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Cablegate: Taiwan Insurers Can Invest More Offshore

VZCZCXRO5190
RR RUEHGH
DE RUEHIN #1086 1350737
ZNR UUUUU ZZH
R 150737Z MAY 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 5249
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3688
RUEHBJ/AMEMBASSY BEIJING 6769
RUEHUL/AMEMBASSY SEOUL 8636
RUEHGP/AMEMBASSY SINGAPORE 6894
RUEHKO/AMEMBASSY TOKYO 8757
RUEHML/AMEMBASSY MANILA 0053
RUEHJA/AMEMBASSY JAKARTA 4076
RUEHKL/AMEMBASSY KUALA LUMPUR 3734
RUEHHI/AMEMBASSY HANOI 3310
RUEHBY/AMEMBASSY CANBERRA 4511
RUEHWL/AMEMBASSY WELLINGTON 1775
RUEHHK/AMCONSUL HONG KONG 8011
RUEHGH/AMCONSUL SHANGHAI 1068
RUEHGZ/AMCONSUL GUANGZHOU 0243

UNCLAS TAIPEI 001086

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH and Stratford
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN AND NY FRB MARIA
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Insurers Can Invest More Offshore

Ref: (A) 06 TAIPEI 2388, (B) 06 TAIPEI 2695

SUMMARY
-------

1. Taiwan's legislature has relaxed restrictions on insurance
firms' offshore investments primarily to increase their flagging
profits; the measure does little to address Taiwan's excess
liquidity, a root cause of the insurance firms' woes. END SUMMARY.

Agreement on Insurance Amendment
--------------------------------

2. On May 3, legislators reached agreement on a bill amending the
Insurance Law to raise insurance companies' offshore investment
ceiling from 35% to 45% of total insurance funds (equity plus policy
reserves). The bill also proposes to increase the limit on an
insurance firm's total hedge-based financial derivative contracts
from 40% of the firm's net worth to 40% of its total investments,
but retains the provision that not more than half of the limit can
be kept in offshore contracts.

Investment Limit, Profitability
-------------------------------

3. The bill was designed to permit insurance firms to pursue higher
yields overseas so that they can meet higher yield commitments made
to policy buyers in the past, when Taiwan's interest rates were
higher. Interest rates in the United States are currently about
three percentage points higher than in Taiwan. The broadening of
the domestic-overseas interest rate differential has prompted
Taiwan's insurance sector to increase offshore investment from 16%
to 30% of total insurance funds over the past five years. According
to the Insurance Bureau (IB), eleven of Taiwan's 52 insurance firms
are near the 35% ceiling limit on offshore investment. Recently,
Nan Shan Life, a subsidiary of the U.S. American Insurance Group
(AIG), was fined NT$1.8 million (US$54,500) for exceeding the 35%
limit.

4. Cathay and Shin Kong, two of Taiwan's largest life insurance
firms, estimate that increasing their offshore investments from 35%
to 45% can increase their annual profits by 20-30%.

Excess Liquidity to Remain
--------------------------

5. This bill will help insurers cope with the low domestic interest
rate environment they have faced over the past ten years (ref A).
However, the legislation does not address Taiwan's excess liquidity
problem (ref B), which is a major cause of the current low interest
rates and weak currency.

6. A CBC Taiwan (the central bank) contact recently told AIT/T that
excess liquidity in Taiwan is so serious that Taiwan's money market
interest rates barely responded to CBC's recent increase in
benchmark rates. Taiwan's excessive liquidity is estimated at many
times the insurance sector's maximum possible offshore investment
under the new legislation.

YOUNG

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