Fitch signals weak earnings outlook for Taiwan life insurance sector

Fitch said it will assess how the sector adjusts its risk management strategies.

The outlook for several major Taiwanese life insurers has become increasingly uncertain amidst heightened exposure to volatility, Fitch Ratings said. 

The ratings agency also expects to resolve rating watches placed on six firms in the next three to six months, as the market continues to feel the effects of the Taiwan dollar's sharp appreciation against the US dollar.

Insurers including Cathay Life, Fubon Life, KGI Life, Nan Shan Life, and Taiwan Life are under review for possible downgrades, with their Insurer Financial Strength (IFS) ratings placed on Rating Watch Negative. 

Shin Kong Life (SKL) was placed on Rating Watch Evolving, reflecting a mixed outlook, whilst Chubb Life Insurance Taiwan Company (CLITC) maintained a stable rating.

The Taiwan dollar surged by 8% in early May, driving up hedging costs and depleting FX reserves used by insurers to offset exchange rate losses. 

Many Taiwanese life insurers hold large portfolios of US dollar-denominated fixed-income assets whilst funding liabilities in local currency, leaving them vulnerable to further appreciation of the Taiwan dollar.

Fitch said it will assess how the sector adjusts its risk management strategies and how well it maintains capital and earnings levels in a more volatile FX environment. 

The agency noted that whilst capital buffers remain intact under its stress testing, earnings are expected to weaken as hedging costs rise and valuation reserves are drawn down.

SKL's evolving outlook also takes into account its planned merger with Taishin Life, which Fitch sees as potentially strengthening the insurer's market position and access to distribution and financial support from Taishin Financial Holding.

Unlike its peers, CLITC has minimal exposure to currency mismatch risk and is expected to retain an 'Extremely Strong' Prism score.

Fitch warned that a further rise in the Taiwan dollar, especially without mitigating strategies in place, could put additional pressure on capital and prompt negative rating actions.