Fitch rates Taiwanese insurer Nan Shan

Fitch Ratings has assigned a National Insurer Financial Strength rating of 'AA+' to Taiwan-based Nan Shan Life Insurance. The outlook for the rating is Stable.

The rating reflects Nan Shan Life's strong capitalisation on a stand-alone basis, its leading position in the Taiwanese life sector and on-going support from the American International Group in operational and financial management. Fitch also views favourably the company's continued focus on managing its product portfolio and strengthening its distribution capabilities.

However, these positive factors are partially offset by the negative spread problem which originated from high guaranteed returns from past businesses and Taiwan's prolonged low interest rate environment. This has continued to affect current financial performance. Fitch said that it notes that overall, Nan Shan Life's capitalisation remains strong even though the negative interest spreads have continued to inhibit internal surplus growth. The company's statutory risk-based capital adequacy ratio remains comfortably above the regulator's minimum requirement. Furthermore, the management has reiterated its intention to maintain a level of risk-based capital commensurate with the current rating.

Fitch notes that though foreign currency investments have broadened Nan Shan Life's investment options, the company's decision to take sizable unhedged foreign currency investment positions may introduce additional volatility to investment income. Although Fitch recognises that the credit quality of the fixed-income portfolio remains high, the company is exposed to adverse exchange rate movements, which over an extended period could potentially lead to significant capital erosion, when coupled with the burden of legacy liabilities with high interest costs.

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