A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit rating (ICR) to “a” from “a-” of South Korea’s Hyundai Marine & Fire Insurance Co., Ltd (HMFI), as well as upgrading the FSR to ‘A-‘ (Excellent) from ‘B++’ (Good) and ICR to “a-” from “bbb+” of Hyundai Insurance (China) Co., Ltd. (HIC).
The outlook for all of the ratings has also been revised to stable from positive.
Best explained that the upgrades reflect “HMFI’s robust risk-adjusted capitalization, the consistent improvement in operating performance and its sound investment performance. In the past years, HMFI reported a continuous improvement in its risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), of which levels are supportive to the positive ratings action. The company’s capital and surplus grew by an average of 17 percent to KRW 1,744 billion ($1.5636 billion] at the end of March 2012, owing to the strong generation of net profit over the last five years.
“HMFI reported an improvement in its operating performance during the same period due to the improvement in underwriting results and a steady stream of investment income. The underwriting results improved mainly due to the recovery in auto insurance profitability, driven by the positive changes in the regulations including the introduction of a co-payment system in auto claims and a maximum limit on sales commission in the past year. In addition, HMFI’s conservative investment portfolio, consisting mostly of fixed income assets, enabled the company to report a stable growth of investment income and to maintain low volatility in capital movements during the period. The investment assets grew by an average of 18 percent to KRW 13,422 billion [$12.036 billion] over the past five years.
“Going forward, HMFI is expected to continue to improve operating performance in its long-term insurance business. HMFI reported solid growth of risk and loading premium in the long-term line in the past five years, which contributes to the stabilization of the long-term risk loss ratio.
HMFI management’s initiative to focus on sales of protection type products at the expense of volume growth would help the company to further improve its profitability.”
As partial offsetting factors Best cited “the fierce competition in the insurance market, relatively high level of underwriting leverage compared to HMFI’s peers with the same credit ratings and the persistently volatile operating performance of Hyundai Hicardirect Auto Insurance Co., Ltd. (Hi Car Direct), a mono-line direct insurer wholly owned by HMFI.”
Best said “downward rating movement could arise if there is a material deterioration in HMFI’s risk-adjusted capitalization and a weakening of its operating performance.”
The upgrading of HIC’s ratings “reflects its strong risk-adjusted capitalization, as measured by BCAR. After passing the start-up phase of operation, HIC’s BCAR remains at a high level with low premium leverage,” Best explained. “The additional layer of reinsurance cover from 2012 will reduce the capital volatility further, thus strengthening the projected adequacy of risk-adjusted capital.”
Best also indicated that the “business support from HMFI also contributes to HIC’s growth.
“Inward reinsurance business of HIC increased as there is a close relationship of HMFI with Korean and Chinese companies. The experienced staff that transferred from the parent company provides HIC with valuable management expertise. The operational support from HMFI enables HIC to enjoy cost savings as well.
“HIC’s management adopts conservative strategies in various aspects. The business portfolio is highly diversified with a cautious approach taken to explore new opportunities. The loss reserves have been booked based on an ultimate loss ratio target since inception in order to maintain a buffer for material claim events. An excellent liquidity position is kept through holding all invested assets in cash and deposits.”
As an offsetting factor Best noted “the volatile underwriting performance. Although the loss experience improved in 2010 and 2011, the loss ratio increased again in the first half of 2012 due to the major claim cases. The expense ratio was on a downward trend given the consistent increase in premium income, but a further decrease is needed to bring in an underwriting profit.
“Meanwhile, HIC will face more challenges from other Korean insurance companies expanding in China. The gradual opening of the China motor insurance market to foreign insurance companies will also lead to keener competition.”
Best said it “believes that HIC is well positioned at its current rating level. However, key rating factors that could lead to negative rating actions include significant deterioration in the company’s underwriting experience and/or risk-adjusted capital adequacy level.”
Source: A.M. Best
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