HONG KONG--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” of Meritz Fire & Marine Insurance Co., Ltd. (Meritz) (South Korea). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Meritz’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 (ERM).
The risk-adjusted capitalisation of Meritz, as measured by Best’s Capital Adequacy Ratio (BCAR), is at a very strong level in view of the recent capital increase of KRW 100 billion (USD 90 million) from its parent, Meritz Financial Group Inc., and the issuance of KRW 105 billion (USD 95 million) in hybrid bonds, both of which took place in November 2020.
As proven in recent capital raising, Meritz has demonstrated good financial flexibility with a track record of successful issuances of subordinated and hybrid bonds, in addition to its parent’s financial support when needed. Its investment portfolio is mostly comprised of high quality fixed-income assets, coupled with a strong focus on asset-liability management, which further support the strong balance sheet strength assessment. Offsetting factors to its balance sheet strength include the rapidly increasing required capital stemming from strong business growth, which could add pressure to its risk-adjusted capitalisation, if capital growth slows due to a deterioration in its operating profitability.
Meritz has demonstrated robust premium growth, as well as a strong return-on-equity ratio (five-year average of 14.6% [2015-2019]), which is mainly driven by its superior investment returns and a relatively low loss ratio compared with its domestic peers. Its net profits in 2019 increased by 28% on a consolidated basis, primarily driven by a large volume of disposal gains on its securities holdings; this helped offset the underwriting deterioration due to increases in the loss ratio for its major line of long-term insurance and the expense ratio. Notably, the company’s expense ratio has rapidly increased to the highest level among its peers in recent years, principally due to the additional amortisation of deferred acquisition costs derived from its large volume of new business, as mandated by local regulations. However, AM Best expects the expense ratio to improve over the medium term, given the company’s efforts to realign channel strategy and the continuous expansion of its premium base. AM Best also expects its strong investment returns to be partially offset over the coming years by declining running yields from its fixed-income portfolio amid the low interest rate environment. Meritz’s investment yield is likely to remain superior to its peers due to a portion of its real-estate related loans, which have relatively higher returns than traditional investments.
As the fifth-largest non-life insurer in South Korea, Meritz’s market share has gradually increased from 7.8% in 2014 to approximately 10.1% in 2019, based on direct premium written. The company captured about 17% of new business premiums in the non-life health segment in the first half of 2020, mainly driven by strong new business growth from its general agent channel in recent years. The company is now gradually shifting its focus toward the tied agent channel for stronger control over distribution, as well as overall channel profitability.
Meritz’s ERM is viewed as appropriate given its profile. Its ERM framework is developed, with key risks identified and specific committees/teams assigned to monitor and address each key risk category. The company conducts strict risk management on its investment assets, including quarterly capital stress testing on its risk exposures, especially relating to the real estate loan portfolio.
Positive rating actions could occur if Meritz demonstrates continued improvement in its underwriting results driven by a sustained decline in the expense ratio. Negative rating actions could occur if there is a significant decline in the company's risk-adjusted capitalisation due to its capital growth lagging materially behind the rising capital needs driven by fast business expansion.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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