HONG KONG--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” of Meritz Fire & Marine Insurance Co., Ltd. (Meritz) (South Korea). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Meritz’s balance sheet strength, which AM Best categorizes as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
Meritz’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is assessed as strong, supported by the sound growth of its capital and surplus and a solid earnings stream.
As a company listed on the Korea Exchange, Meritz has demonstrated positive financial flexibility with a proven track record of successful new shares and hybrid debt securities issuance. Its parent, Meritz Financial Group Inc., has provided financial support to the company over the past five years when needed. Despite a relatively large investment exposure to real estate-related loans, the significant portion of high-quality bond holdings adds stability to the company’s investment performance and contributes to effective asset liability management.
However, an offsetting factor to its balance sheet strength is the increasing capital requirements stemming from aggressive business expansion, which could add pressure to its risk-adjusted capitalization, if capital growth slows down in the case of deterioration in its bottom line; if unrealized gains decline on its substantial bond holdings; or if debt leverage increases materially.
Meritz has demonstrated strong top- and bottom-line growth over the past five years, with a five-year average gross premium written growth rate of 7.7% and a return on equity ratio of 13.3% (2014-2018). Although Meritz’s loss ratio and investment profitability outperform its peers, the company’s expense ratio in recent years has increased rapidly to the highest level in the industry. This is attributable largely to the additional amortization of deferred acquisition costs due to its large volume of new business.
Meritz is the fifth-largest non-life insurer in South Korea, and it has expanded its market share gradually to 10% in the first half of 2019 (in terms of direct premium written) amid fierce competition. With strong growth mainly driven by long-term health insurance and the general agent channel, the company captured over 20% of new business premiums in the non-life health insurance market in the first half of 2019. Although the general agent channel remains a major growth driver, Meritz is increasing efforts to expand its tied agent channel to better balance its distribution channel mix and to strengthen its control over distribution.
Negative rating actions could occur if there is a significant decline in the company’s risk-adjusted capitalization. Positive rating actions could occur if Meritz demonstrates sustained improvement in its profitability while maintaining strong risk-adjusted capitalization.
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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