Cathay Life Insurance Additional Discussion Report: FX, ALM and Capital Follow-up

• Report date: 2026-05-31
• Issuer / Theme: Cathay Life Insurance Co., Ltd. / foreign-currency investment, ALM, capital flexibility and overseas bond risk
• Report type: additional_discussion
• Discussion scope: Summary of continuing follow-up items on Cathay Life’s foreign-currency exposure, FX hedging, insurance-liability ALM, product strategy, capital policy and overseas bond risk, based on the SSC discussion
• Reference context: 2026-05-14 issuer summary, issuer notes, knowledge snapshot, source registry, 2026-05-31 discussion

1. Purpose and Treatment

This report is a supplementary report that organises the discussion in light of the existing Cathay Life Insurance issuer summary. Any figures, warning lines or sequencing hypotheses discussed here that have not already been confirmed in the existing report are treated as assertions made in the discussion or as points requiring future verification. This report does not constitute a newly verified factual finding based on primary sources, a rating opinion, an investment recommendation or a revision of the existing issuer summary.

The starting point already confirmed in the existing issuer summary is that Cathay Life is a core Taiwanese life insurer with an A-range rating profile and a large insurance franchise, while its credit profile is heavily affected by overseas fixed-income investments, Taiwan dollar movements, FX hedging, insurance-liability ALM, the transition to IFRS 17 / ICS, and subordinated debt structures. The same summary provides the context that international bonds accounted for 61.5% of the FY2025 investment portfolio, North America accounted for 50.7% of financial-asset credit risk, foreign exchange loss amounted to TWD123.4bn in 2025, the FX valuation reserve moved by negative TWD71.7bn, the FY2025 equity-to-asset ratio was 9.4%, RBC remained above 200% over the past three years, and the net worth ratio exceeded 3% at both mid-2025 and year-end 2025. At the same time, the exact RBC ratio, capital headroom after the transition to TW-ICS, capital consumption by product, subordinated debt terms, and detailed rating and sector breakdown of overseas bonds remain unverified items.

2. Discussion Takeaway

The central point of this discussion was that it is not sufficient to view Cathay Life simply as a “strong core life insurer”; the issue is to organise which indicators would affect the credit market first if foreign-currency investment, post-hedging spreads, new-business quality, capital policy and overseas bond credit risk were to move at the same time. The discussion proceeded on the view that the analysis should not divide the situation into “safe” or “deteriorating” based on a single threshold, but should instead distinguish the sequence of P&L, FX reserves, the net worth ratio, RBC / TW-ICS, CSM, subordinated debt spreads and the rating outlook.

The points already confirmed in the existing report are the size of foreign-currency investments and insurance liabilities, the large FX-related profit and loss in 2025, the fact that RBC / net worth ratio remained above minimum levels, the scale of international bond and North American exposure, and the need to distinguish subordinated debt from senior issuer credit. Additional points raised in the discussion include the 1Q26 FX hedging composition, the gap between after-hedging yield and liability interest expense, new-business CSM and product-level CSM composition, the year-end 2025 RBC ratio, the subordinated debt issuance in April 2026, and the 1Q26 regional allocation of overseas bonds. These are useful follow-up candidates, but this report does not treat them as newly and independently verified facts.

The analytical read-through is that credit deterioration at Cathay Life is more likely to appear first as a combination of market, accounting and capital-indicator changes than as an immediate concern over its ability to pay policyholder claims. For foreign-currency risk, the relevant indicators are not only P&L FX loss but also the FX volatility reserve, the net worth ratio and subordinated debt spreads. For ALM, the focus should be on after-hedging spread and CSM generation. For product strategy, the focus should be on new-business CSM, CSM margin, required capital and surrender sensitivity, rather than FYP / APE. For capital policy, it is necessary to distinguish phases in which subordinated debt is a defensive tool from phases in which it becomes a market signal of capital pressure. For overseas bonds, the point to confirm is not merely whether IG spreads widen, but whether spread widening is accompanied by rating migration, Stage 2 / ECL, a decline in the net worth ratio, and a higher TW-ICS / RBC capital burden.

3. Q&A Summary

3.1 Foreign-currency investment, FX hedging and FX reserve

The purpose of the first question was to distinguish how far the large 2025 foreign exchange loss and movement in the FX valuation reserve should be treated as temporary accounting or reserve movements, and from what point they should be viewed as substantive credit deterioration that spills over into RBC / ICS, the rating outlook and subordinated debt valuation. The existing issuer summary has confirmed that Cathay Life has large foreign-currency investments and North American exposure, and that FX-related profit and loss moved significantly in 2025. However, because the same summary does not confirm the exact RBC ratio or the degree of headroom under TW-ICS, the analysis should avoid concluding credit deterioration based only on the amount of profit or loss.

