The Taiwanese legislature's Finance Committee has approved plans by Taiwan Financial Holding to inject new capital into its life insurance unit to shore up its capital and ease the burden of negative interest spreads.
Taiwan Financial had proposed adding NT$10 billion (US$333 million) to the capital of Bank Taiwan Life Insurance whose capital adequacy ratio has fallen to 168% — lower than the 200% requirement — as losses widen this year, Taiwan Financial chairman Mr Joseph Lyu told lawmakers.
The lawmakers gave their go-ahead after reviewing the budget plans of state-owned financial service providers, which also includes the Land Bank of Taiwan and the Export-Import Bank of the Republic of China, reported The Taipei Times.
Pre-tax losses at the Bank Taiwan Life could balloon to about NT$4 billion this year, as the New Taiwan dollar’s appreciation could result in foreign exchange losses, he said.
Meanwhile, negative interest spreads from insurance policies sold in previous years continue to be a drag on profitability, he added.
Bank Taiwan Life’s risk-based capital would rise to 240-250% following the capital injection next year, allowing it to meet regulatory requirements, Mr Lyu said.
Negative interest spreads, which cost NT$110 billion in 2014 and 2015, might be contained in the next three years after savings-like policies mature, he said.
Before 2013, Bank Taiwan Life sold large volumes of six-year insurance policies with guaranteed interest rates as high as 6%, Mr Lyu said, adding that the company needs to lift its cash position levels to meet potential redemption requirements in the next two years. Redemption costs might drop below NT$10 billion thereafter, allowing the insurer more financial flexibility to improve profitability, he said.
Because the government owns a 100% stake in Taiwan Financial, its major decisions are subject to oversight by lawmakers. Some of the lawmakers questioned whether Bank Taiwan Life merited a capital increase in light of its poor sales strategies and financial statements.
Mr Lyu defended the subsidiary, saying Bank Taiwan Life could not afford to hire expensive actuaries to conduct cost analyses prior to the launch of insurance policies due to wage constraints.
The government should allow state-owned financial institutions greater independence in setting compensation levels so that they can hire better qualified professionals and enhance their earnings ability, other legislators said.