Insurance Companies' Credit Ratings Downgraded Consecutively

Declining Demand and Low Interest Rates Worsen Profits
NICE Ratings Downgrades NongHyup Life Insurance from AA+ to AA

[Asia Economy Reporter Park Jihwan] Credit rating agencies are continuously downgrading the credit ratings of the insurance industry. This is because the possibility of profitability deterioration due to the prolonged COVID-19 pandemic and low interest rates has become higher than ever, in addition to the decline in new subscription demand that started from the domestic economic slowdown. There are also observations that the possibility of a downgrade relay of insurance companies' credit ratings or outlooks cannot be ruled out due to the prolonged COVID-19 pandemic.

According to the credit rating industry on the 8th, NICE Credit Rating downgraded NongHyup Life Insurance's subordinated unsecured bonds credit rating from 'AA+ (Negative)' to 'AA (Stable)' on the 5th. The main reasons were the worsening profitability outlook due to a decrease in new business and an increase in refund burdens. Since 2015, NongHyup Life Insurance has been reducing the sales of savings-type insurance, resulting in a decline in premium income. On the other hand, insurance benefit costs have steadily increased due to the maturity of previously sold insurance products and contract cancellations.

Interest rate cuts aimed at economic recovery in various countries are also lowering the profitability outlook of the investment business sector. In the first quarter of this year, NongHyup Life Insurance's investment business profit was 411.5 billion KRW, down 8.15% from 448 billion KRW in the previous year. Lee Kangwook, Head of Financial Evaluation Division 2 at NICE Credit Rating, said, "With the realization of insurance liabilities maturity, the amount of interest rate risk is increasing and profitability is declining, causing the RBC ratio to fall below 200%, deteriorating capital adequacy. If profitability improvement does not enhance the ability to retain earnings internally, capital adequacy indicators may continue to decline."

On the same day, NICE Credit Rating also lowered Hanwha Life Insurance's long-term credit rating outlook from stable to negative. The analysis pointed out that the decrease in earned premiums and the continuous increase in surrender refunds have led to poor performance in the insurance business sector, and despite the increase in managed assets due to the prolonged low interest rate environment, the investment business sector's performance is also unsatisfactory.

Non-life insurers were also not spared from the credit rating agencies' downgrade movements. Korea Credit Rating lowered Hanwha General Insurance's long-term credit rating (AA-) outlook from 'positive' to 'stable.' This reflected the significant deterioration in profitability due to increased operating expenses and loss ratios last year. Hanwha General Insurance faced cost increases in automobile insurance and indemnity insurance last year, but premium hikes were insufficient, and competition in incentive policies through the independent agency (GA) channel expanded the burden of operating expenses, resulting in a net loss of 61 billion KRW.

Within the credit rating industry, voices are emerging that the possibility of downgrades or outlook changes for some insurance companies cannot be ruled out. This is because the increased volatility in the financial sector caused by COVID-19 could significantly impact the operating environment of insurance companies. These concerns are directly reflected in the credit rating outlooks of rating agencies. Among the 40 companies whose credit rating outlooks were changed by NICE Credit Rating since the beginning of the year, four were financial companies, three of which were insurance companies. In the case of Korea Credit Rating, two out of three financial companies with rating changes were insurance companies.

This content was produced with the assistance of AI translation services.