The key answer was that the FX-related losses and reserve movements in 2025 are a central credit-analysis issue, but they do not by themselves prove substantive deterioration in senior issuer credit. As long as the context confirmed in the existing report—total capital, equity-to-asset ratio, RBC above 200% and net worth ratio above 3%—remains in place, no breach of a regulatory minimum line has been confirmed. However, given that the exact RBC level and ICS sensitivity are unknown, it would also be unsafe to treat the issue as mere noise.

The follow-up explored the extent to which the 61% proxy & open position in the 1Q26 materials should effectively be viewed as unhedged TWD appreciation risk. The discussion concluded that it would be too crude to define proxy & open of 61% as “61% fully unhedged”, but because it is not an explicit TWD hedge, a substantial portion should be treated as an imperfect hedge or residual FX risk under a TWD surge stress. In particular, a proxy hedge may work through correlation in normal conditions, but basis risk could emerge in a scenario where only the TWD appreciates sharply. The open portion is more directly exposed to TWD appreciation.

The credit implication is that the deterioration sequence should not be assessed only through P&L. The discussion noted that accounting FX loss in P&L or the FX reserve may appear first, while as a credit-market reaction, subordinated debt spreads and call expectations may move before an official deterioration in RBC / ICS. The relevant combination to monitor is additional accumulation of the FX volatility reserve, persistently high hedging cost, a decline in after-hedging yield, a decline in the net worth ratio / E-A ratio, capital headroom after the transition to TW-ICS, and subordinated debt market valuation.

The distinction to be made in this section is between issues confirmed in the existing report and assertions made in the discussion. The international bond ratio, North American ratio, 2025 FX loss, movement in the FX valuation reserve, RBC above 200% and net worth ratio above 3% are confirmed context in the existing report. By contrast, the 1Q26 hedging structure, proxy & open of 61%, AC FX accounting treatment, and 1Q26 hedging cost and FX volatility reserve level are information presented in the discussion and require future confirmation against primary materials. Unverified items include the breakdown between proxy and open, the effective hedging ratio of proxy hedges, basis risk under a TWD-specific shock, foreign-currency sensitivity under TW-ICS, and the specific capital and FX triggers used by rating agencies.

3.2 Insurance-liability ALM, interest-rate scenarios and post-hedging spread

The purpose of the second question was to identify which scenario—declining interest rates, a sharp rise in rates or persistently high rates—would have the greatest impact on Cathay Life’s credit profile through its insurance liabilities and ALM structure. The issue is not the simple generalisation that “rising rates cause bond valuation losses” or “falling rates cause negative spreads”; rather, as a Taiwanese life insurer, Cathay Life needs to be analysed by looking together at legacy policies with high guaranteed rates, reinvestment yields, hedging costs, liability costs, and capital sensitivity after the transition to IFRS 17 / TW-ICS.

The key answer was that the issue cannot be reduced to a single direction, because declining rates, a sharp increase in rates and persistently high rates each cause deterioration through different channels. Declining interest rates damage medium- to long-term capital formation through lower reinvestment yields and a recurrence of negative spreads on legacy policies with high guaranteed rates. A sharp rise in rates affects FVOCI valuation losses, OCI, the net worth ratio, the E/A ratio and subordinated debt market valuation more quickly. Meanwhile, relative to the current baseline, the central practical risk was framed as a combined stress in which high interest rates, high hedging costs, TWD volatility and rising liability costs persist at the same time.

The follow-up asked how far the spread between after-hedging yield and liability interest expense / crediting rate would need to narrow before it should be viewed not merely as spread compression, but as structural deterioration affecting CSM generation, capital formation and the rating outlook. In the discussion, based on the premise that the 1Q26 P&L-based after-hedging investment yield was 2.85% and liability interest expense was 2.11%, a simple spread of approximately 74bp was presented. This figure is not treated in this report as an independently verified fact, but as a portfolio-management monitoring hypothesis, the discussion presented the following framework: above 100bp indicates headroom; 50-100bp indicates normal monitoring; 25-50bp indicates caution; 0-25bp indicates a stage just before structural deterioration; and a sustained zero or negative spread indicates structural deterioration.

