The winning bid for American International Group’s (AIG) local life insurance unit, Nan Shan Life Insurance Co (南山人壽), will face a number of challenges including the need to increase capital, staff integration and the higher cost of insurance policies, Standard & Poor’s local arm, Taiwan Ratings Co (中華信評), said last week.
Taiwan’s three largest financial firms, Cathay Financial Holding Co (國泰金控), Fubon Financial Holding Co (富邦金控) and Chinatrust Financial Holding Co (中信金控), are all bidding for AIG’s 97.57 percent stake in Nan Shan.
The major investors in -Ruenchen Investment Holding Co (潤成投資控股), which include Ruentex Industries Ltd (潤泰全球), Ruentex Development Co (潤泰創新) and Pou Chen Corp (寶成工業), are also interested in the insurer, as is Primus Financial Holdings Ltd (博智金融), a buyout company and the former bidder.
With assets of NT$1.72 trillion (US$56.67 billion), Nan Shan is about 60 percent of the size of Cathay Financial’s life insurance subsidiary and about the same size as Fubon Financial’s life insurance subsidiary, said Andy Chang (張書評), director of financial services ratings at Taiwan Ratings.
“Whichever financial firm wins Nan Shan, it will need to increase capital,” Chang said in an interview on Thursday. “A deal via a share swap will pose less of a challenge, but AIG needs cash to settle debts with the US government.”
As for Chinatrust Financial, which does not own an insurance unit, the company will have to address the financial regulator’s -concern over the stability of its capital structure, while seeking to develop new business, Chang said.
Taiwan rejected AIG’s earlier share transfer plan to a Hong Kong consortium, comprising Primus Financial and China Strategic Holdings Ltd (中策集團), on Aug. 31 over concerns relating to the buyer group’s ability to boost capital and long-term commitment.
“The New Taiwan dollar has gained quite a bit against the US dollar since then,” a Chinatrust official said by telephone on condition of anonymity last week. “The company has to factor in that trend before making an offer.”
Cathay Financial and Fubon Financial will have no difficulty raising funds in the local bourse given their earning ability and financial health, Chang said. The Financial Supervisory Commission has frowned on recapitalization attempts through private placement because of their lack of transparency.
Chinatrust Financial can avoid shareholder instability if group founder Jeffrey Koo (辜濂松) and family members subscribe most new shares, Chang said, adding that support from foreign institutional investors is also important, as they own a considerable amount of equity.
Nan Shan’s nearly 40,000 employees and 4 million policyholders pose another headache as the regulator has said the buyer is required to uphold employee’s working rights and the interests of policyholders.
With banking branches nationwide in an overcrowded environment, the three financial holding firms are unlikely to retain all Nan Shan sales agents.
They will also have to deal with negative interest spreads for years as Nan Shan’s mainly traditional life insurance products pay higher interest rates.
“It will take five to 10 years to digest the cost burdens given the low interest rates and the pace of rate hikes,” Chang said.
Nan Shan has about 8 million effective policies and a market share of 15.32 percent.
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