TRC: Recent NT-Dollar Rise Has No Immediate Rating Impact

Taipei, March 4, 2011 (CENS)--Taiwan Ratings Corp. (TRC) recently said that foreign exchange (forex) volatility won't immediately impact ratings on Taiwan's life insurers, despite weaker operating performances of several major players in Jan. 2011 due to higher hedging costs as a result of currency appreciation.

"The N.T. dollar appreciated 3.5% against the greenback in Jan. 2011 before the greenback regained 0.58% in the first two weeks of February. We view such fluctuations and earnings volatility to be within our expectations for major rated domestic life insurers," said TRC's credit analyst Serene Hsieh. "We already factor life insurers' intrinsic profit volatility into our ratings. Forex fluctuations on their own aren't likely to trigger negative rating actions unless volatility is higher than expected."

In TRC's view, forex movement is a natural phenomenon found in any financial system, and is likely to continually affect the volatility of the insurers' operating performances. The level of recurring investment yield (excluding capital gains or losses) on life insurers' securities portfolios indicates the amount of recurring investment profits that insurers can use as a buffer against forex costs.

"This buffer has not yet recovered to the level prior to the onset of the financial market dislocation in 2008. We estimate that the life insurance sector's ratio of net interest income to average interest-yielding assets was about 4% in 2010, down from 4.9% in 2007," said Hsieh.

Rated life insurers' generally declining forex risk appetite also supports their ability to manage forex volatility, said TRC.