Insurance Life & Non-Life Insurers Korea

Fitch Ratings 2020 Outlook: Korean Outlook Remains Stable; Pressure on Profitability Wan Siew Wai, Senior Director Fitch’s Sector Outlook: Stable Fitch Ratings maintains a stable sector outlook for 2020. Strengthening of capital adequacy in light “Fitch expects life and non-life insurers in to continue of progressive tightening in the regulatory capital regime would be credit positive. Fitch expects seeking capital strengthening opportunities to build up their resilience Korean insurers to continue seeking capital-raising opportunities, such as subordinated debt or ahead of tightening regulatory regimes, while striving to maintain hybrid issuance and equity-raising via IPOs or rights issues, to boost their capital buffers in profitability amidst a challenging operating environment.” preparation for the adoption of K-ICS and IFRS17. However, Fitch expects top-line growth in Korea to remain flat due to sluggish economic growth and saturation of the local market. In addition, we expect downward pressure on insurers’ financial performance as underwriting profitability is likely to remain volatile, while investment profit will decrease amid the declining interest rates in the domestic market. Ratings Outlook/Watch (As of November 2019) Rating Watch Rating Outlook: Stable Evolving Fitch maintains a stable rating outlook for 2020. Fitch expects the key credit profiles of Korean life 11% and non-life insurers to remain in line with our rating expectations in the near term. The majority Negative of ratings in Korean insurance sector have a Stable Outlook. 11% Rating Distribution Weighting: Investment Grade The IFS ratings of all Fitch-rated Korean insurers are investment grade. They are mainly among the Stable 78% ‘A’ (Strong) and ‘BBB’ (Good) rating categories, depending on the business profile, capital strength, and leverage level relative to its capital base. Major players with significant presence in the domestic industry tend to have stronger business profiles, including large business franchises and robust capital buffers with lower leverage, compared to mid-sized peers, in both the life and non- life sectors. Source: Fitch Ratings

Korean Insurance Ratings Distribution - International Scale (As of November 2019) (No.) What to Watch 4  Continued slowdown in domestic market growth  Business strategy to focus on value or bottom line amid unfavourable and volatile market conditions 2  Negative spread still a challenge for major life insurers; non-life players' underwriting profitability under pressure due to high loss ratios in the auto and long-term businesses  Capital strength to improve by issuing bonds – mainly in onshore market, despite tightening 0 regulations AA AA- A+ A A- BBB+ BBB BBB– BB+ BB & Lower  Understanding and managing asset risks is the key as we expect the exposure to alternative and Source: Fitch Ratings overseas investments to remain high

Outlook │ 25 November 2019 Fitchratings.com/Outlooks 1

Insurance Life & Non-Life Insurers Korea

What to Watch - Continued Slowdown in Market Growth Premium Income - Life Direct Premiums Written - Non-Life Fitch expects overall premiums for both life and non-life to continue to increase modestly in the Samsung Life Hanwha Life Samsung Fire & Marine near term due to persistent global economic uncertainties and sluggish domestic GDP growth, Kyobo Life Others Hyundai Marine & Fire DB Insurance YoY growth along with the decline in savings-type product sales. The Korea Insurance Research Institute (KIRI) (KRWtrn) Others expects premiums for the Korean insurance industry to rise by 0.3% in 2019 and by 0% in 2020. (KRWtrn) YoY growth (RHS) 140 100 6.0% 2.2% Life insurance premiums are likely to decline in the next few years as the moderate increase in 5.6% 4.0% 105 3.7% sales of protection-type products is not enough to make up for the drop in sales of savings-type 2.6% 70 -1.0% 2.2% products. However, non-life insurance premiums will increase, driven by sales of long-term -2.7% 50 protection-type products, although the growth rate in 2020 would be lower than that in 2019. 35 -4.9%

