Nan Shan Life Insurance's gradual shift from traditional savings-type products and single-premium policies to long-term regularly paid policies and protection products contributed to the growth in the value of the new business margin over the past five years, says Fitch Ratings.
However, overall profitability will remain vulnerable to volatility in investment returns, which can be constrained by high hedging costs resulting from the interest rate differential between the US and Taiwan, the global credit rating agency adds.
Fitch has affirmed Nan Shan Life's Insurer Financial Strength (IFS) Rating at 'A-' (Strong), National IFS Rating at 'AA(twn)', Long-Term Issuer Default Rating at 'BBB+' and National Long-Term Rating at 'AA-(twn)'. The outlooks are ‘Stable’.
Fitch has also affirmed the insurer's Taiwanese dollar subordinated bonds at 'A+(twn)'. Simultaneously, Fitch has affirmed Nan Shan Life's US dollar subordinated dated capital bonds issued through its wholly owned SPV, Nanshan Life Pte. Ltd., at 'BBB'.
The affirmation reflects Nan Shan Life's sound capital adequacy, 'Favourable' company profile and the improving trend in underwriting profitability. However, moderate investment risk and negative spread burden remain key constraints on the ratings.
Aside from financial performance, other drivers of Nan Shan Life’s ratings include:
Sound Capital Position: Fitch estimates the issuer's capital score, measured by Fitch's Prism Global model, will remain in the 'Very Strong' category at end-2024, underpinned by its thick capital base, including a portion of reserves, and the recent issue of onshore and offshore subordinated bonds that count towards capital under the calculation of regulatory solvency. This includes $700m of subordinated bonds issued via Nanshan Life Pte. Ltd. and the proposed issuance of Taiwan dollar subordinated bonds. The issuer's risk-based capital ratio remained above 280% at end-June 2024.
'Favourable' Company Profile: Fitch ranks Nan Shan Life's company profile as 'Favourable' compared with those of all other local life insurers, reflecting its 'top three' market position in terms of premium income and total assets in 2023. The issuer has enhanced its sales of health policies, which accounted for nearly one-third of premium income in 1H2024, over the past few years. The company profile score is 'a' under Fitch’s credit factor scoring guidelines.
Improved Underwriting Profitability: Fitch believes that the issuer's gradual shift from traditional savings-type products and single-premium policies to long-term regularly paid policies and protection products contributed to the growth in the value of the new business margin over the past five years. However, overall profitability will remain vulnerable to volatility in investment returns, which can be constrained by high hedging costs resulting from the interest rate differential between the US and Taiwan.
Moderate Risky-Asset Ratio: Nan Shan Life's risky-asset ratio, including listed and unlisted stocks, equity-type mutual funds, preferred shares, below-investment-grade bonds and sovereign exposures, was 139% at end-1H2024 (end-2023: 135%), higher than the ratio guideline for its rating category.
Negative Spread Burden: The insurer has experienced a negative spread between investment yields and cost of liability over the past few years. This is primarily due to the high burden from its previously sold saving-type policies with high guarantee rates. We consider Nan Shan Life's negative spread to be the widest among market peers. However, the negative spread gradually narrowed in the past three years as the investment yield slightly increased.