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Announcement:

Moody's: foreign life insurers exit Taiwan on accounting issues

29 Apr 2010

Hong Kong, April 29, 2010 -- According to a new report from Moody's Investors Service, an important consideration in the exit of foreign life insurance companies from Taiwan over the past two years is accounting difference between domestic and foreign players related to interest rate assumptions used to estimate policy reserves. However, this distinction may well fade as accounting standards converge over the next few years.

"From an economic standpoint, the interest rate used for estimating insurers' liability should be based on the expected return on assets backing those liability. Taiwanese accounting standards currently provide some leniency regarding the interest rate used for policies sold prior to 2001," says Sally Yim, a Moody's VP/Senior Analyst and author of the report.

As allowed by the regulations, Taiwanese life insurers typically use a relatively high interest rate in estimating their reserves for these policies, which often offered a high guarantee interest rate.

"By contrast, and in accordance with accounting rules in their home countries, foreign insurers use more current investment return/valuation rate assumptions for their high guarantee policies sold by their Taiwanese branches or subsidiaries. Some foreign insurers also adopt a more stringent reserving policy and hence hold more economic capital for these policies," says Yim.

As a result, in light of the low investment yield achieved in the market and the high cost of liability, many foreign life insurers have viewed the returns on allocated capital available in Taiwan as being weak. And with Taiwan typically comprising a very modest proportion of their overall business -- in contrast to the domestic players -- foreign insurers seeking to bolster their risk-based capital have increasingly sought to exit the market.

Because of this difference, and because many overseas insurers need to raise capital following the financial crisis, some foreign players have exited the Taiwanese market by selling their business at a loss, either to incumbent domestic players or to other domestic groups. This has enabled them to free up large amounts of capital which had originally been set aside for their Taiwanese businesses.

The accounting difference will fade over the next few years as Taiwan's accounting standards converge with international standards and recognize their insurance liabilities at fulfillment value using a risk-free rate. While the adoption date is still uncertain, ultimately, should Taiwanese life insurers have to use a (much lower) risk-free rate to estimate their reserves, they will likely have to significantly increase their reserves for the initial adoption, putting pressure on reported capital , says the report.

Therefore, a gradual adoption is much more likely, with regulators aware of the significant impact on the industry arising from the new rate. This would give insurers more time to strengthen their capital bases in stages, it says.

Moody's expects, however, that insurers will have to raise capital eventually in order meet the new requirement. Depending on the amount and means of capital raise, the leverage profile of the Taiwanese life insurers may change over time.

The report also notes that in order to reflect the difference in accounting treatment , Moody's adjust Taiwanese insurers' reported results to align them with global life insurers in order to maintain global consistency and ratings comparability.

"The Taiwanese life insurance market is still attractive to some newcomers, including to some foreign insurance companies. These companies have no negative spread burdens; hence, their new policies can be priced at much lower cost of liability and can offer low guarantee return rates, either floating or fixed," adds Yim.

"In addition, residents' high savings rates and the country's aging population makes the market attractive for new players, while there is also still room for growth for insurance, retirement and wealth management products. Some companies may also see Taiwan as a stepping stone to doing business in China," she adds.

The report, entitled "Accounting Plays Key Role in Exit of Foreign Life Insurers From Taiwan", can be accessed at www.moodys.com.

* * * * * * * * *

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1076; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7 495 228 60 60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Craig Jamieson in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com.

Hong Kong
Sally Yim
Vice President - Senior Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077

Singapore
Deborah Schuler
Senior Vice President
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308

Moody's: foreign life insurers exit Taiwan on accounting issues
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