October 25, 2017 / 1:59 AM / a year ago

Fitch Assigns First-Time IFS 'BBB+' to Heungkuk Life Insurance

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, October 24 (Fitch) Fitch Ratings has assigned South Korea-based Heungkuk Life Insurance Co., Ltd. (HKL) an Insurer Financial Strength (IFS) Rating of 'BBB+' and Long-Term Issuer Default Rating (IDR) of 'BBB'. The Outlooks on both ratings are Stable. Additionally, Fitch has assigned an expected rating of 'BBB-(EXP)' to HKL's proposed USD500 million subordinated securities. The proposed securities will be HKL's direct, unsecured and subordinated obligations. Net proceeds will be used for general corporate purposes. The final rating is contingent on the receipt of final documents conforming to information already received. KEY RATING DRIVERS The ratings take into consideration HKL's good business profile, moderately weak capitalisation, and good financial performance. It also reflects ongoing challenges the company faces, particularly in improving its capital adequacy amid a tightening regulatory environment, and mitigation of the negative burden that stems from its legacy policy obligations with high guarantee rates. Fitch views HKL's business profile as good. It has an operating history of more than 60 years, and maintains a mid-sized presence in the domestic market, with a market share of 5% in 2016 by gross premiums written. HKL has a diverse mix of distribution channels, with a particular focus on its strengths in bancassurance and general agency, which together account for more than 70% of gross written premiums in 2016. Fitch views HKL's capitalisation as moderately weak. The score on Fitch's Prism Factor-Based Model (FBM) was 'Somewhat Weak' in 2016 and end-1H17. Its risk-based capital (RBC) ratio fell to 145% in 2016 (2015: 183%) due to the regulator's shift to a consolidated RBC regime. The RBC ratio improved to 162% at 1H17, and Fitch expects it to continue to improve, driven by surplus accretion, efficient capital usage and the raising of capital. HKL's financial performance in 2016 was good, with pre-tax return on assets at 0.3%, within Fitch's median guidelines for its rating category. Fitch expects the company's shift towards more profitable and capital-light products to support HKL's surplus growth. The proposed subordinated securities are rated one notch below HKL's IDR to reflect Fitch's assumption of "below-average" recovery prospects in the event of a default, given the level of subordination. There is no additional notching for non-performance risk, as Fitch views this risk as "minimal" under the agency's criteria. Fitch believes the coupon cancellation triggers are unlikely to be triggered unless HKL is in extreme distress and on the brink of insolvency. As the securities are afforded equity credit for regulatory solvency purposes, Fitch applies its "regulatory override" and therefore classifies these securities as 100% equity capital within the agency's assessment of risk-based capital adequacy. However, HKL's consolidated financial leverage is expected to increase post-issuance, as Fitch treats these securities as 100% debt for purposes of this calculation. Fitch estimates HKL's leverage at end-September 2017 to be above 35%, after including its proposed issuance of USD500 million. This is within the median guidelines for its rating category. RATING SENSITIVITIES Triggers for a downgrade include: - A significant decline in HKL's capital buffer; specifically, a fall in the local RBC ratio to below 180% over a sustained period; or - A prolonged deterioration in profitability, measured by consolidated pre-tax return on assets (ROA) to below 0.3% and fixed-charge coverage ratio falling below 3.5x (1H17: 9.8x) Triggers for an upgrade include: - A significant strengthening of HKL's domestic market franchise; - Prism FBM Score maintained at 'Strong' and continued proactive management of the negative spread burden; - Pre-tax ROA above 0.7% on a sustained basis; and - Financial leverage ratio consistently below 30% Contact: Primary Analyst Christopher Han, CFA, CA Associate Director +65 6796 7224 Fitch Ratings Singapore Pte Ltd. One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Jeffrey Liew Senior Director +852 2263 9939 Committee Chairperson Wan Siew Wai Senior Director +65 6796 7217 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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