Korea Life Insurance Industry Outlook

Transcription

1 FEBRUARY 21, 2013 INSURANCE INDUSTRY OUTLOOK Korea Life Insurance Industry Outlook Table of Contents: SUMMARY OPINION 1 KEY TRENDS AND RATING IMPLICATIONS 2 Economic Environment 2 OPERATING ENVIRONMENT 3 ASSET QUALITY 6 PROFITABILITY 8 Low interest rates will continue to weaken profitability 8 CAPITALIZATION 9 Top players maintain solid capital adequacy amid tighter requirements, yet some may face challenges 9 MOODY S RELATED RESEARCH 10 Analyst Contacts: HONG KONG Sally Yim Vice President - Senior Credit Officer yatmansally.yim@moodys.com Stella Ng Assistant Vice President - Analyst stella.ng@moodys.com Alvis Chan Associate Analyst alvis.chan@moodys.com Stephen Long Managing Director - Financial Institutions stephen.long@moodys.com Summary Opinion Our outlook for the Korean life insurance industry is stable. The outlook expresses our expectations for the fundamental credit conditions in the industry over the next 12 to 18 months. The following factors support our stable outlook:» Stable premium growth. We anticipate total premium growth of 6.0%-6.5% in the coming months; lower than the 6.7% recorded in FY2011 (ending March 2012), but at a level that remains supportive of our forecasts for annual GDP growth of 2.5%- 3.5% in Korea s aging population is a fundamental driver, which supports a demand for retirement pension and medical insurance products.» Tightening regulatory regime to enhance capitalization. A key driver is the new riskbased capital (RBC) regime that the Financial Supervisory Services (FSS) introduced in April 2012, and which includes more stringent RBC calculations as well as tightened rules on insurers lending and provisioning. As a result, we anticipate insurers will build more capital under the current RBC regime and strengthen their risk management practices. - The RBC ratio s confidence level is lifted to 99% from 95%, and insurers now face more stringent capital charges on their investments. These are positive drivers on their capitalization. - The industry has increased bond holdings and narrowed the duration gap between assets and liabilities, though a modest gap remains. The proportion of loans as a percentage of total invested assets has declined consistently over the past five years. These are positive drivers for the industry s asset quality. 1 Refer to Global Risk Perspectives Update to the Global Macro-Risk Outlook : Slow Adjustment to Weigh on Growth, 12 February 2013

2 However, these strengths are partially offset by:» Low interest rates dragging on investment earnings. A prolonged low interest rate environment could aggravate the negative spread burden on products like annuity policies with long-term guarantees, and old books of savings-type policies that carry fixed yields. In addition, low interest rates will lead to a higher valuation of insurers liabilities and through that, higher reserving, which will in turn weigh on overall profitability.» A more competitive industry landscape. The increased competition is coming from (1) a new active player, NongHyup Life Insurance, the life insurance operation of the agricultural cooperative National Agricultural Cooperative Federation; (2) non-life insurers expanding their market presence in selected long term business; and (3) aggressive sales from smaller life insurers. Definition of an Industry Outlook The Industry Outlook (positive, stable or negative) indicates our forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of the life insurance industry over the next months. As such, the outlook provides our view of how the operating environment for the life insurance industry, including macroeconomic, competitive and regulatory trends, will affect, among other things, asset quality, capital, funding, liquidity and profitability. Since outlooks represent our forward-looking view on credit conditions that factor into our ratings, a negative (positive) outlook suggests that negative (positive) rating actions are more likely on average. However, the outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of the rating outlooks of issuers in the industry, but rather our assessment of the direction of credit fundamentals overall within the industry broadly. Key Trends and Rating Implications Economic Environment A moderate yet steadily recovering economy will continue to support top-line growth. Our baseline scenario assumes GDP growth of 2.0%-3.0% in 2012 and 2.5%-3.5% in We expect growth sustained by (1) the country s competitive and diversified exports, and (2) strong private consumption. Inflation and interest rates to stay low. The Bank of Korea s CPI forecast is 2.3% for 2012 and 2.7% for 2013, down from 3.7% in The central bank, responding to weakening prices and growth, cut its key interest rate by 25 basis points to 2.75% in October, and is likely to maintain this level through It also projects a gradual improvement in the unemployment rate to 3.2% for 2013 from the 3.3% projected for 2012 (3.4% for 2011). Financial market volatility and housing price weaknesses are the two main downside risks to our baseline scenarios. We expect the stable economic growth and inflation to support steady demand for life insurance products over the next months. We consider Korea s life insurance market as one of the most saturated markets across the globe, with an insurance penetration rate 2 of 7.0% in This situation suggests that future demand growth in traditional life products will likely be discretionary 2 Insurance penetration rate is defined as premium as a percentage of GDP 3 Swiss Re, sigma No3/ FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

