Media Reports

Nan Shan Deal Highlights Regulatory Concerns in Taiwan

time:2011-01-18 source:Best Week

 Several factors will weigh on Taiwan's Financial Supervisory Commission's review the proposed sale of Nan Shan Life Insurance Co. Ltd. to Ruen Chen Investment Holding Co. Ltd., a new investment company formed by Taiwanese industrial groups Ruentex Group and Pou Chen Corp.

The regulator said it will evaluate the proposed transaction based on five criteria: professional capability to operate an insurance business, financial stability and legally compiled funding sources, long-term business commitment, future fund-raising ability and protection to employees and policyholders. 

The evaluation will be independent, efficient, professional and fair for the protection of policyholders, Nan Shan operations and the insurance market as a whole, said the FSC in a statement.

American International Group Inc. agreed to sell Nan Shan for US$2.16 billion in cash to Ruen Chen, which is 80% owned by Ruentex Group and 20% by Taiwanese footwear manufacturer Pou Chen (BestWire, Jan. 12, 2011).

As the transaction involves a foreign entity, AIG, the Investment Commission of the Ministry of Economic Affairs will also take part in the regulatory review process, said an FSC officer.

"It's hard to predict the outcome of regulatory approval this time," said Brandon Liu, an equity analyst with Taiwan International Securities Corp. Taiwan-based Pou Chen and Ruentex Group's subsidiary are listed on the Taiwan stock exchange. The two entities seem to have no direct funding sources from mainland China, which would be a concern for the regulator.

AIG's first proposed to sell Nan Shan to a Hong Kong-based consortium comprised of China Strategic Holdings Ltd. and Primus Financial Holdings, which jointly won an earlier bidding round to acquire Nan Shan for US$2.15 billion. That deal was rejected by Taiwan's regulator amid concerns that the buyers were backed by capital from mainland China and lacked experience in the insurance business and the ability to raise funds for future operations (BestWire, Sept. 1, 2010).

Insurance experience is among the five evaluation criteria set by FSC. Liu said Ruentex Group had investments in a life insurance business many years ago but it is uncertain if this experience would be counted. Ruentex Group had a 20% stake in ING Groep NV's life insurance unit in Taiwan in 1986 but the shares were sold back to ING in 2001.

The proposed Nan Shan acquisition by a nonfinancial services group will not bring change to the domestic life market, said Liu. Ruen Chen's purchase of Nan Shan would enable the life unit to maintain its own structure and operation. An acquisition by a financial group would lead to certain integration and reshape the life market share.

Last December, AIG attracted four Taiwanese financial and business conglomerates for a new round of acquisition bidding for Nan Shan. The four companies expressing interest in Nan Shan were Chinatrust Financial Holding Co., Cathay Financial Holding Co., Ruentex Group and Fubon Financial Holding Co. Ltd. (BestWire, Dec. 6, 2010).

Multiple Issues

In Taiwan, the FSC is dealing with multiple issues on the life sector, along with AIG's divestment of Nan Shan. Several foreign players left the market and others may also leave. At the same time, the FSC is still looking for buyers for Kuo Hau Life Insurance Co. Ltd., which has been taken over by the regulator due to insolvency (BestWire, April 26, 2010).

In October 2010, the FSC rejected Taiwan-based Waterland Financial Holdings Co.'s application to acquire MetLife Inc.'s Taiwanese life unit because of concerns about Waterland's ability to run the life insurance operation, and about funding (BestWire, Oct. 8, 2010).

One of the concerns for Taiwan's regulator is the exodus of foreign players. "Also high on their list is the difficulty in selling Kuo Hua and keeping their promises to the policyholders," said Sam Radwan, a partner and co-founder of management consultant Enhance International.

Taiwan is keen to portray itself as a market favorable for foreign investment, said Radwan. Another concern is "the risk that exists with the legacy book of business having moved from being diversified across local and foreign players to being more concentrated with a smaller handful of local players."

Radwan said this problem "becomes even more of an issue as the regulators look to move to much stricter capital standards by adopting the International Financial Reporting Standards."

For local insurance companies, a key regulatory concern is implementation of international financial reporting standards and the impact it will have on capital requirement for legacy business. For foreign insurers, Radwan said it will create "a more level playing field when all have to comply with IFRS."

International insurers have been leaving Taiwan's life market since 2008. ING sold its life subsidiary to Fubon Financial Holding and the life unit was integrated into Fubon Life Insurance Co. Ltd.

In February 2009, U.K.-based Prudential plc sold its agency distribution business and agency force to China Life Insurance Co. Ltd. of Taiwan. Aegon NV sold its life unit to Zhongwei in April 2009.

MassMutual Financial Group is planning to withdraw from its life insurance business in Taiwan by selling its stake in a life joint venture to its local partner, Mercuries Corp. (BestWire, Oct. 20, 2010).

Taiwanese insurance groups are pursuing expansion in China as Taiwan and China are building closer ties in financial cooperation. For the regulators, Radwan said "this may become an issue down the road" in terms of supervising the insurers' capital and financial conditions.

"How soon will depend on how fast Taiwanese insurers are able to expand in the mainland, but for the next few years I believe revenue from China may be small compared to their domestic business," said Radwan.

(By Iris Lai, Hong Kong bureau manager:

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