Fitch Revises Outlook on Hanwha General Insurance to Negative, Withdraws 'A' IFS Rating

Hanwha General Insurance

21/04/2020 08:01

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-April 21: 

Fitch Ratings has revised the Outlook on South Korea-based Hanwha General 
Insurance Co., Ltd.'s (HGI) Insurer Financial Strength (IFS) Rating to Negative 
from Stable. The IFS Rating is affirmed at 'A' (Strong). Fitch has 
simultaneously chosen to withdraw the rating of HGI for commercial reasons.

The ratings were withdrawn with the following reason For Commercial Purposes.

Key Rating Drivers

The Outlook revision and rating affirmation are based on Fitch's current 
assessment of the impact of the coronavirus pandemic, including its economic 
impact, under a set of ratings assumptions described below. These assumptions 
were used by Fitch to develop pro-forma financial metrics for HGI that Fitch 
compared to ratings guidelines defined in its criteria and relative to 
previously established rating sensitivities for HGI.

The Outlook revision also reflects HGI's weaker operating profitability in 2019, 
and Fitch's expectation that persistently weak operating results amid the 
coronavirus pandemic could hamper the insurer's ability to support its capital 
strength through surplus growth. The rating was affirmed based on its 'Strong' 
capitalisation, and 'Moderate' business profile and financial performance. 

The rating also recognises HGI's ownership linkage with Hanwha Life Insurance 
Co., Ltd. (HLI, IFS Rating A/Negative). According to Fitch's group rating 
methodology, we view the strategic status of HGI within HLI as 'Important' 
considering its earnings contribution and operating scale. Fitch has explicitly 
factored in a one-notch uplift into HGI's standalone credit profile to reflect 
HLI's majority ownership (51.4%) of HGI since its establishment in 1946. 

Fitch expects HGI's financial performance - measured by return on assets 
(pre-tax) - to further decline to below our ratio guideline for the 'A' IFS 
rating category, based on the assumed pro-forma financials, which include 
assumptions about the pandemic impact. Deterioration in underwriting results and 
impairments to investment assets caused a net loss of KRW69 billion in 2019. 
Consequently, return on assets (pre-tax) and return on equity dropped to 0.7% 
and 5.4%, respectively, on a three-year average basis. 

We expect the company's capitalisation to continue to be in the 'Adequate' 
category based on the assumed pro-forma Prism Model Score, which reflect the 
coronavirus impact. HGI's regulatory risk-based capital ratio decreased to 181% 
by end-2019 (2018: 195%), while its score under Fitch's proprietary Prism 
capital adequacy model remained at the 'Adequate' level.

Assumptions for Coronavirus Impact (Rating Case):

Fitch used the following key assumptions in support of the pro-forma ratings 
analysis discussed above: 

--Decline in key stock market indices by 35% relative to 1 January 2020.

--Increase in two-year cumulative high-yield bond default rate to 16%, applied 
to current non-investment grade assets, as well as 12% of 'BBB' assets. 

--Both upward and downward pressure on interest rates, with spreads widening 
(including high-yield by 400 basis points) coupled with notable declines in 
government rates. 

--Capital markets access is limited for issuers at senior debt levels with 'BBB' 
ratings and below. 

--A COVID-19 infection rate of 5% and a mortality rate (as a percentage of 
infected) of 1%. 

--Impairment of beneficiary certificates by 7.8%.

--Decline in value of investment property by 7.8%.

--For the non-life and reinsurance sectors, a negative impact on the 
industry-level accident year loss ratio from COVID-19-related claims at 3.5 
percentage points, partially offset by a favorable impact from the auto line 
averaging 1.5 percentage points.

RATING SENSITIVITIES

Rating sensitivities are not applicable as the rating is withdrawn. 

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This 
means ESG issues are credit-neutral or have only a minimal credit impact on the 
entity, either due to their nature or to the way in which they are being managed 
by the entity. For more information on Fitch's ESG Relevance Scores, visit 
www.fitchratings.com/esg.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions issuers have a 
best-case rating upgrade scenario (defined as the 99th percentile of rating 
transitions, measured in a positive direction) of three notches over a 
three-year rating horizon; and a worst-case rating downgrade scenario (defined 
as the 99th percentile of rating transitions, measured in a negative direction) 
of four notches over three years. The complete span of best- and worst-case 
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. 
Best- and worst-case scenario credit ratings are based on historical 
performance. For more information about the methodology used to determine 
sector-specific best- and worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the 
Applicable Criteria.

Hanwha General Insurance Co., Ltd.; Insurer Financial Strength; Affirmed; A; 
RO:Neg

; Insurer Financial Strength; Withdrawn; WD

Contacts: 

Primary Rating Analyst

Claire Lee, CFA

Senior Analyst

+852 2263 9618

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Terrence Wong, 

Senior Director

+852 2263 9920

Committee Chairperson

Siew Wai Wan, 

Senior Director

+65 6796 7217

 

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Insurance Rating Criteria (pub. 02 Mar 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10112692

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Prism Factor-Based Capital Model, v1.7.1

1-https://www.fitchratings.com/site/re/969155

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10118498

Solicitation Status 

https://www.fitchratings.com/site/pr/10118498#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10118498#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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