weaker
providers that lack scale, competence and sufficient capital to cope with
market changes could face rising operating pressures, as indicated by
recent financial results. In the first nine months of 2004, Taiwan's 29
life insurers reported a preliminary aggregate profit of NT$19 billion,
or an annualized return on assets of 0.4%. However, five listed companies,
which accounted for 55% of the sector's total assets in 2003, reported
a preliminary combined annualized return on assets of about 1% in the
same period.
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