The credit implication is that after-hedging spread, CSM movement, new-business margin and subordinated debt spreads should be watched for simultaneous deterioration before the official RBC / ICS figures move. Under IFRS 17, CSM release and the presentation of liability interest cost may make short-term P&L appear stable, so net income alone could miss ALM deterioration. For Cathay Life, the key issue is not the coupon yield on foreign-currency bonds, but how far the yield after deducting hedging costs exceeds the liability cost and crediting rate.

The existing report has confirmed the need to distinguish among insurance liabilities, the IFRS 17 transition, CSM, foreign-currency investment, and RBC / net worth ratio. Assertions made in the discussion include the 1Q26 yields, hedging cost, liability interest expense, break-even asset yield after IFRS 17, and spread-monitoring lines. Unverified items include product-level crediting rates, liability-cost sensitivity, the asset-liability duration gap, interest-rate sensitivity under TW-ICS, and details of CSM generation and loss components.

3.3 Product strategy, new-business sales and capital efficiency

The purpose of the third question was to confirm whether Cathay Life’s new-business sales are moving in a direction that dilutes legacy high-guaranteed-rate policies and foreign-currency / ALM risk over time, or whether investment-linked, foreign-currency and high-yield-marketed products are rebuilding future liability costs and surrender risk. The underlying issue is that growth in FYP / APE alone cannot distinguish between improved capital efficiency and renewed accumulation of risk.

The key answer was that there is evidence of improvement on a CSM basis, but because the sales-volume basis still depends on foreign-currency, investment-linked and interest-rate-sensitive products, it cannot be said that the business has fully shifted to a risk-reducing product mix. The discussion covered 1Q26 new-business CSM, the CSM balance, the contribution from health and accident products, CSM/FYP and CSM/APE. At the same time, FYP / APE growth was said to be supported partly by investment-linked products and USD-denominated traditional products.

The follow-up organised the circumstances in which new-business CSM, CSM margin, product-level capital consumption and surrender sensitivity should be prioritised over FYP / APE. In particular, the discussion concluded that quality should be prioritised over sales volume when sales growth is driven by investment-linked or USD-denominated traditional products, when CSM margin declines, when USD products are explained as a way to reduce FX exposure, and when future profit and capital consumption become more important than P&L after the transition to IFRS 17 / TW-ICS.

The credit implication is that investment-linked products and USD-denominated traditional products should not be treated as uniformly negative; they should be assessed based on their terms. Investment-linked products could be credit neutral to positive if investment risk is mainly transferred to policyholders, minimum guarantees or principal guarantees are limited, fee income is stable, surrender sensitivity is low, and required capital / CSM is low. Conversely, if minimum guarantees, strong surrender values, market dependence, fee burdens and declining CSM margins are prominent, sales growth becomes a future earnings and capital risk. USD products could be positive if USD assets and liabilities are naturally matched, guaranteed rates are conservative, duration and hedging are controlled, and TWD-based capital indicators are not excessively impaired. However, if they rely on high crediting rates or strong surrender options, they represent renewed accumulation of foreign-currency, interest-rate and liquidity risk.

The existing report has confirmed that FY2025 sales growth was supported by USD-denominated traditional products and investment-type products, that VNB increased year on year, and that confirmation of the product mix is required. Assertions made in the discussion include 1Q26 new-business CSM, product-level CSM composition, CSM/FYP, CSM/APE and the explanation for the decline in CSM margin. Unverified items include product-level required capital, capital consumption under TW-ICS, guarantees on investment-linked products, guaranteed rates, duration and surrender values for USD products, and surrender sensitivity under interest-rate, FX and market-decline stresses.

3.4 Capital policy, parent support and subordinated debt market access

The purpose of the fourth question was to organise how realistically Cathay Life can use capital conservation, equity injections, subordinated debt issuance, dividend restraint and parent support as defensive tools against the risk sources of foreign-currency exposure, ALM and product strategy. Cathay Life’s status as a core company within the Cathay Financial Holdings group is a supporting factor, but for subordinated debt investors, the effectiveness of parent support, dividend restrictions, capacity for capital strengthening and call decisions are important.

The key answer was that the company still has normal-course capital-policy flexibility, but group support should not be confused with an explicit guarantee. In the discussion, year-end 2025 RBC of 310.17%, E/A ratio of 9.40%, the USD500mn subordinated debt issuance in April 2026, and Fitch’s BBB+ rating were presented. This report treats these as assertions made in the discussion, but the point that capital headroom remains while the possibility of a downward trend in RBC should be monitored is important.

