Shin Kong Life Insurance (SKL) posted a net profit of NT$14.8bn ($456m) in 1H2024, on stronger returns from equity investments and lower hedging costs driven by its strategy to sell profitable foreign-currency policies, notes Fitch Ratings
However, the sustainability of the improved earnings has yet to be tested, the global credit rating agency adds.
The life insurer’s return on equity (ROE) averaged -2% in 2021-2023 (2023: -10%). SKL reported a net loss of NT$17.1bn in 2023 due to soaring traditional hedging costs on continued US rate hikes and large fair valuation losses on financial assets.
Strategy
The insurer’s underlying margins remain heavily reliant on spread gains, due to significant savings components in its product portfolio. However, SKL has been moving to reduce this reliance, by selling more accident and health products and policies with longer premium payment terms, which generate sustainable new business value. The continued shift towards less-spread-dependent protection-type products will also improve contractual service margin accumulation, which will prepare the insurer for implementation of the localised Insurance Capital Standard (TW-ICS) alongside IFRS 17 in 2026.
Ratings affirmed
Fitch Ratings has affirmed SKL’s National Insurer Financial Strength (IFS) Rating of 'A(twn)' and National Long-Term Rating of 'A-(twn)'. The outlook is ‘Stable’. Simultaneously, Fitch has affirmed the insurer's Taiwanese dollar subordinated bonds at 'BBB+(twn)'.
The affirmation reflects SKL's recovery of its regulatory solvency position and 'Favourable' company profile, which are offset by weak, but improving, financial performance and high risky-assets exposure.
Aside from financial performance, key rating drivers for SKL include:
Restoring Regulatory Solvency: A sound and sustained risk-based capital (RBC) buffer remains key to the agency’s assessment of SKL's capitalisation profile. The insurer received a capital injection of NT$7bn from Shin Kong Financial Holding (SKFH) and completed subordinated debt issuance of NT$5.5bn in 1H2024. As a result, SKL's regulatory RBC ratio improved by end-1H24 from 176% at end-4Q23. The Fitch Global Prism model score remained at the lower end of the 'Strong' level at end-2023, reflecting its volatile financial results and investment risks.
Fitch expects SKL's solvency position to be more stable, considering it has been replenishing its capital base in 2024. A further capital injection of nearly NT$14bn from SKFH and an additional debt issuance by SKL are likely to be completed by end-August 2024, which will ease pressure on its thin capital buffer amid challenging capital markets and high interest-rate risk exposure. The financial leverage ratio was 18% at end-2023, up from 13% at end-2022.
High Risky-Assets Ratio: SKL's investment portfolio entails high asset risks and Fitch believes it is unlikely to reduce its exposure to risky assets significantly in the near term for better returns. Risky assets, mainly equity investments and below-investment-grade fixed-income securities, stayed high at 259% of total equity and loss-absorbing reserves at end-2023 (2022: 283%). The capitalisation is susceptible to equity market volatility. Its considerable overseas investments — 68% of cash and invested assets at end-1Q2024 — expose it to swings in hedging cost and foreign-exchange risk.
Asset-Liability Management Focused: The insurer aims to maintain a close duration match between assets and liabilities, and reclassified some of its foreign bonds to assets measured at amortised costs from assets measured at fair value through other comprehensive income, to reduce volatility in its financial results caused by interest rate risk. Nonetheless, a portion of its overseas bond investments are used to back up the Taiwan-dollar-denominated policies, leaving it exposed to interest rate and currency mismatches between Taiwan and the US.
Stable Local Market Position: Fitch ranks SKL's company profile as 'Favourable' compared with that of other life insurers in Taiwan. The insurer had a 7.7% share of the domestic life sector by premiums in 2023 and remained the fourth-largest insurer. The assessment also underscores SKL’s favourable operating scale, diversified business mix and relatively high business risk profile with more spread burden.