Fitch Ratings has revised the outlook on South Korea-based Hanwha Life Insurance's (HWL) Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating to 'Positive' from 'Stable'. HWL is among the country's top three life insurers.
The global credit rating agency affirmed HWL’s ratings at 'A' (Strong) and the 'A-', respectively.
The ‘Positive’ outlook reflects HWL's 'Strong' capital position after the implementation of the more stringent capital regime, Korean Insurance Capital Standard (K-ICS) in 2023, and improving profitability.
The rating affirmation takes into consideration HWL's 'Favourable' company profile, manageable risky-asset portfolio, and narrowing asset-liability duration gap.
Insurance profit
Fitch says that it expects that a steady release of CSM, driven by better operating performance, will contribute to a sound insurance profit. This could also offset earnings volatility from investments amid capital market fluctuations and interest rate movements. HWL had strong new business CSM growth in 2023, led by its protection-type focused strategy. The new business CSM rose to KRW2.5tn ($1.9bn) in 2023 (2022: KRW1.6tn). Annualised return on equity and return on assets (pre-tax) improved to 6.9% in 1H24 (2023: 4.9%) and 0.8% in 1H24 (2023: 0.7%), respectively.
Apart from an improving operating performance, other key rating drivers for HWL include:
Solid Capitalisation Under IFRS 17: Fitch regards HWL's capital strength to be 'Strong'. The insurer's solvency capital ratio, as measured by K-ICS, stood at 183.8% in 2023, well above the 100% minimum standard. HWL estimated its K-ICS to be 163% in 1H24, due mainly to the tightened discount rates, but we expect the company to improve the ratio in the near term.
HWL's capital score, as measured by the Fitch Prism Global model, has improved to above 'Strong' in 2023 and 1H24 when both assets and liabilities are valued on an economic basis. The consolidated financial leverage ratio has also greatly improved after the redemption of $1bn hybrid securities in April 2023. Fitch estimates that HWL's financial leverage ratio stood below 15% in 1H24 with the contractual service margin (CSM) net of tax included as part of equity capital.
Manageable Investment Risk: Fitch expects HWL's risky assets, such as alternative investments and listed securities, to increase as the insurer continues to focus on better investment yield. HWL's risky-asset ratio, including stocks and equity-related investment funds, improved to 85% by end-2023, which is commensurate with the ratio guideline for an IFS 'A' category-rated life insurer. The sharp improvement was due mainly to changes in the accounting standard and the inclusion of CSM net of tax as part of equity capital.
HWL has exposure to commercial real estate (CRE), mainly in the form of beneficiary certificates, and domestic project financing loans. The company is likely to face additional losses related to overseas CRE if the asset values further deteriorate. Nevertheless, Fitch believes that HWL's strong capitalisation will provide sufficient headroom to withstand shocks from CRE-related losses.
Dynamic Asset-Liability Management: HWL's exposure to negative spread burden from legacy high-guarantee policies was alleviated by a one-off loss recognition upon the launch of IFRS 17 in 2023. The insurer has maintained its forward-looking approach in asset liability management in preparation for a potential interest rate cut, which could extend liability duration. HWL has gradually increased asset duration by replacing assets with longer-term domestic bonds. The duration gap had narrowed to 0.38 years by end-1H24 (2023: 1.21 years).
Solid Business Franchise: Fitch ranks HWL's company profile as 'Favourable', based on a 'Favourable' business profile and 'Neutral' corporate governance compared with other South Korean life insurers. This reflects a solid brand franchise, strong distribution capability, and substantial insurance scale. HWL uses multiple distribution platforms to disseminate its products, ranging from an exclusive agency channel from its majority-owned subsidiary, Hanwha Life Financial Service, and general agency to bancassurance. HWL has a 13% market share in South Korea by assets.