AM Best has upgraded the Financial Strength Rating to A (Excellent) from A- (Excellent) and the Long-Term Issuer Credit Rating to “a” (Excellent) from “a-” (Excellent) of Meritz Fire & Marine Insurance Co., Ltd. (Meritz) (South Korea). The outlook of these Credit Ratings (ratings) has been revised to stable from positive.
The ratings reflect Meritz’s balance sheet strength, which AM Best assesses as strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.
The rating upgrades reflect the company’s strong profitability in recent years, which has been supported by consistently superior investment performance and improved underwriting performance. The company reported a double-digit return-on-equity ratio in each of the past five years with an average of 17.7% (2017-2021).
While Meritz continued to outperform its domestic peers in terms of loss ratio and investment returns, its expense ratio had increased steeply prior to 2019, driven by strong new business growth. However, this trend stabilised and Meritz’s expense ratio has improved notably in recent years as the company realigned its channel strategy with greater focus on profitability, coupled with strong fixed expense control. The company’s overall loss ratio, which remained relatively low compared with domestic peers, further declined in recent periods. This was primarily driven by an improving loss ratio in the long-term insurance line due to an enlarged premium base and tighter underwriting discipline, as well as the regulator’s recent efforts to normalise medical claims by controlling over-treatment in clinics. Meanwhile, Meritz’s strong investment performance, supported by competitive returns from real estate-related loans, continued to be a major source of earnings, with a five-year average net investment return (including capital gains/losses) of 4.9% (2017-2021).
AM Best assesses Meritz’s risk-adjusted capitalisation as very strong, as measured by Best’s Capital Adequacy Ratio (BCAR), supported by strong internal capital generation and good financial flexibility. Recent rapid interest rate rises have placed significant pressure on the company’s capital due to unrealised losses on its long-term bond holdings. However, AM Best expects that the current capital sensitivity to interest rates will be mitigated once IFRS 17 takes effect in 2023, whereby the accounting mismatch between assets and insurance liabilities will be largely resolved. AM Best also notes that its parent, Meritz Financial Group (MFG), recently announced its plan to delist Meritz from the Korea Stock Exchange and transfer the company to a wholly owned subsidiary of the group by the first quarter of 2023. Despite the uncertainty over the future dividend policy under the new structure, AM Best expects that Meritz’s strong earnings stream will continue to support its balance sheet strength over the medium term.
Meritz is the fifth-largest non-life insurer in South Korea, and its market share has gradually increased over the past five years from 8.6% in 2017 to 11.3% in 2021 in terms of gross premium written (GPW). The company has a strategic focus on long-term insurance (86% of 2021 GPW), which covers various types of personal risks such as accidents, illnesses and medical expenses. While the general agency channel remains a major distribution channel, Meritz has recently been trying to expand its tied agent channel to strengthen its control over distribution, as well as improve overall channel profitability.
Negative rating actions could occur if there is a significant deterioration in the company’s risk-adjusted capitalisation, for example, due to insufficient capital growth to support its business expansion or an increase in investment asset risk or an excessive dividend policy, to a degree that no longer supports the current balance sheet strength assessment. A material deterioration in the credit profile of its parent, MFG, may also have a negative impact on the company’s ratings.
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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