Fitch Affirms Hyundai Marine & Fire Insurance's IFS Rating; Outlook Stable on Coronavirus Review

HYUNDAI MARINE & FIRE INSURANCE

07/05/2020 08:04

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-May 07: 

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 actions noted above 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 HDMF that Fitch compared to both ratings 
guidelines defined in its criteria, and relative to previously established 
Rating Sensitivities for HDMF. 

The Stable Outlook reflects the insurer's sound capital buffer to withstand 
losses from asset volatility under the rating-case scenario. The pro forma 
rating analysis demonstrates that HDMF's capital strength, as estimated by Fitch 
Prism model, would remain in the 'Strong' category. Ongoing surplus growth 
sustained the insurer's regulatory risk-based capital (RBC) ratio at 214% in 
2019 (2018: 219%). 

Fitch expects recent interest-rate cuts and global stock-market volatility in 
the wake of the pandemic to suppress HDMF's near-term investment returns. 
Nonetheless, Fitch expects HDMF's pro forma operating results in terms of return 
on assets (pre-tax) to remain commensurate with its rating category. The 
company's annualised return on assets (pre-tax) amounted to 1.1% in 3Q19. 

The rating affirmation reflects HDMF's 'Favourable' business profile due to its 
solid operating record, favourable brand franchise, and strong distribution 
capability. 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.

Assumptions for Coronavirus Impact (Rating Case):

Fitch used the following key assumptions, which are designed to identify areas 
of vulnerability, 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' rated assets;

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

- Capital markets access is limited for issuers at senior debt levels of 'BBB' 
and below;

- A coronavirus infection rate of 5% and a mortality rate, as a percentage of 
people infected, of 1%;

- A negative impact on the industry-level accident year loss ratio from 
coronavirus-related claims at 3.5pp, partially offset by a favorable impact from 
the auto line averaging at 1.5pp; 

- Impairment of beneficiary certificates of 7.8%; and

- Decline in value of investment property of 7.8%.

RATING SENSITIVITIES

The rating remains sensitive to any material change in Fitch's Rating Case 
assumptions with respect the coronavirus pandemic. Periodic updates to our 
assumptions are possible given the rapid pace of changes in government actions 
in response to the pandemic, and the pace with which new information is 
available on the medical aspects of the outbreak. A discussion of how ratings 
would be expected to be impacted under a set of Stress Case assumptions is 
included at the end of this section to help frame sensitivities to a severe 
downside scenario. 

Factors that could, individually or collectively, lead to negative rating 
action/downgrade:

- A material adverse change in Fitch's Ratings Assumptions with respect 
coronavirus impact; 

- a weakening in capital strength, with HDMF's statutory RBC ratio consistently 
below 175% or its Fitch Prism model 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%; 

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

Factors that could, individually or collectively, lead to positive rating 
action/upgrade:

- A material positive change in Fitch's ratings assumptions with respect to the 
coronavirus impact;

- A positive rating action is prefaced by Fitch's ability to reliably forecast 
the impact of the coronavirus pandemic on the financial profile of both the 
Korean insurance industry and HDMF;

- strengthening in capital position, as measured by Fitch Prism model score, 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%;

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

Stress Case Sensitivity Analysis

- Fitch's Stress Case assumes a 60% stock-market decline, two-year cumulative 
high-yield bond default rate of 22%, high-yield bond spreads widening by 600bp 
and more prolonged declines in government rates, heightened pressure on capital 
markets access, a coronavirus infection rate of 15% and mortality rate of 0.75%, 
an adverse non-life industry-level loss ratio impact of 7pp for coronavirus 
claims, partially offset by a favorable 2pp impact on the auto line, impairment 
of beneficiary certificates by 16.5%, and a decline in the value of investment 
property by 16.5%.

The implied rating impact under the stress case would be a downgrade of no more 
than one notch.

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

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.

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/10119944

Solicitation Status 

https://www.fitchratings.com/site/pr/10119944#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10119944#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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