0 What to Watch - Focus on Value or Profitability 0 2015 2016 2017 2018 1H19 Fitch expects insurers to shift from top-line growth to more sustainable growth by enhancing their 2015 2016 2017 2018 1H19 risk management and focusing on products with high value of new business margins. Source: Fitch Ratings, FISIS Source: Fitch Ratings, FISIS For life insurers, protection-type products increased by 10pp to 41% of premium income in 1Q19 from 2015. Long-term business made up the largest share of 59% of non-life insurers' direct Product Mixa - Life Product Mixa - Non-Life premiums written in 1Q19, followed by automobile at 19%. Both types of insurers also optimised Protection Endowment Long-term Automobile General Annuities the use of capital to maximise their enterprise value. We expect insurers to continue to shift away Pure endowment Variable 10% from savings-type to protection-type products. Group 10% 11% What to Watch - Negative Spread Still a Challenge for Major Life Insurers 13% 17% The Bank of Korea cut its base rate by 25bp each in July and October 2019 to a record-low 1.25%, 12% 41% 10% 18% 31% 19% 58% citing weakening exports and private consumption. Therefore, the negative spread burden, which 21% stems from legacy policies with high guaranteed rates mainly sold in the 1990s, will continue for 18% 19% 59% life insurers. The negative spread for the major Korean life companies was more than 100bp on 17% average in 1H19. We expect this to put pressure on profitability, although the life insurers are 14% shifting towards floating-rate products with low or non-guaranteed benefits, and away from fixed- Inner ring: 2015. Outer ring: 1Q19 Inner ring: 2015. Outer ring: 1Q19 a rate ones. a By premium income By direct premiums written Source: Fitch Ratings, KIRI Source: Fitch Ratings, KIRI The companies’ thinner bottom lines, which are mostly backed by their investment returns, could have a negative impact on their capital adequacy as well as interest burden if they continue to increase bond issuance amid the volatile market environment. Profitability - Life Profitability - Non-Life What to Watch - Non-Life Insurers' Underwriting Results Still Squeezed Pre-tax ROA Investment yield Expense ratio (LHS) (%) Loss ratio (LHS) Korean non-life insurers’ underwriting earnings are likely to stay under pressure due to their high ROE 7 (%) ROE (RHS) (%) loss ratios in the automobile and long-term businesses and increased spending on the agency 6 Investment yield (RHS) 120 14.0 channel to meet stronger competition in light of product shifts. The loss ratio of the non-life 5 industry rose to 83.5% in 1H19 from 81.8% in 2017, and the expense ratio also climbed to 21.6% 4 90 10.5 from 20.3%. 3 60 7.0 2 However, motor premiums increased twice in January and June by 3%-4% and 1%-2%, 1 30 3.5 respectively, in 2019 across the industry, and insurers are considering another premium hike in 0 0 0.0 1H20. Fitch believes that improved pricing in 2020 will start to benefit insurers’ profitability, 2015 2016 2017 2018 1H19 although it may take time to for the price adjustments to be fully reflected in their results. 2015 2016 2017 2018 1H19 1H19 figures are annualised 1H19 figures are annualised Source: Fitch Ratings, FISIS Source: Fitch Ratings, FISIS

Outlook │ 25 November 2019 Fitchratings.com/Outlooks 2

Insurance Life & Non-Life Insurers Korea

What to Watch - RBC Ratio to Increase despite Tightening Regulations Local Risk-Based Capital Ratio Bond Issuance by Currency Upcoming regulatory changes for Korean insurers include the full recognition of credit and market Total (LHS) risk charges for guaranteed retirement pensions and an increase in required capital to be held (%) Non-Life Life Total Offshore (USD) as % of total (RHS) (USDbn) Onshore (KRW) as % of total (RHS) (%) against interest-rate risk arising from variable-rate products that provide minimum guaranteed 350 3.5 120 returns to policyholders. The strengthening of the existing risk-based capitalisation (RBC) 300 3.0 100 framework aims to reduce the impact of a new solvency regime, K-ICS. 250 2.5 80 200 2.0 Fitch expects the local RBC ratio to gradually increase in the near term due to supplementary 60 capital issuance, although this would be partly offset by the implementation of more stringent 150 1.5 1.0 40 capital requirements under K-ICS. The industry's aggregate local RBC ratio increased to 282.4% 100 0.5 20 by end- 1H19 from 257.9% at end-2017. 50 0.0 0 What to Watch - Bond Issuance to Shift towards Onshore Bonds 0 2015 2016 2017 2018 Sep 19 2015 2016 2017 2018 1H19 Korean insurers are likely to continue to enhance capital buffers ahead the implementation of Includes publicly placed bonds only Source: Fitch Ratings, FISIS IFRS17 and K-ICS by issuing bonds, mainly in the onshore market. Several life companies began to Source: Fitch Ratings, Bloomberg issue offshore debt in 2017, but insurers have favoured onshore bonds since 2H18 due to the Alternative and Overseas Investments - Life & Non-Life increased cost of offshore debt after the US Federal Reserve raised rates. Nevertheless, this trend Overseas securities (LHS) may change in the coming year due to volatile market conditions and the increase in economic (KRWtrn) Beneficiary certificates (BCs) (LHS) (%) uncertainties. BCs and overseas securities as % of invested assets (RHS) 250 30

