Korean Reinsurance ratings affirmed at ‘A’ following domestic issuance of subordinated securities

HONG KONG: S&P Global Ratings has affirmed its ‘A’ financial strength and long-term issuer credit ratings on Korean Reinsurance Co. (Korean Re). The outlook is stable.

On Oct. 21, 2019, Korean Re’s existing subordinated capital securities were redeemed upon its exercise of a call option five years from the issue date. Hence, S&P discontinued the ‘BBB+’ issue rating on the securities.

The affirmed ratings on Korean Reinsurance Co. (Korean Re) reflect the reinsurer’s dominant position in Korea as the only domestic reinsurer, stable operating performance and satisfactory capitalization.

“In our view, Korean Re’s moderate business growth and stable underwriting performances, albeit thin profitability, will likely underpin its current capitalization. This comes amid increasing risk appetite stemming from its overseas business expansion and allocation toward high-risk assets. Following Korean Re’s issuance of replacement subordinated capital securities within Korea, we discontinue our issue ratings on the redeemed capital instrument”.

On Oct. 21, 2019, Korean Re issued Korean won (KRW) 230 billion of subordinated capital securities in the domestic capital market, following the redemption of earlier issued US$200 million hybrid instruments. “We first rated the callable US$200 million capital instrument in 2014. We view the newly issued instruments as having intermediate equity content, and therefore incorporate them as part of the reinsurer’s total adjusted capital. As the net impact of the issuance–redemption is neutral, we consider Korean Re’s capital position as unchanged following the transaction. Korean Re’s regulatory solvency ratio is about 220% as of June 2019, well above the minimum requirement of 100%”.

Korean Re will continue to leverage its domestic dominance and maintain stable revenue growth in its domestic reinsurance portfolio. Korean Re’s sliding-scale commission arrangement with local cedants to support its earnings stability over the next few years.

Korean Re’s high reinsurance utilization reflects its retrocession cover for its overseas businesses, which accounted for about 25% of gross premiums written in 2018. “We anticipate Korean Re’s exposure to natural catastrophe events to increase in tandem with its overseas expansion. However, its retrocession cover with low retention will result in lesser earnings volatility, when compared to regional peers”.

The stable outlook on Korean Re reflects that the reinsurer will likely sustain its current capitalization with moderate business growth over the next two years. “We expect Korean Re to maintain its dominant position in Korea’s reinsurance market while gradually expanding its international presence”.

“We could lower the ratings on Korean Re if the reinsurer’s capital adequacy deteriorates significantly, or if its competitive position significantly weakens over the next two years. In addition, we may lower the ratings if Korean Re’s allocation to liquid investments declines significantly, hampering its liquidity position”.

“We may upgrade Korean Re should its capitalization strengthen substantially over the next two years. While we consider the likelihood to be low, we may raise the ratings on Korean Re if its international business contributes sustainably to its profits with strengthened competitive advantages in the international reinsurance market”.

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