Overview
- On Nov. 15, 2023, we published our revised criteria for analyzing insurers' risk-based capital (see "Insurer Risk-Based Capital Adequacy--Methodology And Assumptions").
- Implementation of the revised criteria improves our view on Korean Reinsurance Co.'s (Korean Re) capital and earnings, reflecting a higher level of risk diversification and increased visibility on the reinsurer's future profits under Korean International Financial Reporting Standard (K-IFRS) 17.
- We also expect Korean Re's stable and sound profitability leveraging on its very strong competitive position to support its capitalization.
- We revised our rating outlook on Korean Re and its subsidiary Korean Reinsurance Switzerland AG to positive from stable. We affirmed our 'A' long-term financial strength and issuer credit ratings on the reinsurers.
- The positive rating outlook reflects our expectation that Korean Re will continue to build a record of very strong capital adequacy, while maintaining its dominant position in the domestic reinsurance market over the next 12-18 months.
Rating Action
On Feb. 28, 2024, S&P Global Ratings revised its rating outlook on Korean Reinsurance Co. (Korean Re) and its subsidiary Korean Reinsurance Switzerland AG (KRSA) to positive from stable. We affirmed our 'A' long-term financial strength and issuer credit ratings on the reinsurers.
Impact Of Revised Capital Model Criteria
- The improvement in Korean Re's capital adequacy primarily reflects the benefits of capturing risk diversification more explicitly in the new capital model.
- We also have greater visibility on the reinsurer's future profits following its adoption of K-IFRS 17 from Jan. 1, 2023.
- Higher catastrophe risk charges and a revised approach to interest rate risk charges modestly offset these improvements.
| Overview | |
|---|---|
| Key strengths | Key risks |
| Market leader in Korea, with a growing international presence. | Higher sensitivity to adverse financial market conditions than global peers, due to sizable holdings of alternative investments or loans. |
| Strong capitalization to support business growth. | Higher reliance on retrocession than peers. |
| Lower capital and earnings volatility than for global and regional peers. | |
Outlook
The positive rating outlook on Korean Re and KRSA indicates that we may raise our ratings on the reinsurers over the next 12-18 months. This reflects our view that Korean Re will sustain very strong capital adequacy, and maintain its stable operating performance and dominant position in the domestic reinsurance market while gradually expanding its international business portfolio.
Upside scenario
We could raise the ratings on Korean Re and KRSA over the next 12-18 months if Korean Re:
- demonstrates its prospective capital adequacy sustainably at the 99.95% confidence level; and
- sustains stable operating performance in line with our base case and maintains its dominant position in the domestic reinsurance market.
Downside scenario
We could revise the outlook to stable if Korean Re's:
- prospective capital adequacy weakens sustainably to below the 99.95% confidence level. This could happen due to aggressive business growth, especially in overseas markets, and underwriting and investment losses that we do not foresee in our base-case scenario;
- operating performance, as measured by the return on equity and the combined ratio, significantly weakens relative to peers'; or
- presence in the domestic reinsurance market weakens substantially.
Rationale
The outlook revision reflects the possibility that we could upgrade Korean Re and KRSA over the next 12-18 months if Korean Re sustains its strengthened capital buffer. We had placed the ratings on under criteria observation on Nov. 15, 2023, to reflect the potential impact of the new capital criteria on our financial risk profile assessment.
The revised capital model criteria improves our view on Korean Re's capital adequacy. This primarily reflects a higher level of risk diversification in the new capital model, and enhanced visibility on the reinsurer's future profits following the adoption of K-IFRS 17.
Under our revised capital model, we no longer apply haircuts or capital charges to equity-like reserves, such as contractual service margin and risk adjustments disclosed in the reinsurer's audited financial statements from Jan. 1, 2023.
Korean Re's capital and earnings could face volatility owing to the reinsurer's exposure to alternative investments and loans, as well as natural catastrophes. In the wake of the application of the new criteria, we revised our risk exposure assessment on Korean Re to moderately high from moderately low.
