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South Korea’s third largest life insurer, Kyobo Life Insurance, faces the challenge of developing new growth drivers due to the mature and highly competitive domestic life insurance market to maintain its profitability amid the lingering low interest-rate environment, notes Fitch Ratings.

The international credit rating agency has affirmed Kyobo Life’s Insurer Financial Strength (IFS) Rating at ‘A+’ (Strong) and its Long-Term Issuer Default Rating (IDR) at ‘A’. The Outlooks are Stable. Fitch has also affirmed the rating of Kyobo Life’s $500m subordinated securities due 2047, which may be extended, at ‘A-‘.

The rating actions are based on Fitch’s current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of rating assumptions.

The rating reflects Kyobo Life’s ‘Favourable’ business profile, ‘Strong’ capital level commensurate with its business profile and ‘Strong’ profitability.

The company’s return on assets (pretax) was 0.8% for 2019, with a three-year average of 0.9%. Fitch expects the economic downturn caused by the coronavirus to dampen the insurer’s bottomline in the short-term period under its rating assumptions, with the pro forma profitability ratio falling to the lower end of the median ratio range of the ‘a’ rating category.

Nonetheless, the agency believes the insurer’s fundamental operating profile will remain intact and the company’s operating performance will normalise after the pandemic runs its course. Its pro forma risky-asset ratio remains in line with its rating category, based on our current assessment and rating assumptions.

Kyobo Life has a ‘Favourable’ business profile compared with that of all other Korean life insurance companies due to its operating scale and a substantive business franchise within its sector. The life insurer has been the country’s third largest for the past three years, with a market share of 10.6% by premiums in 2019 and 11% in 2018.

Fitch expects the pandemic to generally impact life insurers’ new business growth due to disruptions in business activities and the limitation of face-to-face meetings with policyholders. Kyobo Life aims to increasingly focus on sales of protection-type products for sustained profitability and improve its marketing efficiency and customer outreach by a variety of distribution channels, such as online marketing platforms.

Assumptions for coronavirus Impact

Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of its pro forma ratings analysis:

-Decline in key stock market indices by 35% relative to 1 January 2020.

-Increase in two-year cumulative high yield bond default rate to 16%, applied to current non-investment grade assets, as well as 12% of ‘BBB’ assets.

-Both upward and downward pressure on interest rates, with spreads widening (including high yield by 400 basis points) coupled with notable declines in government rates.

-Capital markets access is limited for issuers at senior debt levels of ‘BBB’ and below.

-A COVID-19 infection rate of 5% and a mortality rate (as a percentage of infected) of 1%.

-Impairment of beneficiary certificates by 7.8%.

-Decline in value of investment property by 7.8%.


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