TEXT-S&P revises outlook on Hyundai Marine & Fire to positive

Fri Nov 30, 2012 3:51am EST

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(The following statement was released by the rating agency)

Nov 30 - Standard & Poor's Ratings Services said today that it revised the outlook on its 'BBB+' long-term counterparty credit and insurer financial strength ratings on Hyundai Marine & Fire Insurance Co. Ltd. (HMF) to positive from stable. At the same time, we affirmed the long-term counterparty credit and insurer financial strength ratings at 'BBB+'.

The outlook revision reflects our view that HMF's underwriting performance and capitalization have improved over the past few years. If the company further strengthens its capitalization, we may upgrade it to the 'A' rating category over the next 24 months.

The rating affirmations reflect HMF's strong market position, good operating performance, and relatively strong profit base in its long-term business. On the other hand, the ratings are constrained by the company's modest capitalization and the low interest rate environment in Korea.

HMF holds a strong business position as Korea's second-largest non-life insurer with a market share of about 16% in terms of direct premiums. Strong growth in the company's long-term business line (which mainly covers third-sector insurance such as private health, personal accident, and nursing insurance) over the past few years has supported its market share. It has good distribution channels and, therefore, maintains relatively strong growth in its long-term business line. In our view, it will be able to maintain its strong business position.

HMF showed strong improvement in its operating performance in fiscal 2011. The company's overall combined ratio fell below 100%, thanks to favorable market conditions as well as an improved expense ratio. Its operating performance has remained at the industry's average level over the past five years. However, recent strong growth in the protection-type long-term business (risk business) has strengthened its profit base in both underwriting and investment. In our opinion, HMF will continue to enjoy profits from its long-term business as well as growth in its investment income, thanks to larger investment assets. We maintain a favorable view of the company's earnings prospects in the near to medium term.

The company's capitalization remained at a moderate level, as savings-type product sales continued to drive strong growth in its long-term business. We expect HMF to post another record net profit in fiscal 2012, although we believe that its capitalization, as measured by our risk-based capital model, will remain moderate due to the company's continued strong growth. However, from 2013, we expect business growth to slow due to the company's efforts to shift its focus away from savings-type products as well as weak market conditions. In our view, HMF's capitalization is unlikely to come under downward pressure as its operating performance will remain favorable and the company's growth will slow. We expect its capitalization to gradually improve in the medium term.

Standard & Poor's views low interest rates amid rising competition in the non-life insurance industry as a key challenge for HMF and other insurers. As the low interest rate environment continues, Korean non-life insurers' interest rate spreads are narrowing. We think that it is unlikely for HMF's interest rate spread to turn negative in the near to medium term. As the company faces difficulty in achieving sales growth for its protection-type products due to saturated market demand, we still consider narrowing interest spread to be a risk for the company in terms of its efforts to maintain its good performance and adequate capitalization.

The positive outlook on the ratings on HMF reflects our expectation that the company will improve its capitalization on the back of an improved operating performance and its good competitive market position. We may raise the ratings on HMF if the company successfully improves its capitalization through strong profitability over the next few years. Conversely, we may revise the outlook back to stable if its operating performance declines due to fierce competition, or if it fails to improve its capitalization.

RELATED CRITERIA AND RESEARCH

-- Interactive Ratings Methodology, April 22, 2009

-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Summary Of Standard & Poor's Enterprise Risk Management Evaluation Process For Insurers, Nov. 26, 2007

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