What happened?
A few days ago, Fitch placed five Taiwanese Life insurers on negative ratings watch. This reflects the impact of the sharp appreciation in the Taiwanese Dollar vs. the USD, given currency mismatches in insurers'' ALM. The Taiwanese insurance regulator made further comments on the topic yesterday, and there is continued press discussion of the impact of FX movements on the Taiwanese life insurance industry. We offer some brief thoughts on the read-across to Prudential below, which we think is largely insulated from this topic.
BNPP Exane View:
. CONTEXT: Taiwanese Life insurers hold substantial international asset portfolios, c.90% denominated in USD. Yesterday, the Chief Secretary of the Financial Supervisory Commission''s Insurance Bureau reported that this portfolio is 61.5% currency hedged.
. FITCH: A few days ago, Fitch placed five Taiwanese Life insurers on negative ratings watch, reflecting the risks from the currency mismatch: this creates exposure to higher hedging costs, and losses on unhedged holdings, as the USD depreciated. Fitch noted it had not seen an increase in policy surrenders, but warned that such an event would be negative for credit profiles (we note flows in Taiwan-listed US bond ETFs turned negative in the past few months, according to the FT). The rating agency said that the companies could absorb a 10% appreciation in the Taiwanese Dollar vs. USD without breaching downgrade thresholds.
. PRUDENTIAL: Taiwan made up 18% of Pru Plc APE in FY24, although we expect the contribution to value, and the in-force book, is much lower. Based on our conversations with the company, we think various features limit Prudential''s exposure to the FX topic. Firstly, the products are largely participating, and so policyholders bear much of the exposure. Secondly the company sells more USD product than Taiwanese Dollar product, and so this limits ALM mismatches. Thirdly, the company has a policy of limiting FX mismatches across...
