Life Insurance Firms Incur Heavy Foreign Exchange-Related Loss

Taipei, March 26, 2008 (CENS)--Sharp appreciation of the ND dollar on massive influx of hot money has seriously eroded profits of domestic life insurance firms, due to foreign exchange-related loss or cost on their huge overseas assets.

The NT dollar has revalued around 7% against the U.S. dollar, far exceeding the scale of other currencies, so far this year, inflicting some NT$40 billion of foreign exchange-related loss or cost so far this year on life insurance firms from their overseas assets, which top NT$2.2 trillion in value.

Susan Chang, vice chairperson of Financial Supervisory Commission (FSC), admitted that foreign-exchange loss incurred by life insurance firms in March will be even more serious than February.

Of the NT$2.2 trillion overseas assets, life insurance firms have resorted to traditional 100% direct-hedge method for NT$1 trillion, while employing the proxy hedge method, or one basket of foreign currencies which tend to move in the same direction with the NT dollar, for the remainder, which is useless due to the exceptional strength of NT dollar this year.

Cathay Life Insurance, the industry champion, for instance, had incurred over NT$10 billion of foreign-exchange cost on its book as of the end of February, compared with NT$12 billion for entire 2007.

Li Chang-keng, chief strategic officer of Cathay Life Insurance, noted that the ratio of direct hedge for the company's overseas investments, topping NT$700 billion in value, now reaches only 50%, adding that it plans to raise the ratio after maturity of the existing contracts.

Shin Kong Life Insurance, the second largest domestic life insurer, has also incurred foreign exchange-related cost of NT$5 billion in the first quarter this year, compared with NT$4 billion for entire 2007, as ratio of direct hedge for its NT$400 billion overseas assets reaches 60% now.

Due to the foreign exchange-related loss, Morgan Stanley has lowered the rating of Cathay Life Insurance and Shin Kong Life Insurance to "neutral" and "underweight," respectively.