Fitch Affirms Hyundai Marine & Fire Insurance's IFS Rating at 'A'; Outlook Stable

HYUNDAI MARINE & FIRE INSURANCE

01/04/2020 07:29

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-April 01: 

Fitch Ratings has affirmed South Korea-based Hyundai Marine  Fire Insurance Co., 
Ltd.'s (HDMF) Insurer Financial Strength (IFS) Rating at 'A' (Strong). The 
Outlook is Stable.

Key Rating Drivers

The rating affirmation reflects HDMF's 'Favorable' business profile and stable 
capital strength. While Fitch recognises the company's efforts in managing its 
assets and liabilities, Fitch believes lingering low interest rates and capital 
market volatility amid the coronavirus outbreak will challenge the insurer's 
ability to sustain the stability of its investment yield. 

Fitch views HDMF's overall operating performance as 'Strong', given its ability 
to consistently report profitable results despite challenging market conditions. 
Deterioration in underwriting results in the motor and long-term insurance book 
weighed on the company's operating earnings in 2019, which dropped by 30% to 
KRW250 billion. 

Nonetheless, the business quality of HDMF's non-auto general insurance portfolio 
remained favourable, with a combined ratio averaging 83% from 2017 to 2019. The 
company's annualised return on assets (pre-tax) amounted to 1.1% in 3Q19, but 
Fitch expects recent cuts in interest rates and global stock market volatility 
in the wake of the coronavirus pandemic to suppress HDMF's investment return in 
the near term. 

Fitch regards HDMF's capitalisation as 'Strong', as ongoing surplus growth 
enabled it to sustain its regulatory risk-based capital (RBC) ratio at 214% in 
2019 (2018: 219%). This is well above the minimum regulatory requirement of 100% 
and the 150% recommended by the regulator. Fitch estimated the insurer's capital 
score in terms of the Fitch Prism Factor-Based Capital Model (FBM) was in the 
'Very Strong' category at end-3Q19, reflecting its sound ability to withstand 
potential shocks from asset volatility. 

Fitch ranks HDMF's business profile as 'Favourable' against all other South 
Korean non-life insurers due to its solid operating record, favourable brand 
franchise, and strong distribution capability. Fitch scores HDMF's business 
profile at 'a+' under its credit factor scoring guidelines in light of this 
ranking. HDMF is South Korea's second-largest non-life insurer, with about 16% 
market share by direct written premiums over the past three years. The company's 
sources of businesses are well-diversified; it has been able to originate 
business through a range of distribution networks, including solicitors, agents, 
bancassurance and direct channels. 

HDMF continues to be proactive in managing its asset and liabilities in view of 
lingering low interest-rate conditions and its exposure to long-term business. 
It cut its policy crediting rate in response to interest-rate movements in the 
market. Its saving reserve liability funding cost dropped steadily as the 
proportion of floating-rate reserves to fixed-rate reserves increased further. 
It extended its asset duration by increasing the allocation to overseas bonds 
with longer maturities. 

HDMF continues to mitigate its underwriting volatility by ceding out business to 
a portfolio of good-quality reinsurers through quota shares, surplus and 
excess-of-loss (XOL) reinsurance treaties. The risk-retention ratio for the 
company's general insurance book was only 39% for 2019, while it was about 95% 
for automobile insurance. The company also arranged an XOL treaty to shield it 
from extreme catastrophe claims, including earthquakes and windstorms.

RATING SENSITIVITIES

Fitch is developing updated assumptions to support a review of the insurance 
companies it rates, focused on the significant uncertainties created by the 
onset of the global COVID-19 pandemic. Assumptions will be put in place for 
interest rate levels; declines in the market values of stocks, bonds, 
derivatives and other capital market instruments typically owned/traded by 
insurance companies; market liquidity; and the magnitude of COVID-19-related 
claim/benefit exposures. Fitch plans to conduct pro-forma analysis for 
individual companies to reflect these assumptions, and compare the pro-forma 
results to current rating sensitivities. Fitch expects to place ratings on 
Rating Watch Negative or downgrade ratings, if sensitivities are notably 
breached. HDMF will be part of this review.

Downgrade rating sensitivities include: 

- a weakening in capital strength, with HDMF's statutory RBC ratio consistently 
below 175% or its Prism FBM score declining to below 'Strong' for a sustained 
period; 

- dramatic decline in earnings, with pre-tax operating return on assets 
consistently below 0.8% or its non-life combined ratio, excluding savings 
products, in excess of 103%; or

- an increase in financial leverage to above 31% for a prolonged period.

Upgrade rating sensitivities include:

- strengthening in capital position, as measured by Fitch's Prism FBM, to the 
upper range of the 'Very Strong' category or higher on a sustained basis; 

- improvement in operating stability, with pre-tax operating return on assets 
consistently above 1.3% or its non-life combined ratio, excluding savings 
products, persistently below 97%; and

- a reduction in financial leverage to persistently below 25%.

Best/Worst Case Rating Scenario

Ratings of financial institution 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 www.fitchratings.com/site/re/10111579

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(ies), either due to their nature or to the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg 

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.

Hyundai Marine  Insurer Financial Strength; Affirmed; A; RO:Sta

Contacts: 

Primary Rating Analyst

Terrence Wong, 

Senior Director

+852 2263 9920

Fitch (Hong Kong) Limited

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

Hong Kong

Secondary Rating Analyst

Jeffrey Liew, 

Senior Director

+852 2263 9939

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/10116196

Solicitation Status 

https://www.fitchratings.com/site/pr/10116196#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10116196#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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