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Rating Action:

Moody’s reviews Hanwha Life and Hanwha General’s ratings for downgrade

 The document has been translated in other languages

16 March 2020


Hong Kong , March 16, 2020 - Moody's Investors Service has placed on review for downgrade the A1 insurance financial strength rating (IFSR) of Hanwha Life Insurance Co., Ltd. and the A3 (hyb) rating on its subordinated capital securities.

Moody's has also placed on review for downgrade the A2 IFSR of Hanwha General Insurance Co., Ltd.

The previous outlook on both entities were stable.

RATINGS RATIONALE

HANWHA LIFE

The review for downgrade reflects Hanwha Life's weakening credit profile because of lower profitability and pressure on capitalization from lower interest rates. Moody's believes it will be challenging for Hanwha Life to improve its profitability given the prolonged low interest rate environment in a weakening economy, with the coronavirus outbreak adding downside risk.

Hanwha Life's profitability has weakened given lingering negative spreads associated with its legacy high-guarantee policies and falling investment yields. The insurer's standalone net income was KRW115 billion in 2019, down 68% from a year ago. This steep decline was driven by (1) higher reserving of KRW340 billion stemming from variable guaranteed products with a rapid fall in interest rates; (2) a KRW194 billion impairment loss on its ETF investments; and (3) a drop in investment yields to 3.45% in 2019 from 3.70% a year earlier.

In addition, claims from its health and medical insurance products have increased. The insurer's expense ratio also slightly picked up in 2019 as it expanded its protection-type products, incurring higher acquisition costs and new sales expenses despite these products generating stable risk and expense margins.

Given the likelihood of further interest rate decline, we believe it will be challenging for the insurer because a prolonged low interest rate environment would depress the insurer's investment yield and further widen its negative spread.

Hanwha Life's capital adequacy remains moderate, but 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.

Moody's review will focus on (1) Hanwha Life's ability to manage interest rate risk in the current lower-for-longer interest rate environment, while mitigating the financial impact from lingering negative spreads; and (2) the level of expected capital adequacy and its capital management plans amid tightening capital regulations.

Despite the coronavirus outbreak, we do not expect the insurer's profitability to be negatively impacted with the low current level of claims reflecting the still low numbers of infections relative to Korea's total population, and with most of the resultant medical expenses being borne by the Korean government. However, its profitability will remain at risk with higher global capital market volatility and reduced premium income due to disruptions to its distribution channel.

As the situation is still fluid, and the insurer has high mortality gains in underwriting income, Hanwha Life faces a potential spike in claims under a downside scenario with significant increase of infected cases and a much higher mortality rate.

Given that the ratings are on review for downgrade, an upgrade is unlikely.

However, the ratings could be confirmed if (1) the insurer meaningfully improves its profitability, for example with its return on average capital exceeding 8% 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 in case of: (1) a significant deterioration in its profitability, for example with return on capital consistently below 6%; (2) 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 175%.

HANWHA GENERAL

The review for downgrade considers Hanwha General's weakening profitability and capitalization. In addition, the rating action reflects the weakening credit profile of its parent, Hanwha Life, which has also been placed under review for downgrade.

The rating currently incorporates a one-notch uplift from its standalone credit profile of a3, reflecting the ownership by and support from its parent Hanwha Life that enhances Hanwha General's brand, distribution, capital position, operating efficiency and financial flexibility.

Hanwha General recorded a net income of KRW14.7 billion in the first nine months of 2019, 87% decline from a year ago driven by (1) rising loss ratios in its auto and long-term insurance segments, which increased to 96.0% and 83.5% in 3Q2019 from 90.6% and 82.0% a year ago; (2) an increased expense ratio due to higher acquisition costs following the expansion of its general agency channel to promote higher protection-type products; and (3) subdued investment returns amid the persistent low interest rate environment.

In particular, the insurer suffered from industry-wide high claims inflation in 2019 amid rising medical expenses on its indemnity policies, which account for about one-third of the insurer's long-term risk premium. Moody's expects the large premium hike on medical indemnity policies throughout 2020 will partially improve the insurer's earnings, but not fully offset the effect of weaker investment returns and Korea's slowing economy amid the coronavirus outbreak.

Hanwha General's solvency position remains moderate, with its local risk-based capital (RBC) ratio slightly declining to 191.0% at the end of September 2019 from 195.1% at the end of 2018 following tightening local RBC regulations. Nevertheless, the more stringent capital requirements of K-ICS and the insurer's relatively wide duration gap could reduce its capital buffer.

Moody's review will focus on (1) Hanwha General's ability to improve its profitability; (2) the insurer's target capital adequacy and capital management plans amid tightening capital regulations and wide duration gaps; and (3) Hanwha Life's ability to provide support to Hanwha General given its own weakening credit profile.

Given that the ratings are on review for downgrade, an upgrade is unlikely.

The rating could be confirmed if the insurer meaningfully improves its profitability, with the risk loss ratio of its long-term business consistently staying below 90%, or if it improves its capitalization, with its local RBC ratio rising above 200% on a sustained basis.

On the other hand, Moody's could downgrade Hanwha General's rating if (1) return on capital drops below 6.0% on a sustained basis; (2) its high-risk asset leverage rises above 175% of shareholders' equity on a sustained basis; (3) there is a significant decline in capital adequacy, with its adjusted capital-to-assets ratio below 6% on a sustained basis; (4) the parent's adjusted financial leverage rises above 25% on a sustained basis; and/or (5) the parent reduces its stake, there are other signs of weakening parental support, or if Hanwha Life's ratings are downgraded.

RATING METHODOLOGY

The principal methodology used in rating Hanwha Life Insurance Co., Ltd. was Life Insurers Methodology published in November 2019. The principal methodologies used in rating Hanwha General Insurance Co., Ltd. were Life Insurers Methodology published in November 2019, and Property and Casualty Insurers Methodology published in November 2019. 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 30 September 2019, Hanwha Life's total assets and shareholders' equity amounted to KRW138.3 trillion and KRW13.0 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 30 September 2019, Hanwha General's total assets and shareholders' equity amounted to KRW17.9 trillion and KRW1.6 trillion, respectively, on a consolidated basis.

REGULATORY DISCLOSURES

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.

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
Associate Managing Director
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

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