AM Best Removes From Under Review With Negative Implications and Affirms Credit Ratings of Hanwha General Insurance Company Limited

AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” of Hanwha General Insurance Company Limited (HGI) (South Korea). The outlook assigned to these Credit Ratings (ratings) is negative.

The ratings reflect HGI’s balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management. The ratings also reflect various forms of implicit and explicit support that the company receives from its parent, Hanwha Life Insurance Co., Ltd. (Hanwha Life).

The negative outlooks reflect the worsening trend of HGI’s operating performance in recent years, which led to a large net loss of KRW 69 billion (USD 60 million) and a return on equity ratio of -4.8% in 2019. The deterioration was mainly due to inadequate pricing against increasing claim costs in auto insurance and long-term medical indemnity coverage, as well as continually rising expenses amid intensifying market competition.

The company has implemented various initiatives to improve underwriting profitability, including several rounds of auto rate adjustments since 2019, a significant rate hike for medical indemnity in early 2020 and the adoption of a more cautious approach to new business expansion. Nonetheless, AM Best expects HGI’s overall operating performance to remain under pressure in the short term as its efforts will require time to take effect, coupled with a decreasing investment margin amid the current ultra-low interest rate environment. Additionally, operating expenses from Carrot General Insurance Co. Ltd., HGI’s newly established subsidiary in 2019, will negatively impact HGI’s consolidated results over the medium term.

The negative outlooks also reflect AM Best’s concern over the stability of HGI’s balance sheet strength in the medium term. The company’s interest coverage ratio decreased significantly in recent years due to the deterioration in its operating performance and the increase in interest expenses from hybrid and subordinated bonds issued in 2018. AM Best expects risk-adjusted capitalisation to be pressured by stagnant capital growth, due to HGI’s weakened bottom line and increased interest obligations, although required capital will continue to increase to support business growth. Nevertheless, despite the company’s proven track record of capital market accessibility, further issuance of supplementary capital is unlikely in the midterm given an already heightened interest expense burden.

The company’s capital and surplus sharply increased in the first quarter of 2020 after it reclassified all of its hold-to-maturity assets to available-for-sale securities; however, AM Best believes that this will lead to higher capital volatility with the fluctuation in market interest rates.

AM Best also notes the recent pressure on Hanwha Life’s credit profile, which was mainly derived from its deteriorating profitability. However, the level of support from Hanwha Life to HGI, its key subsidiary, is expected to remain unchanged over the medium term considering Hanwha Life’s solid financial strength and HGI’s strategic importance to its parent.

Negative rating actions could occur if, despite various mitigation efforts, deterioration in HGI’s underwriting and operating performance continues. Negative rating actions could occur if the company’s risk-adjusted capitalisation declines to a level that no longer supports the current balance sheet strength assessment.

Negative rating actions also could be triggered if there is a reduced level of support from Hanwha Life or continuous deterioration in Hanwha Life’s credit profile that no longer enables it to provide rating lift to HGI.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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