China Life Insurance to reclassify its financial assets

  • By Kao Shih-ching / Staff Reporter

China Life Insurance Co (中國人壽) announced yesterday that it will reclassify its financial assets according to International Financial Reporting Standards 9 (IFRS 9) to improve its financial strength, following in the footsteps of its peers to protect against the rapid rise interest rates.

The asset reclassification would boost China Life’s shareholders’ equity by about NT$30 billion (US$932 million) and raise its equity-to-assets ratio by 1.3 percentage points, parent company China said. Development Financial Holding Corp (中華開發金控) in a statement. filing with the Taiwan Stock Exchange on Thursday.

China Life’s equity-to-assets ratio, an indicator of a life insurer’s capital adequacy, stood at 4.03% at the end of June, above the 3% threshold set by the Financial Supervisory Commission ( FSC), according to company data.

Photo courtesy of China Life Insurance Co

China Life is the fifth local life insurer to reclassify its financial assets, after Nan Shan Life Insurance Co (南山人壽), Cathay Life Insurance Co (國泰人壽), Taiwan Life Insurance Co (台灣人壽) and Shin Kong Life Insurance Co (新光人壽).

By reclassifying their assets, these insurers were able to increase shareholders’ equity by about NT$650 billion in total.

The Oct. 11 commission said local life insurers can use one of three accounting methods to recalculate the value of their investments: amortized cost (AC), fair value through comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) .

Unlike the AC method, the FVOCI and FVTPL methods reflect changes in bond prices, so life insurers using the latter two methods are vulnerable to falls in bond prices when the market rate rises.

The reclassification allows insurers to move to amortized cost, thereby protecting their investment value from rate increases.

However, FSC Chairman Thomas Huang (黃天牧) on Wednesday expressed his disapproval of a proposal by life insurers to change the method of accounting for liabilities.

“There should be consistency in the way financial reports are written. Thus, we are still concerned about such a proposal,” Huang said during a meeting in Taipei.

For example, changing the method of recognizing liabilities may seem beneficial when interest rates rise, but it would not be favorable when interest rates fall, he said, adding that accounting principles should not be changed frequently.

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