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Rating Action:

Moody’s downgrades Hanwha Life’s ratings, outlook stable, and confirms Hanwha General’s rating, outlook negative

 The document has been translated in other languages

19 June 2020


Hong Kong , June 19, 2020 – Moody's Investors Service ("Moody's") has downgraded the insurance financial strength rating (IFSR) of Hanwha Life Insurance Co., Ltd. to A2 from A1 as well as its junior subordinated capital securities to Baa1(hyb) from A3(hyb). The outlook has been revised to stable from ratings under review.

At the same time, Moody's has confirmed the A2 IFSR of Hanwha General Insurance Co., Ltd. The outlook has been revised to negative from ratings under review.

Moody's rating action concludes the review for downgrade initiated on 16 March 2020.

Please click on this link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1000003050 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The Korean life and non-life insurance industries have been the sectors affected by the shock given insurers' high cost of liabilities and reliance on investment income, and the prolonged low interest rate environment in a weakening economy would pressure their profitability. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Hanwha Life and Hanwha General of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.

HANWHA LIFE

The downgrade of Hanwha Life's IFSR and debt rating reflects its weakened credit profile because of lower profitability and pressure on capitalization stemming from prolonged low interest rate environment. It also reflects insurer's inherent volatility associated with its legacy variable guarantee products that raises its product risk.

Moody's believes its financial profile is better aligned at A2, in terms of profitability and capital adequacy. Also, it will be challenging for the insurer to meaningfully improve its financial profile given the prolonged low interest rate environment in a weakening economy, with higher susceptibility to business disruptions which would have an impact on premium sales and adverse financial market fluctuations resultant from the coronavirus.

In particular, Moody's expects its lingering negative spreads associated with legacy high-guarantee policies and falling investment yields will continue to pressure its profitability over the next 12-18 months. Given the policy rate cut by the Bank of Korea twice this year in March and May with the on-going pandemic globally, interest rates will likely to stay lower for longer weakening insurer's profitability.

The insurer's earnings improved in the first quarter 2020 reporting a net income increase of 261% on a consolidated basis from a year ago driven by higher investment yields amid realized gains on its bond portfolio, a low base effect from first quarter 2019, and improved earnings on its subsidiary, Hanwha General Insurance Co., Ltd. (insurance financial strength A2 negative).

Nonetheless, its earnings were continued to be impacted by higher reserving from variable guarantee policies of KRW230 billion in the first quarter amid heightened equity market fluctuations from the pandemic. Although a large portion of reserving will be reversed in the coming quarters as equity markets recover, we view these products exhibit higher volatility and product risk.

Hanwha Life's capital adequacy remains moderate, at 245.6% at the end of March 2020 and compares less favorably against other large insurers. The upcoming tighter regulations coupled with weaker earnings will pressure the insurer's solvency. In particular, the tightening of the liability adequacy test (LAT) assessment in 2020-21 adds the risk of higher capital needs for additional reserve provisioning if interest rates drop further.

Despite these negative pressures, Hanwha Life's A2 IFSR also reflects its strong brand and market position, strong tied agency force, and improving product mix towards high margin protection-type policies.

The stable outlook reflects our expectation that insurer' credit profile will not further deteriorate over the next 12-18 months given its solid capital buffer while maintain its moderate earnings.

HANWHA GENERAL

The confirmation of Hanwha General's IFSR at A2 reflects our view that insurer's profitability will potentially recover in the coming quarters with the highly anticipated double digit premium hike in 2020 on its medical indemnity products and amid recent stabilization on its auto and long-term loss ratios. In addition, its capitalization remains moderate with local RBC ratio stood at 235.5% as of the end of March 2020 from below 200% at year-end 2019.

However, the negative outlook reflects the uncertainty whether the insurer will successfully execute the premium rate increase and whether this will lead to a significant improvement on its loss ratio and profitability. Further, the lower-for-longer interest rate will continue to pressure its investment return over the next 12-18 months.

Despite recording a net loss of KRW61 billion in 2019 driven by rapid increase on its auto and long-term loss ratios while incurring impairment loss on their ETF investments, its earnings improved in the first quarter of 2020 to KRW34 billion from KRW10.1 billion a year ago. Slowdown in business activities with reduced traffic and lower frequent visits to hospitals amid the pandemic drove lower claims in auto and medical insurance, which in turn largely stabilized its loss ratios in the first quarter. However, this trend may not persist in the coming quarters as business activities recover.

The insurer's capitalization largely improved in the first quarter amid the reclassification of its bond portfolios to available-for-sale from held-to-maturity during the period which boosted unrealized gains that supported available capital. Nonetheless, the tightening of local capital regime and the insurer's still wide duration gap will continue to pressure insurer's capitalization.

Hanwha General's A2 IFSR continues to incorporate a one-notch uplift from its standalone credit profile of A3, reflecting the ownership by and support from its parent Hanwha Life (insurance financial strength A2 stable) that enhances Hanwha General's brand, distribution, capital position, operating efficiency and financial flexibility.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

HANWHA LIFE

Moody's could upgrade Hanwha Life's ratings if (1) the insurer meaningfully improves its profitability, for example with its return on average capital exceeding 6% on a sustained basis or through a material reduction in negative spreads; and/or (2) its capital position further improves without a significant increase in financial leverage.

On the other hand, Moody's could downgrade Hanwha Life's ratings if (1) there is a further significant deterioration in its profitability, for example with return on capital consistently below 2%; (2) there is a significant reduction in its capital adequacy, for example with an adjusted capital-to-assets ratio below 6%; (3) its adjusted financial leverage rising above 25%; and/or (4) its high-risk asset leverage rising consistently above 200%.

HANWHA GENERAL

Given the outlook is negative, an upgrade of Hanwha General's IFSR is unlikely.

However, the outlook could be changed to stable from negative if (1) the insurer significantly improves its profitability, with the risk loss ratio of its long-term business staying below 90% on a sustained basis; and/or (2) the insurer maintains or improves its capitalization, with its local risk-based capital (RBC) ratio rising above 200% on a sustained basis.

On the other hand, Moody's could downgrade Hanwha General's IFSR if there is (1) a significant deterioration in profitability, such that its return on capital (ROC) falls below 6% on a sustained basis; (2) a significant decline in capital adequacy; (3) an increase in the parent's adjusted financial leverage to above 25% on a sustained basis; (4) a reduction by the parent in its stake in the company, signs of weakening parental support or a downgrade of Hanwha Life's ratings.

RATING METHODOLOGY

The principal methodology used in rating Hanwha Life Insurance Co., Ltd. was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . The principal methodologies used in rating Hanwha General Insurance Co., Ltd. were Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 , and Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Hanwha Life Insurance Co., Ltd., headquartered in Seoul, Korea, was established in September 1946, and was listed on the Korea Exchange in March 2010. As of 31 March 2020, Hanwha Life's total assets and shareholders' equity amounted to KRW143.4 trillion and KRW14.1 trillion, respectively, on a consolidated basis.

Hanwha General Insurance Co., Ltd., headquartered in Seoul, Korea, provides various insurance products including automobile, property, casualty and marine, as well as long-term insurance and annuities and is 51.4% owned by Hanwha Life. As of 31 March 2020, Hanwha General's total assets and shareholders' equity amounted to KRW18.9 trillion and KRW1.8 trillion, respectively, on a consolidated basis.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1000003050 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Endorsement

• Lead Analyst

• Releasing Office

• Person Approving the Credit Rating

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Young Kim
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Sally Yim, CFA
MD-Financial Institutions
Financial Institutions Group
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Releasing Office :
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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