Shin Kong Life sees solvency boost from parent company’s aid

Fitch expects SKL’s solvency position to stabilise further with an additional $0.43b.

Whilst Shin Kong Life (SKL) faces ongoing challenges, particularly with its high-risk asset exposure, the insurer's efforts to restore its solvency position and improve earnings are positively reflected in Fitch Ratings' assessment and stable outlook.

SKL has strengthened its capital base, with a significant recovery in its risk-based capital (RBC) ratio by the end of the first half of 2024, following a capital injection of $0.22b (TW$7b) from its parent company, Shin Kong Financial Holding Co., Ltd. (SKFH), and a $0.17b (TW$5.5b) subordinated debt issuance.

The RBC ratio improved from 176% at the end of 2023. Fitch’s Global Prism model score for SKL remains at the lower end of the 'Strong' category, reflecting volatility in the insurer's financial results and investment risks.

Fitch expects SKL’s solvency position to stabilise further with an additional $0.43b (TW$14b) capital injection from SKFH and another debt issuance anticipated by the end of August 2024.

This is expected to ease pressure on SKL’s capital buffer amidst challenging market conditions and high interest-rate risk exposure. The financial leverage ratio of the insurer increased to 18% at the end of 2023, up from 13% in 2022.

SKL's return on equity (ROE) has averaged -2% over the period 2021-2023, with a net loss of $0.53b (TW$17.1b) in 2023, driven by high traditional hedging costs and substantial valuation losses on financial assets.

However, the insurer posted a net profit of $0.46b (TW$14.8b) in the first half of 2024, supported by stronger equity investment returns and lower hedging costs from its strategy to sell profitable foreign-currency policies. Whilst these earnings are promising, their sustainability remains uncertain.

SKL is working to reduce its dependence on spread gains by shifting its product portfolio toward accident and health products and policies with longer premium payment terms, which generate sustainable new business value.

This transition is also expected to enhance the insurer’s contractual service margin, preparing it for the implementation of the localised Insurance Capital Standard (TW-ICS) alongside IFRS 17 in 2026.

SKL's investment portfolio remains highly exposed to risky assets, including equity investments and below-investment-grade fixed-income securities, which accounted for 259% of total equity and loss-absorbing reserves at the end of 2023.

The insurer’s capitalisation is vulnerable to equity market fluctuations, and its significant overseas investments—comprising 68% of cash and invested assets as of the end of the first quarter of 2024—expose it to volatility in hedging costs and foreign-exchange risks.

SKL continues to focus on aligning the duration of its assets and liabilities and has reclassified some of its foreign bonds to reduce volatility from interest rate risks. However, a portion of its overseas bond investments are allocated to back Taiwan-dollar-denominated policies, leaving the insurer exposed to interest rate and currency mismatches between Taiwan and the U.S.

With a 7.7% market share in Taiwan’s life insurance sector by premiums in 2023, SKL remains the fourth-largest insurer in the country. The insurer benefits from a favourable operating scale, a diversified business mix, and a relatively high business risk profile.

($1.00 = TW$32.46)