Taiwan to Encourage Insurance Investment Overseas
By Marius | Published April 02, 2012
Taiwanese insurance companies looking to diversify and prosper outside their over-crowded home market will soon be given greater capacity to capture business opportunities overseas. It was announced this past week that Taiwan’s chief industry regulator, The Financial Supervisory Commission (FSC) will begin to loosen overseas investment rules for domestic insurers later this year.
According to the FSC’s revised measures governing foreign investments by insurance firms, published online last Thursday, Taiwanese insurers who maintain adequate solvency standards will soon be allowed to invest up to 60 percent of their equity holdings in BBB+ graded foreign bonds, up from the 40 percent allocation permitted originally. This regulatory revision, scheduled to take effect during the second quarter of 2012, is expected to give Taiwan-based insurance companies an additional investment quota worth NT$100 billion (US$3.4 billion) to further grow and diversify their businesses.
In addition to this regulation, The FSC also stated that any insurer with a risk-based capital ratio (RBC) above 200 percent can now apply to the commission for a new overseas investment quota, which will exclude the purchase of foreign currency-based insurance policies going forward. This move, according to Taiwan Economic News, is forecast to give the Taiwanese insurance industry an extra share of NT$300 billion (US$10.2 billion) for overseas investments.
While any international market could in theory now be targeted by Taiwanese insurers for investment, this liberalization move by the national government is intended to encourage greater cross-strait financial ties with Mainland China in particular. As part of this effort, the FSC has agreed to lower the required RBC ratio from 250 to 200 percent for insurance firms looking to invest in Chinese securities, including yuan-denominated stocks and bonds, going forward. The commission noted that several prominent insurance firms had dropped below the previous solvency threshold due to investment losses and international debt contagion issues last year and adjustments had to be made to reflect these new economic realities.
Taiwan’s banks and insurance companies, long struggling with an over saturated home market, have been clamoring for better access to China’s huge capital market. The FSC began allowing domestic banks and insurance firms to invest in Mainland China stocks and bonds last year, and since then the acquisition activity has been fervent. Seven Taiwanese insurance companies have now obtained the prerequisite QFII (qualified foreign institutional investors) license from the China Securities Regulatory Commission to begin investing in the Mainland stock market. These insurers are Shin Kong, China Life, Taiwan Life, Mercuries, Global Life, Cathay Life, and Fubon Life.
All foreign investors in China have to be both QFII licensed and also granted a specific investment quota by the State Administration of Foreign Exchange (SAFE) in order to legally buy and sell on the country’s stock exchanges. This second step has proven more elusive for Taiwanese insurers so far, with several QFII licensed companies only receiving their yuan-denominated investment allocation in the past month. Shin Kong Life Insurance announced on the 1st of March that it had been granted a quota of US$100 million to trade on the Chinese stock market, becoming the first Taiwanese insurer to clinch their allocation. That same day, Cathay Life Insurance Co, the nation’s largest life insurer by market value, said it gained a QFII license from China, with investment quota impending. Taiwan-based China Life Insurance then released a statement on the 8th of March saying that it had become the second insurance company to get a quota. According to SAFE, the Mainland government approved a record US$2.11 billion worth of foreign investment through the QFII program in March, a sum that exceeded the total amount approved last year. Going forward the government agency intends to further expedite their review process in order to better support China’s capital market reforms and development.
For Taiwanese insurers, the decision to increase and diversify their investments on the Mainland could prove particularly important in 2012. A new report published last week by prominent local consultancy group, Taiwan Ratings Corp, expects stubbornly low interest rates and intense intra-market competition to constrain earnings growth for most local insurance companies this year. According to the report, titled “Taiwan Life Insurers’ Low Earnings Growth Hinders Capital Restoration,” the performance of the country’s life insurance market has in fact been subdued over the past two years, with unstable operating conditions and binding product adjustments proving particularly detrimental to recent premium growth.
Heading into 2012, Taiwan Ratings fear that volatile global stock markets could curb earnings growth further and delay local insurers’ attempts to recapitalize and turn around their performance. “Low operating performance and mediocre capitalization will remain the life insurance sector’s key rating weaknesses in 2012,” wrote credit analyst Serene Hsieh, “Nonetheless, we believe insurers’ adequate liquidity, continuous new business flows, and generally adequate investment asset quality will help protect their credit profiles from modest volatility.” Indeed, with the Mainland China market now made much more accessible, Taiwan life insurers can perhaps afford to take more risks with their investment strategies in order to both improve their competitiveness and maximize shareholder returns.
Taiwan’s Financial Supervisory Commission (FSC) was established on July 1st 2004 to promote and manage the interests of the country’s financial services sector. The FSC now works to supervise Taiwan’s banking, securities and insurance sectors, and acts as a single regulator for all of these industries.
Taiwan Ratings Corp
Taiwan Ratings Corp (TRC) is a leading provider of financial market intelligence in Taiwan and through its association with Standard & Poor’s Ratings Services offers first-rate financial news coverage and analysis across the global market.