Nan Shan Life Insurance, the third biggest life insurer in Taiwan, suffered from a negative spread between investment yields and cost of liability over the past few years, driven by the high burden from saving-type policies it had sold in the past with high guarantee rates, says Fitch Ratings.
The global credit rating agency views that Nan Shan Life's negative spread is the widest among market peers. However, the negative spread has gradually narrowed in the past three years as the investment yield has slightly increased.
Ratings affirmed
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’. Simultaneously, Fitch has affirmed the insurer's Taiwanese dollar subordinated bonds at 'A+(twn)'.
The affirmation reflects Nan Shan Life's 'Favourable' company profile, strong capitalisation, low leverage, and stable profitability. The ratings are constrained by moderate investment risk and persistent negative spread burden associated with a legacy book with high guaranteed rates.
Aside from the negative spread, key rating drivers for Nan Shan Life include:
'Favourable' Company Profile: Fitch ranks Nan Shan Life's company profile as 'Favourable' compared with those of all other local life insurers, reflecting its established brand name and franchise as the third-largest life insurer in Taiwan in terms of premium income and total assets in 2023. The market share by premium income was 12%. The insurer offers a wide range of products and has focused more on health products, which accounted for around 31% of premium income in 2023, over the past few years. The company profile score is 'a' under our credit factor scoring guidelines.
Strong Capital Adequacy, Low Leverage: Nan Shan Life's capitalisation remains strong with a risk-based capital ratio of 280% at end-2023 (2022: 292%) and a net worth ratio of 6.7% (2022: 5.6%). Its total capital, including a portion of reserves, increased due to narrower unrealised losses in 2023, compared to a year ago when the interest rate sharply rose.
Fitch estimated the insurer's capital score, measured by Fitch's Prism Global model, to have been above the 'Strong' category at end-2023. However, the Prism score is sensitive to interest-rate risk and the return assumptions used in embedded value calculation. Nan Shan Life's financial leverage ratio remained low at 13% in 2023 (2022: 12%) and both operating and asset leverage ratios remained at levels similar to a year ago. Fitch estimated those leverage ratios to have remained commensurate with its existing ratings, even after a series of subordinated securities issued in 1H24.
Stable Profitability: The insurer's return on equity averaged 9% over 2021-2023, the same as the previous three-year average. The stable and strong profitability is underpinned by its higher focus on health products and a gradual shift from single-premium policies to long-term regular paid policies and protection products, which generate a higher contractual service margin under IFRS 17 accounting standard that will be implemented from January 2026. The investment return has been less volatile than that of peers of similar operating scale, due partly to a lower proportion of equity investments.
Moderate Investment Risk: Nan Shan Life's risky-assets ratio, including listed and unlisted stocks, equity-type mutual funds, preferred shares, below-investment-grade bonds, and sovereign exposures, fell to 135% by end-2023 (2022: 145%), on a recovery in total capital. The insurer's investment portfolio mainly consists of fixed-income securities, mostly investment-grade bonds. The proportion of equity investments is lower than that of peers, resulting in a lower risky-assets ratio than peers' and a moderate level of investment risk.