AM Best has revised the outlook to positive from stable for the Long-Term Issuer Credit Rating (Long-Term ICR) and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICR of "a" (Excellent) of Korean Reinsurance Company (KRE) (South Korea). The outlook of the FSR is stable.
The Credit Ratings (ratings) reflect KRE's balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, favourable business profile and appropriate enterprise risk management.
The revision of the Long-Term ICR outlook to positive from stable reflects AM Best's expectation of an improvement in KRE's balance sheet strength from 2023 onward while its operating performance and business profile fundamentals remain unchallenged. The company's risk-adjusted capitalisation, which AM Best assesses comfortably at the strongest level, as measured by Best's Capital Adequacy Ratio (BCAR), is expected to improve further following its plan to restructure the underwriting portfolio, coupled with increased capital from recent hybrid bond issuances and continued solid profit retention.
KRE's issuances of hybrid securities in 2022 and 2023 (a total of KRW 580 billion) is expected to provide additional capital buffer under the new accounting and solvency regimes (IFRS 17 and K-ICS). Meanwhile, AM Best expects KRE's underwriting risk to reduce notably in 2023 due to the portfolio restructure plan to offload unprofitable business (especially in the domestic personal line) and more subdued premium growth over the coming years, leading to enhanced risk-adjusted capitalisation. Notwithstanding, AM Best is of the view that a further monitoring period would be needed to confirm the sustainability of the improvement, given potential deviations from the business plan that could lead to a rebound in underwriting risk, depending on various factors such as reinsurance market conditions.
Other supportive balance sheet strength considerations include good accessibility to capital market and a conservative investment strategy.
KRE's underwriting performance remains stable, despite a relatively thin margin, mainly due to a large proportion of domestic personal lines business with loss-sensitive commission structures. The company's underwriting performance in domestic business has improved, largely driven by its ongoing portfolio modification to reduce unprofitable business and favourable pricing environment in the commercial segment. However, its overseas performance deteriorated in 2022 due to sizeable COVID-19 claims and unexpectedly large natural catastrophe losses. KRE plans to reduce its exposure to property catastrophe risks overseas, while trying to expand non-catastrophe business segments such as casualty and specialty lines. KRE's robust investment income is expected to benefit further from expansion in the investment asset base following recent issuances of hybrid securities and coinsurance contracts.
The company ranked 13th in the global reinsurance market in terms of gross written premium (GPW) in 2022, supported by a strong market base in South Korea as the only local reinsurer and its growing overseas business. Despite the recent decline in domestic market share due to the company's focus on portfolio improvements by reducing underperforming policies, AM Best believes that KRE's domestic market leadership will remain unchallenged over the medium term. The company's overseas business continues to expand gradually, accounting for more than a quarter of its consolidated GPW in 2022, supporting its diversification. AM Best expects the coinsurance business in South Korea to be a growth opportunity and an additional source of earnings for KRE over the long term.
Positive rating actions could occur if there is a sustained improvement in KRE's balance sheet strength, demonstrated, for example, by materially strengthened risk-adjusted capitalisation while its operating performance and business profile assessment remain unchanged. Negative rating actions could arise if there is a sustained deteriorating trend in the company's operating performance. Negative rating actions also could occur if there is a material decline in its risk-adjusted capitalisation, triggered by incidents such as multiple medium- or large-scale catastrophe losses retained in a fiscal year.
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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