Korean Re's investment portfolio is diversified but still more susceptible to credit and market risks than that of its international peers. This is mainly due to a higher allocation to alternative investments, loans, and equities, which together accounted for about 25% of total investments at end-2023. Korean Re is also exposed to natural catastrophe risk, although the exposure is lower than that of global reinsurance peers considering sound reinsurance protection, in our view.
Korean Re's dominant market position in Korea, long operating history, and strong ties with local primary insurers underpin its very strong competitive position. The reinsurer has a diversified business portfolio across commercial, long-term healthcare, life, and motor insurance. Korean Re is gradually expanding its international presence, with overseas business accounting for about 32% of its total gross premiums written in 2023. We expect Korean Re's combined ratio to stay at 98%-100% over the next two years, with a return on average equity of 6.0%-7.0%.
Korean Re's reinsurance utilization of about 22% in 2023 was higher than that of regional peers. This reflects the retrocession cover for its domestic commercial and overseas businesses. This cover provides some earnings stability. However, we believe the reinsurer's capacity to manage risks could be tested if retrocession costs substantially increase or reinsurance utilization significantly declines.
Ratings Score Snapshot
| To | From | |||||
|---|---|---|---|---|---|---|
| Financial strength rating | A/Positive/-- | A/Stable/-- | ||||
| Anchor* | a | a | ||||
| Business risk | Very Strong | Very Strong | ||||
| IICRA | Intermediate | Intermediate | ||||
| Competitive position | Very Strong | Very Strong | ||||
| Financial risk | Satisfactory | Satisfactory | ||||
| Capital and earnings | Strong | Satisfactory | ||||
| Risk exposure | Moderately High | Moderately low | ||||
| Funding structure | Neutral | Neutral | ||||
| Modifiers | 0 | 0 | ||||
| Governance | Neutral | Neutral | ||||
| Liquidity | Adequate | Adequate | ||||
| Comparable ratings analysis | 0 | 0 | ||||
| Support | 0 | 0 | ||||
| Group support | 0 | 0 | ||||
| Government support | 0 | 0 | ||||
| *This reflects our view that Korean Re's overseas franchise or combined ratio is relatively weaker compared with global reinsurance peers. IICRA--Insurance Industry And Country Risk Assessment. | ||||||
Related Criteria
- Criteria | Insurance | General: Insurer Risk-Based Capital Adequacy--Methodology And Assumptions, Nov. 15, 2023
- General Criteria: Hybrid Capital: Methodology And Assumptions, March 2, 2022
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Criteria | Insurance | General: Insurers Rating Methodology, July 1, 2019
- General Criteria: Group Rating Methodology, July 1, 2019
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Insurance Industry And Country Risk Assessment: Korea Property/Casualty, Dec. 19, 2023
- Certain Issuer And Issue Ratings Placed Under Criteria Observation After Insurance Capital Model Criteria Update, Nov. 16, 2023
- Korea (the Republic of), Oct. 30, 2023
- Korean Insurers And IFRS 17: Jury's Out If Increased Capital Is Here To Stay, Sept. 22, 2023
- Korean Reinsurance, Aug. 14, 2023
Ratings List
| Ratings Affirmed; CreditWatch/Outlook Action | ||
|---|---|---|
| To | From | |
|
Korean Reinsurance Co. |
||
| Issuer Credit Rating | A/Positive/-- | A/Stable/-- |
|
Korean Reinsurance Co. |
||
|
Korean Reinsurance Switzerland AG |
||
| Financial Strength Rating | ||
| Local Currency | A/Positive/-- | A/Stable/-- |
|
Korean Reinsurance Switzerland AG |
||
| Issuer Credit Rating | ||
| Local Currency | A/Positive/-- | A/Stable/-- |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings.
| Primary Credit Analyst: | Emily Yi, Hong Kong + 852 2532 8091; emily.yi@spglobal.com |
| Secondary Contacts: | WenWen Chen, Hong Kong + 852 2533 3559; wenwen.chen@spglobal.com |
| Johannes Bender, Frankfurt + 49 693 399 9196; johannes.bender@spglobal.com | |
| Additional Contacts: | Chang Sim, Hong Kong +852 25333579; chang.sim@spglobal.com |
| Amy Choi, Hong Kong +852 25333519; amy.choi@spglobal.com |
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