Hanwha Life Insurance (HWL), South Korea’s second-largest life insurer, is expected to maintain near-term operating profitability given its business orientation and rising interest rate trend, according to Fitch Ratings.
Steady mortality gains and improved expense margin profit helped HWL expand its net profit by 150% to KRW 411 billion ($335 million) in 2021. The new business value margin (NBV) of the business improved in 2021, due to its focus on selling higher margin protection type insurance policies, while the pre-tax return on assets averaged 0, 3% in the three years before 2021.
Fitch affirmed HWL’s Insurer Financial Strength Rating (IFS) at “A” and Long-Term Issuer Default Rating (IDR) at “A-”. The outlook is “stable”. Fitch also affirmed the rating of HWL’s $1 billion subordinated hybrid notes due 2048, which can be extended, at “BBB+”.
Fitch says the ratings reflect HWL’s stable operating performance, “favorable” business profile and proactive asset and liability management, as well as Fitch’s belief that HWL has a cushion of capital adequate to withstand asset risk and pursue new business growth in the context of rising interest rates. .
The global rating agency said: “We consider HWL’s capitalization to be ‘strong’, particularly in a rising interest rate environment. Higher interest rates will reduce HWL’s insurance liabilities, leading to an improvement in the insurer’s capital cushion. will be better reflected in the company’s financial statements prepared in accordance with IFRS 17 in the future.
“In addition, HWL issued $750 million of subordinated debt in January 2022 to strengthen its capital adequacy. We estimate that HWL’s capital score, as measured by the Fitch Prism model, would not fall within the “Strong” category at the end of 2021 if the impact of interest rate increases on its capital position and liabilities is considered.
Korean accounting standards require life insurers to measure insurance liabilities at historical cost, while financial assets – which are classified at fair value through profit or loss – and available-for-sale instruments are measured on the basis of market value. The company experienced a decline in shareholders’ equity during the year due to losses associated with available-for-sale fixed income securities as a result of rising interest rates.
The company’s financial leverage on a consolidated basis would have reached approximately 27% at the end of 3Q21 on a pro forma basis after issuing subordinated debt, which is within the guideline for IFS “A” rated insurers. HWL’s consolidated financial leverage stands at 19% at the end of 2020.
HWL’s risky asset ratio reached 214% in 3Q21, compared to 163% at the end of 2020. This was due to a higher allocation to equities and equity securities, including beneficiary certificates, coupled with a decline in capital equity in a context of losses on available-for-sale securities. Fitch believes that the risky asset ratio would be lower if VFL’s insurance liabilities were not valued at cost.
Fitch rates HWL’s corporate profile as ‘favorable’ due to a ‘favorable’ corporate profile and ‘moderate/favorable’ corporate governance, compared to that of other national life insurers . HWL has a strong business franchise, an extensive distribution network, a large scale of operations and a long history of operating in the domestic life insurance market. It had around 13% market share per asset over the past two years.
Fitch says HWL has continued to take a proactive approach to reducing costs associated with the burden of negative spread. It attempted to reduce the duration gap between assets and liabilities and placed more emphasis on spreading protection-type policies while easily changing its deposit rates in response to changing interest rates.