AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of NongHyup Property and Casualty Insurance Company Limited (NH P&C) (South Korea). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect NH P&C’s balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management. The ratings also reflect the implicit and explicit support the company receives from its ultimate parent, National Agricultural Cooperative Federation (NACF).
NH P&C’s risk-adjusted capitalisation is assessed at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s solid expansion of retained earnings in recent periods, backed by its no-dividend policy and improved earnings, provided a partial buffer against the negative capital pressure (under IFRS 4) due to the valuation loss on available-for-sale bonds from rapid interest rate hikes in 2022. NH P&C’s financial flexibility is supported by its good accessibility to the capital market underpinned by its previous issuances of subordinated bonds and additional financial support from its immediate parent, NongHyup Financial Group Inc. (NHFG). The company has a conservative investment portfolio consisting mainly of fixed-income assets, with increased focus on asset-liability management to enhance its capital management.
AM Best assesses NH P&C’s operating performance as adequate, with a weighted five-year average operating ratio of 96.4% (2018-2022) and a return-on-equity ratio of 6.3%. The year-over-year increase in the company’s net income in 2022 was mainly driven by improved investment returns, supported by stable interest income from its bond portfolio amid the elevated interest rate environment and favourable excess return on alternative investments. Albeit moderately volatile depending on weather events, AM Best expects NH P&C’s prospective underwriting performance to remain supported by growing long-term protection products with favourable margins, coupled with improved profitability of government policy insurance lines.
NH P&C is a domestic non-life insurer in South Korea, with a 4.6% market share in terms of gross premiums written in 2022. The company is an exclusive (or major) provider of government policy insurance products for the country’s farmers, such as crop, livestock and agricultural vehicle insurances.
In its largest business line of long-term insurance, which NH P&C maintains a modest market share, the company has been gradually expanding protection-type product sales to secure its profitability and aims to diversify into non-cooperative channels, such as general agent and tied-agent channels. However, overall premium growth of the long-term line has remained limited due to strong market competition. Distribution remains highly concentrated in the cooperative channel, which is a network of NACF’s members.
As a wholly owned subsidiary of NHFG, which is the financial arm of NACF and one of the largest financial groups in South Korea, NH P&C is strategically important to NACF, given its role as the exclusive provider of government policy insurance products to cooperative members. AM Best also recognises various forms of explicit support, such as capital support from NHFG, as well as direct reinsurance support and full expense reimbursement from the government for its crop insurance line.
Negative rating actions could occur if there is a sustained deteriorating trend in NH P&C’s operating performance. Negative rating actions could also arise if the level of support or the company’s strategic importance to NACF is reduced to a degree that no longer supports the current level of enhancement. Positive rating actions could occur if NH P&C’s business profile improves in a sustainable manner, for example, through successful channel diversification that results in a materially enhanced market presence without deterioration in its risk-adjusted capitalisation and operating profitability. Positive rating actions could also occur if the company’s balance sheet strength fundamentals demonstrate sustained improvement.
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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