What to Watch - Alternative and Overseas Assets to Grow Conservatively 200 25 We expect both life and non-life insurers to continue to increase their exposures to alternative 20 150 investments and overseas securities (mainly long-tenor bonds), although the growth could slow. 15 100 This is because these assets still provide Korean insurers with higher yields. Insurers have shifted 10 their allocation towards alternative and overseas assets steadily to 24% of their total investment 50 5 portfolio at end-1H19. 0 0 Increasing liability duration due to the growth in long-term product sales has pushed insurers to 2015 2016 2017 2018 1H19 increase their allocation to overseas securities - mainly in US dollars - to lengthen the asset Source: Fitch Ratins, FISIS duration, as the supply of bonds with longer maturity terms is insufficient in the domestic market. Investments in alternative assets, such as infrastructure, real estate, aircraft/shipping financing, 10-Year Government Bond Yields and renewable energy, also increased as they offer good balance of risk against return, compared (%) Yield spread (Korea-US) (RHS) US (LHS) South Korea (LHS) BOK base rate (LHS) (bps) with traditional investment assets of bonds and equities. 4.0 150 3.5 What to Watch - Risk Management of Growing Importance 100 3.0 Fitch believes that the risk management is getting more important for insurers in a volatile global 2.5 50 market. Korean insurers are likely to further diversify their investment portfolios into non-US 2.0 dollar denominated assets as hedging costs for US dollar assets have increased to more than 1.5 0 100bp. Meanwhile, we expect insurers to be more cautious about investing in alternative assets, 1.0 -50 which carry higher liquidity and transparency risks, and pay more attention to their underlying 0.5 asset risks. 0.0 -100 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19

Source: Fitch Ratings, Bloomberg

Outlook │ 25 November 2019 Fitchratings.com/Outlooks 3

Insurance Life & Non-Life Insurers Korea

Appendix Fitch's Coverage List Company name Market Sector IFS Rating Outlook/Watch Hanwha Life Insurance Co., Ltd. Life A+ Negative Heungkuk Life Insurance Co., Ltd. Life BBB+ Stable KDB Life Insurance Co., Ltd. Life BBB- Stable Kyobo Life Insurance Co., Ltd. Life A+ Stable TONG YANG Life Insurance Co., Ltd. Life BBB+ Evolving Construction Guarantee Non-Life A Stable Hanwha General Insurance Co., Ltd. Non-Life A Stable Hyundai Marine & Fire Insurance Co., Ltd. Non-Life A Stable Guarantee Insurance Company Non-Life AA- Stable

Note: As of 31 October 2019 Source: Fitch Ratings

Outlook │ 25 November 2019 Fitchratings.com/Outlooks 4

Insurance Life & Non-Life Insurers Korea

Outlooks and Related Research

Credit Outlooks 2020 Korea - September 2019 Global Economic Outlook Forecast (September 2019) Major Korean Insurers' Earnings May Remain Under Pressure (August 2019) Revised Expense Rules to Have Limited Impact on Korean Insurers (August 2019) South Korea Insurers: Understanding Asset Risks (May 2019)

Analysts

Claire Lee +852 2263 9618 [email protected]

Siew Wai Wan +65 6796 7217 [email protected]

Outlook │ 25 November 2019 Fitchratings.com/Outlooks 5

Insurance Life & Non-Life Insurers Korea

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Outlook │ 25 November 2019 Fitchratings.com/Outlooks 6