AM Best revises outlook to positive for Meritz Fire & Marine Insurance Co., Ltd.
HONG KONG – (COMMERCIAL THREAD) –AM Best revised the outlook from stable to positive and confirmed the financial strength rating of A- (excellent) and the long-term issuer credit rating of “a-” (excellent) of Meritz Fire & Marine Insurance Co., Ltd. (Meritz) (South Korea).
The ratings reflect the strength of Meritz’s balance sheet, which AM Best considers strong, as well as its adequate operational performance, neutral business profile and appropriate management of business risks.
The positive outlook is based on the improvement in the underwriting performance of the company over the past few years through a realigned distribution strategy and underwriting initiatives. The outlook reflects AM Best’s expectations that the favorable trend in operating performance will continue, supported by the company’s strategy to achieve profitable growth, as well as robust investment income, while maintaining solid strength. the balance sheet needed to support an expanding business volume.
Meritz’s operating performance is underpinned by its relatively low loss ratio relative to its domestic peers and strong investment performance which has enabled the company to consistently generate double-digit return on equity over the course of each of the past five years, with an average of 15.5% (2016-2020). Its rapidly rising expense ratio in previous years, which has been fueled by strong growth in new business through the agency channel channel, has stabilized and improved significantly since the start of 2020 as the company has realigned its channel strategy with a greater focus on profitability. Although its risk-loss ratio for the long-term line of insurance (a measure of the loss ratio excluding loading and savings premiums) remains high in a context of rising medical consumption, AM Best expects This will be partially mitigated over the next few years by various underwriting initiatives, including rate of medical coverage adjustments, tighter pricing, as well as improved persistence ratios. Its auto loss ratio, which has remained the lowest among its peers since 2017, improved further in 2020 and the first nine months of 2021 due to cumulative rate hikes and reduction in claims under of the COVID-19 pandemic.
Meanwhile, his historically superior investment income continued to be a major source of income, with a net investment return including gains of 4.8% in 2020 and a five-year average of 5% (2016-2020). ).
AM Best believes that Meritz’s risk-adjusted capitalization is very strong, as measured by Best’s capital adequacy ratio (BCAR). Meritz’s capital and surplus declined in the first nine months of 2021 due to a significant decline in accumulated other comprehensive income, caused by a recent rise in long-term returns and a significant number of redemptions shares as part of its new return-to-shareholder policies (which also include significantly reduced dividend payout ratios for years to come). However, AM Best expects Meritz’s capital to rebound in 2022, supported by strong earnings retention and a planned issuance of hybrid securities, as well as total cash outflows normalized for shareholder return. The strength of its balance sheet is also based on good financial flexibility, which the company has demonstrated in using various sources of capital to support the growth of its business over the past five years, such as capital injections from its parent company, Meritz Financial Group Inc., and successful issues. hybrid securities and subordinated bonds.
Meritz is South Korea’s fifth-largest non-life insurer in terms of direct written premium (DPW) in 2020, and its market share has gradually increased to 10.8% in 2020, from 8.2% in 2016. Its activity is mainly focused on the long term. insurance (86% of DPW 2020), which covers various types of personal risks such as accidents, illnesses and medical expenses, as well as automobile insurance (8%) and general insurance (6%). While the general agency channel remains a major distribution channel, the company has recently turned to the tied agent channel for tighter control over distribution and the overall profitability of the channel.
Positive rating actions could occur if Meritz continues to show favorable underwriting performance with a favorable expense ratio level as it executes its business growth plan, while maintaining a strong balance sheet. Negative rating actions could occur if there is a significant deterioration in the company’s risk-adjusted capitalization to a degree that no longer supports the current balance sheet valuation.
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