Credit rating agency AM Best has upgraded Korean Reinsurance Company’s (KRE) Long-Term Issuer Credit Rating (Long-Term ICR) to “a+” (Excellent) from “a” (Excellent) and affirmed its Financial Strength Rating (FSR) of A (Excellent).
Additionally, AM Best has revised the outlook of the Long-Term ICR to stable from positive while the outlook of the FSR is stable.
According to the agency, the upgrade of the Long-Term ICR reflects the company’s improved balance sheet strength, underpinned by its risk-adjusted capitalisation that showed a noticeable rise in 2023.
This is expected to remain at a similar level over the medium term, as measured by Best’s Capital Adequacy Ratio (BCAR).
AM Best stated that KRE’s Long-Term ICR upgrade is a result of their strengthened balance sheet, an improvement that derives from a significant increase in risk-adjusted capitalization in 2023, by increased available capital from hybrid bond issuance in 2023, as well as strong profit retention, and reduced underwriting risk due to portfolio restructuring.
This focus on offloading unprofitable business is expected to fuel organic growth and maintain stable underwriting risk.
Furthermore, KRE’s well-matched asset and liability management, coupled with their access to capital markets and a conservative investment approach, reinforces their financial stability and ability to weather interest rate changes, the agency also noted.
“AM Best assesses KRE’s operating performance as adequate, with a return-on-equity of 9.5% and a non-life combined ratio of 95.5% (net/net, IFRS 17), as calculated by AM Best. The company’s domestic personal business reported a material reduction in insurance service revenue in 2023, mainly due to its concerted effort to discontinue underperforming treaties. AM Best expects that KRE’s domestic profit fundamentals will improve following the portfolio modification and profit-oriented underwriting,” analysts stated.
It was also pointed out that the company’s overseas performance has deteriorated mainly due to a number of high-severity natural catastrophe losses.
AM Best added: “The company is reducing its exposure to catastrophe property risks overseas, while striving to expand non-catastrophe business segments, such as casualty and specialty lines. KRE’s robust investment income is expected to be supported by the steady expansion of its asset base from coinsurance business and favourable returns on foreign bonds and alternative investment.”
As the dominant and only local reinsurer in South Korea, KRE holds a strong global position, ranking as the sixth-largest IFRS 17 reporting reinsurer in the global reinsurance market in terms of gross insurance service revenue (ISR) in 2023.
Despite increasing competition at home, analysts noted, KRE’s leadership will remain unchallenged over the medium term, especially with its involvement in the expanding coinsurance market.
KRE is at the forefront of the growing coinsurance market in South Korea, which AM Best expects will be an additional source of earnings for the company in the long term. KRE’s overseas business continues to expand gradually, constituting more than a third of its gross insurance service revenue in 2023, supporting its diversification.
KRE’s rating could be negatively impacted by a continuous decline in operating performance or a significant drop in risk-adjusted capitalization due to events like multiple catastrophe losses, AM concluded.
On the other hand, a positive rating action could result from consistently strong operating performance that distinguish KRE from its competitors.
