(The following was released by the rating agency)
Overview
-- Taiwan-based life insurer Nan Shan Life has a strong business franchise and a strong liquidity profile with prudent investment mix.
-- We are assigning our local currency 'A-' insurer financial strength and counterparty credit ratings on Nan Shan Life, as well as our 'cnAA' Greater China regional scale rating.
-- The stable outlook reflects our view that Nan Shan Life should be able to maintain its credit profile and more specifically its capitalization at the level commensurate with the ratings despite a difficult operating environment in Taiwan.
Rating Action
On Oct. 8, 2012, Standard & Poor's Ratings Services assigned its local currency 'A-' insurer financial strength and counterparty credit ratings on Nan Shan Life Insurance Co. Ltd. The outlook on the ratings is stable. At the same time, we also assigned our 'cnAA' Greater China regional scale rating.
Rationale
The ratings on Nan Shan Life Insurance Co. Ltd. reflect the insurer's strong business franchise in Taiwan, strong liquidity profile, and prudent investment mix. Counterbalancing factors include the sensitivity of its capitalization to the external investment environment and average operating performance by international standards.
Nan Shan Life was established in 1963 and is a top-three player in Taiwan's life industry in terms of total assets and premiums with a widespread domestic network, despite strong market competition. It had total premiums of new Taiwan dollar (NT$) 201.5 billion in the first half of 2012, representing about 16% share of the domestic market. Taiwan-based Ruentex (not rated) group and Pou Chen (not rated) group currently own over 90% of Nan Shan Life. The conglomerates' business operations include textile, property development, wholesale, medical, education, and footwear. Nonetheless, we expect Nan Shan Life to operate independently from its parents and other group members under Taiwan insurance regulator's supervision.
In our opinion, Nan Shan Life's strong market position and extensive distribution network in the domestic life insurance market will continue to support its strong business profile over the next one to two years. The insurer possesses good talent in its agent channel, which help to bring in good quality business. This is evidenced by Nan Shan Life's consistently above-average mortality experience and good persistency ratios. The insurer began building up its bancassurance channel since August 2011 and has achieved a more diversified distributional channel with about 50% premium contribution from banking channels in the first half of 2012.
We view Nan Shan Life's liquidity profile as strong, supported by our opinion of the insurer's good new business inflow and prudent financial policies. Nan Shan Life's invested assets are of strong liquidity and satisfactory quality, in our opinion. As of the end of June 2012, cash and bank deposits accounted for 7% of Nan Shan Life's total invested assets. The insurer's fixed income securities, which accounted for 77% of total invested assets at the same date, are generally of good credit quality. We expect Nan Shan Life to maintain satisfactory growth on its new business and this may sustain its liquidity profile at the current level.
We believe that Nan Shan Life will maintain a prudent investment strategy and mix, despite some volatility from its increased holdings on equity and property. As of the end of June 2012, Nan Shan Life's cash position and holdings of government bonds accounted for about 47% of the insurer's total invested assets and most of its remaining fixed-income positions are of good credit quality, in our view. Nan Shan Life's stock and property holdings could gradually increase from the current 9% of total invested assets in the coming two years; nonetheless, we expect this to remain manageable given the insurer's focus on stocks with lower volatility and prudent investment risk control.
Nan Shan Life's capitalization, albeit slightly better than the domestic average, is sensitive to the external investment environment. Global economic uncertainty is likely to exert some volatility over Nan Shan Life's capitalization considering the insurer's increasing equity, property, and overseas investments. The lack of long-term investment facilities with reasonable yield in Taiwan has resulted in a significant asset-liability mismatch for Taiwan life insurers. Nonetheless, we expect the company's continuous effort to narrow the mismatch by changing its business mix to prevent a sharp deterioration in its capitalization. Nan Shan Life's prudent capital policy with high earnings retention also helps to moderate the risk of deteriorating capitalization.
We view Nan Shan Life's operating performance as only average by international standards, even considering a potential boost to the company's profits from projected strong business growth in the coming three years. Low interest rates at present constrain the returns on Nan Shan Life's new money investments and its strong new business growth has also somewhat diluted its existing business margin. Under the prevailing low interest rate environment, Nan Shan Life inevitably faces obstacles to manage the industry-wide problem of negative spread, wherein the insurance policy liability rate generally outweighs the insurer's investment asset return. Nonetheless, Nan Shan Life's stable underwriting surplus from its in-force book and strong asset liability management and responsive investment adjustments somewhat moderate these constraints.
Outlook
The stable outlook on Nan Shan Life reflects our expectation that the insurer should be able to maintain its credit profile, and more specifically its capitalization, at a level commensurate with the current ratings despite the difficult operating environment in Taiwan. The rating outlook also reflects our expectation that Nan Shan Life's management team will adopt a prudent strategy to maintain a stable credit profile supporting the company's continuous strong business growth. We also believe Nan Shan Life's strong franchise and prudent underwriting control will prevent its business margin from dropping sharply during strong business growth. We expect Nan Shan Life to maintain a prudent risk appetite on its investments, which should prevent its risk profile from significant deterioration. Moreover, we believe Nan Shan Life's operations will remain independent from the Ruentex and Pou Chen groups under Taiwan's regulatory framework for financial institutions.
We may lower ratings on Nan Shan Life if increased competition weakens the insurer's business momentum or constrains reasonable new business margins on its business growth. We may also lower the ratings if the insurer's capitalization weakens beyond our expectation either from aggressive business growth or external economic volatility. Conversely, we may raise the ratings on Nan Shan Life if its new business strategy achieves continuous new business growth with stable returns and satisfactory margins, as well as improvement in its asset-liability mismatch through changing investment yield mix with good risk control supporting sustainable improvement in its capitalization.
Related Criteria And Research
-- Credit FAQ: Greater China Credit Rating Scale Explained, April 27, 2011
-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
-- Interactive Ratings Methodology, April 22, 2009 Ratings List New Rating; Outlook Action Nan Shan Life Insurance Co. Ltd. Counterparty Credit Rating Local Currency A-/Stable/-- Financial Strength Rating Local Currency A-/Stable/-- New Rating Nan Shan Life Insurance Co. Ltd. Counterparty Credit Rating Greater China Regional Scale cnAA/--
Keywords: MARKETS RATINGS NANSHANLIFEINSURANCE