The follow-up explored how to distinguish cases in which subordinated debt issuance functions as a capital-strengthening tool from cases in which access to the subordinated debt market itself becomes a deterioration signal. Subordinated debt issuance can be viewed as credit neutral to positive when RBC / TW-ICS remains well above regulatory lines, issuance cost is not excessively high, an improvement in capital ratios can be confirmed after issuance, financial leverage remains within rating tolerance, and existing subordinated debt call expectations are not impaired. By contrast, if RBC clearly falls below 300% and moves toward 250%, TW-ICS headroom is unclear, new-issue spreads widen sharply, and non-call risk on existing subordinated debt becomes a focus, the same subordinated debt issuance becomes a sign of capital pressure.

The credit implication is that the market’s sequencing differs from the regulatory sequencing. Subordinated debt spreads tend to price in lower capital headroom, alternative issuance cost and call risk quickly. After that, concerns over non-calls, capital headroom after the TW-ICS transition, a fall below 300% RBC or approach toward 250%, and changes in parent-support expectations may affect market valuation. Even before Cathay Life approaches clear regulatory lines such as RBC of 200% or a net worth ratio of 3%, the subordinated debt market may anticipate the quality of capital policy.

The existing report has confirmed that Cathay Life is a core group company, that parent support should be distinguished from an explicit guarantee, that subordinated debt carries different risks from senior issuer credit, and that RBC / net worth ratio confirmation is important. Assertions made in the discussion include the specific RBC figure, E/A ratio, details of the April 2026 subordinated debt and post-issuance leverage assessment. Unverified items include the eligibility conditions for subordinated debt recognition as capital under TW-ICS, call dates and terms of existing subordinated debt, the extent of post-issuance improvement in capital ratios, Cathay Financial Holdings’ willingness to inject common equity, and the priority order of dividend suspension and group capital allocation under stress.

3.5 Overseas bonds, North American exposure and IG spreads

The purpose of the fifth question was to confirm under what type of market stress Cathay Life’s overseas bond and North American exposure would shift from an interest-rate and FX risk issue into a credit-risk issue. The existing issuer summary has confirmed the size of international bond and North American exposure, but it remains unverified how deterioration in the US credit cycle, IG spread widening, commercial real estate, the financial sector and BBB concentration would transmit to capital headroom and the rating outlook.

The key answer was that it cannot be said at this point that the overseas bond portfolio has already deteriorated in credit terms, but the structure of majority North American exposure and overseas bonds exceeding 60% of the portfolio increases capital sensitivity to US IG spread widening and rating-downgrade cycles. The discussion referred to a 1Q26 international bond ratio of 61.2%, a 53% North American ratio within overseas bonds, and an explanation that investment-grade bonds accounted for the large majority while non-investment-grade exposure was limited. These are candidates for additional confirmation and are treated in this report as unverified discussion information.

The follow-up asked how to distinguish a case in which IG spread widening remains a temporary FVOCI valuation loss from a credit-deterioration phase involving rating migration, higher ECL, and a greater TW-ICS / RBC capital burden. The discussion suggested that the issue is more likely to remain a temporary FVOCI valuation loss if rating migration is limited, the increase in Stage 2 / ECL is modest, there is no concentration in financials, CRE or REIT-related exposure, concentration in long-duration bonds is limited, net worth ratio and RBC / TW-ICS headroom are maintained, and widening in subordinated debt spreads is also limited. Conversely, if fallen angels from BBB- to HY, downgrades in the financial sector or CRE-related exposures, large unrealised losses on long-duration IG bonds due to spread duration, increases in Stage 2 / ECL, a lower net worth ratio and wider subordinated debt spreads all appear at the same time, the situation should be viewed as a credit-deterioration phase.

The credit implication is that investment yield alone is not an early-warning indicator. At a minimum, the monitoring set needs to combine the North American bond ratio, BBB and sub-A ratios, financial / CRE / REIT-related ratios, long-duration bonds and spread duration, FVOCI unrealised losses, Stage 2 / ECL, the net worth ratio / E-A ratio, RBC / TW-ICS headroom, and subordinated debt spreads and call expectations. The transmission sequence was organised as a hypothesis: FVOCI unrealised losses and OCI deterioration, decline in the net worth ratio / E-A ratio, the market’s estimate of lower TW-ICS / RBC headroom, widening of subordinated debt spreads and call concerns, and then deterioration in the rating outlook.

