Overseas Expansion Adds Risk to Taiwanese Life Insurers' Credit Profiles: Moody's

Moody's Investors Service says that the proposal to relax regulation of investments by Taiwanese insurers in overseas insurance companies, adds risk to the life insurers' credit profiles.


The proposed relaxation was announced in a meeting held by Taiwan's Financial Supervisory Commission (FSC) on 18 February 2014 with 16 financial holdings companies. At the meeting, the FSC discussed and exchanged views on overseas expansion -- mainly in Asia -- through mergers and acquisitions.


"The proposed relaxation will exempt Taiwanese insurance companies, on a case-by-case basis, from treating their acquisitions of overseas insurance companies as foreign investments. The life industry's foreign investments increased to 41% at end-2012 from 30% at end-2008, and are approaching the regulatory cap of 45%," says Stella Ng, a Moody's Assistant Vice President and Analyst.


Moody's believes the proposed relaxation is a reaction to, and a reflection of, the difficult operating environment Taiwanese insurers face in their markets. Taiwan's life insurance sector is already a matured market, with a high insurance penetration rate of 15%, and a narrow mortality protection gap compared to emerging markets in Asia.


"All this underpins the incentives to encourage expansion in emerging markets, where a younger population, rising affluence and increasing risk awareness provide sustainable growth  opportunities," adds Ng.


The FSC stressed that, in addition to continued strategic business growth in China, it is crucial for Taiwanese financial institutions to increase their foothold in Southeast Asian markets (including Indonesia, Malaysia, Vietnam and Thailand) in the coming three to five years, given the robust economic growth and the resultant potential business opportunities in the region.


Nevertheless, and despite the potential business appeal, Moody's sees outward expansion as a challenge to the credit profiles of the Taiwanese insurers.


"We assess Taiwanese insurers as untested in their ability to operate in a foreign environment (despite recent forays into China and Vietnam, which remain limited in scale), and their attempt to expand their foreign revenues may challenge their underwriting skills and risk management," says Ng.


Further heightening the risk is that most of the high-growth emerging markets in Southeast Asia are weaker than developed markets in terms of social-political stability, legal/regulatory frameworks, market transparency and corporate governance.


While Moody's generally associates diversification with highly rated companies, a key pre-condition is that the rated entities have demonstrated their underwriting expertise and franchise strength in the target region(s), as well as their ability to operate new business on a meaningful scale with sustainable revenue growth.


In this context, Moody's does not expect Taiwanese insurers' overseas business to become a significant contributor to their overall profitability over a five-year horizon.

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