AM Best Revises Outlooks to Positive for Meritz Fire & Marine Insurance Co., Ltd.

AM Best has revised the outlooks to positive from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of "a-" (Excellent) of Meritz Fire & Marine Insurance Co., Ltd. (Meritz) (South Korea).

The ratings reflect Meritz's balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

The positive outlooks are based on improvement in the company's underwriting performance in most recent years driven by realigned channel strategy and underwriting initiatives. The outlooks reflect AM Best's expectation that the favourable trend in operating performance will continue, supported by the company's strategy to achieve profitable growth, as well as robust investment income, while maintaining the strong balance sheet strength needed to support an expanding book of business.

Meritz's operating performance is underpinned by its relatively low loss ratio compared with domestic peers and strong investment performance that helped the company consistently produce double-digit return on equity in each of the past five years with an average of 15.5% (2016-2020). Its rapidly rising expense ratio in the previous years, which was driven by strong new business growth through the general agency channel, has stabilised and improved notably since the beginning of 2020 as the company realigned its channel strategy with a heavier focus on profitability. Although its risk-loss ratio for the long-term insurance line (a loss ratio metric excluding loading and savings premiums) remains elevated amid rising medical consumption, AM Best expects it will be mitigated partially over the coming years by various underwriting initiatives, including rate adjustments for medical indemnity coverage, and tightened underwriting, as well as improving persistency ratios. Its auto loss ratio, which remained the lowest among peers since 2017, further improved in 2020 and the first nine months of 2021 due to cumulative rate hikes and reduced claims amid the COVID-19 pandemic.

Meanwhile, its historically superior investment income continued to be a major source of earnings, with a net investment return including gains of 4.8% in 2020 and a five-year average of 5% (2016-2020).

AM Best assesses Meritz's risk-adjusted capitalisation as very strong, as measured by Best's Capital Adequacy Ratio (BCAR). Meritz's capital and surplus decreased during the first nine months of 2021 because of a large decline in accumulated other comprehensive income, caused by a recent rise in long-term yields and a sizable amount of share buybacks as part of its new shareholder return policies (which also includes significantly reduced dividend payout ratios for the coming years). However, AM Best expects Meritz's capital to rebound in 2022, backed by strong profit retention and a planned issuance of hybrid securities, as well as normalised total cash outflows for shareholder return. Its balance sheet strength also is underpinned by good financial flexibility, which the company has demonstrated by utilising various capital sources to support its business growth over the past five years, such as capital injections from its parent, Meritz Financial Group Inc., and successful issuances of hybrid securities and subordinated bonds.

Meritz is the fifth-largest non-life insurer in South Korea by direct premium written (DPW) in 2020, and its market share has increased gradually to 10.8% in 2020 from 8.2% in 2016. Its business is concentrated largely in long-term insurance (86% of 2020 DPW), which covers various types of personal risks such as accidents, illnesses and medical expenses, along with auto (8%) and general insurance (6%). While the general agency channel remains a major distribution channel, the company recently has been shifting its focus toward the tied agent channel for stronger control over distribution and overall channel profitability.

Positive rating actions could occur if Meritz continues to demonstrate favourable underwriting performance with a supporting level of expense ratio as it executes its business growth plan, while maintaining strong balance sheet strength. Negative rating actions could occur if there is a significant deterioration in the company's risk-adjusted capitalisation to a degree that no longer supports the current balance sheet assessment.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

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