The existing report has confirmed the FY2025 international bond ratio, North American exposure, overseas fixed-income investment as a major risk, and the need to monitor credit spreads and downgrade risk. Assertions made in the discussion include the 1Q26 regional allocation, specific amounts of investment-grade and non-investment-grade bonds, the ECL model explanation, and the point that credit-spread sensitivity is not included in the disclosed sensitivity. Unverified items include the detailed AAA/AA/A/BBB breakdown, the ratio close to BBB-, the financial-sector ratio, CRE/REIT/CMBS-related balance, spread duration, credit-risk capital charges under TW-ICS, and downgrade sensitivity.

4. Monitoring / Next Check

Future checks should be treated not as final investment-decision inputs, but as follow-up items to avoid missing candidates for future issuer summary or issuer_notes updates.

5. Candidate Items for Transfer to issuer_notes.md

The following are candidate items that could be considered for transfer to the “Follow-up on management strategy, investment plans and financial policy” section of issuer_notes.md in future updates. At this point, they are presented only as candidates within this report, and issuer_notes.md itself is not updated.

• Cathay Life’s proxy & open FX position is large, and under a sharp TWD appreciation scenario it could transmit to capital and subordinated debt valuation as effectively unhedged or imperfectly hedged risk. Continued confirmation of the breakdown and capital sensitivity is required.
• If the after-hedging spread narrows, the impact may reach CSM generation, capital formation and subordinated debt valuation before RBC deterioration appears; therefore, post-hedging spread and CSM indicators should be monitored continuously.
• Cathay Life’s sales growth should not be assessed only by FYP / APE. New-business CSM, CSM margin, product-level capital consumption and surrender sensitivity should be used to determine whether capital efficiency is improving or risk is being rebuilt.
• Capital headroom after the TW-ICS transition and the effectiveness of dividend restraint, subordinated debt issuance and parent capital support under stress are key follow-up items for Cathay Life’s rating outlook and subordinated debt valuation.
• Cathay Life’s subordinated debt is a capital-strengthening tool, but when RBC / TW-ICS headroom declines, it may anticipate credit deterioration through spread widening and concern over non-calls.
• Cathay Life’s overseas bonds are said to be IG-centred, but the North American ratio is high. If BBB, financial, CRE or long-duration concentration is confirmed, there is a risk that FVOCI losses could transmit to capital and subordinated debt valuation.

6. Unverified / Pending Items

The main items discussed here but not treated as verified facts in the existing issuer summary or in this work are as follows.

• The breakdown of 1Q26 FX assets, FX risk exposure, reserve for FX policy, currency swaps & NDFs, FVOCI, and proxy & open positions.
• Currency and instrument composition of proxy hedges, net open position, basis risk under sharp TWD appreciation, and the sequence in which FX accounting for AC bonds is reflected in P&L, OCI, FX reserve and RBC / TW-ICS.
• Cathay Life’s latest and accurate RBC ratio, capital headroom after the TW-ICS transition, and sensitivity to interest rates, FX and credit spreads.
• Quarterly trends in after-hedging yield, hedging cost, liability interest expense and crediting rate, and explicit spread-management lines used by the company or rating agencies.
• Product-level new-business CSM, CSM margin, required capital / CSM, guarantees on investment-linked products, and guaranteed rates, surrender terms and currency-duration matching for USD-denominated traditional products.
• Call dates, step-ups, regulatory approval conditions, capital recognition conditions, and post-issuance RBC / TW-ICS improvement for existing subordinated debt, including the April 2026 subordinated debt.
• AAA/AA/A/BBB breakdown of overseas bonds, ratio close to BBB-, financial-sector ratio, CRE/REIT/CMBS-related balance, long-duration bond ratio, spread duration, and Stage 2 / ECL trends.
• Cathay Financial Holdings’ willingness and capacity to inject common equity into Cathay Life under stress, and the priority order of dividend restraint and intra-group capital allocation.

7. Reference Context

This report refers to the existing Cathay Life issuer summary, issuer_notes, knowledge_snapshot, source_registry and the discussion dated 2026-05-31. The discussion included references to Cathay FHC company materials, Cathay Life capital disclosures, rating-agency comments and Taiwanese regulatory materials, but those external sources were not newly and independently verified at the time this report was prepared. Accordingly, additional figures and warning lines derived from the discussion are treated as candidate issues to be confirmed in the future.