3 and subject to prevailing macroeconomic conditions and consumer confidence. In addition, life insurers are motivated to focus more on other market sectors -- including pension and retirement products -- which are driven by emerging trends like the country s aging demographics. EXHIBIT 1 Total Premium Income and Growth Rate: FY FY (KRW trillions) Premium income Growth rate FY2007 FY2008 FY2009 FY2010 FY2011 Source: Financial Supervisory Service (FSS), Moody's 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% Operating Environment Industry landscape remains competitive. The aggregate market share of Korea s top three life insurers -- Samsung Life (unrated), Hanwha Life [previously known as Korea Life] (unrated) and Kyobo Life (A2 stable) -- declined to 51.4% of total premium income in FY2011, from 56.7% in FY2007. We expect this share to fall further in the next months. The competition is coming from non-life insurers selling life products, new entrants, as well as aggressive sales from smaller, bank-affiliated players. EXHIBIT 2 Market Share by Premium Income: FY2007-1H FY2012 Other domestic Foreign NH Life Kyobo Life Hanwha Life Samsung Life % 27.0% 27.4% 26.0% 25.8% 24.8% % 14.3% 13.7% 13.4% 13.4% 12.1% % 13.4% 13.0% 13.0% 12.2% 11.6% 5 0.8% 8.9% % 21.5% 21.1% 20.5% 19.1% 16.4% % 23.8% 24.8% 27.2% 28.7% 26.2% FY2007 FY2008 FY2009 FY2010 FY2011 1H FY2012 Source: Korea Life Insurance Association 4 FY2011 ended 31 March FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

4 The weakening market share trend of the top three life insurers partly reflects new competition from three sources: First is an effective new entrant, NongHyup Life Insurance (NH Life) (unrated), a wholly owned subsidiary of NH Financial Group. NH Life was separated from the state-run farmers cooperative NongHyup Fraternal Insurance following the 2011 revision of the National Agricultural Cooperative Federation Act. As a result, it is now competing within the insurance sector. Despite being constrained in some aspects of its business, NH Life has become the fourth largest insurer in terms of premium income, representing 9.2% of the market for April 2012 September We see NH Life s biggest strength as being the branch network of NH Bank, its sister bank, which has allowed it to capture significant market shares in single-premium savings /annuity products. Second is the competition from non-life insurers allowed to offer Type 3 insurance. The latter includes policies that cover expenses for treating injuries caused by accidents and death from injuries, surgery and hospital fees for certain diseases, including cancer, and fixed-amount, compensation-type longterm care. Non-life insurers like Samsung Fire & Marine Insurance (unrated), Hyundai Marine & Fire Insurance (unrated) and Dongbu Insurance (unrated) have been competing strongly against life insurers within the long-term health care sector. One reason for the fast expanding premium share of non-life insurers is their relatively late entry to the life market. Life insurers have been selling policies for decades, while non-life insurers only started selling policies in the life market about a decade ago. As a result, many of the outstanding policies of the life insurers are approaching maturity, or are at the end of their premium payment periods. This development has kept their total premium growth low despite robust new business growth. But it is much less of a problem for non-life insurers as their existing policies are relatively young. In other words, most policies of non-life insurers are far from their maturities and renewal premium inflows continue. Finally, aside from non-life insurers, bank-owned financial holding companies like Shinhan Financial Group (unrated), KB Financial Group (unrated) and Woori Finance Holdings (A2 stable), have also expressed their increasing interest in expanding into the life insurance business, seeing it as a means to diversify their earnings and risk profiles. Bank-owned life insurers increased their market shares -- by leveraging cross-selling -- to 14% in FY2011 from 8% in FY2008. We see foreign competition in the industry to ease as a result of retreats by some foreign players. For example, ING Life Korea (unrated) continues to explore options for the divestment of its Korea life insurance unit, following KB Financial Group s abandoned the deal in December The UK financial group Aviva continues talking with Woori Financial Group to sell its stake in Woori Aviva Life Insurance (unrated). In addition, HSBC announced that it will no longer operate its retail business and considers exiting from Hana-HSBC Life (unrated) because of low profits and as part of its general strategy. Industry consolidation is slowing because of continued uncertainties over the global financial markets which will weaken support for merger and acquisition deals. Initial public offerings (IPO) activities in Korea have been postponed in 2012 and are expected to show resilience this year in the face of ongoing market volatility. For example, Mirae Asset Life (unrated) has postponed its IPO plan, which 5 NH Bank is currently subject to the 25% Rule which means the bank cannot sell NH Life products such that they account more than 25% of its total insurance sales. It also has a relatively small agency force and lacks a presence in Greater Seoul and the major metropolitan cities. 4 FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

5 was originally expected in the second half of 2012, because of unfavorable equity capital market conditions. In addition, Dongbu Life (unrated) and Hyundai Life [formerly known as Green Cross Insurance Co] (unrated), two companies that have been considering a public listing, have as yet announced no specific timelines. Vogo Fund (unrated), the largest shareholder of Tongyang Life (unrated) has also put on hold its plan to sell its shares in Tongyang Life. Most recently in January, Kyobo Life has stated for the second consecutive year that it will not seek to go public in 2013, because market conditions at home and abroad are not stable. Demographic profiles and regulatory changes propel annuity and retirement pension opportunities. Industry growth continues to be driven by the country s aging population and increasing postretirement needs. In contrast to highly saturated traditional life products, in particular, we expect stronger growth in pension products, longevity insurance and long-term care products. Key drivers are:» Aging demographics - According to Statistics Korea the median age of Koreans will increase to 52.6 years in 2040 from 37.9 years in The elderly population aged 65 or more is estimated to increase to 32.3% of the total population in 2040 versus 11.0% in We expect prospective retirees turning to tailored insurance products, instead of real estate and bank deposits, to meet their financial needs.» Still low penetration by corporate pension products - Current penetration (as measured by corporate pension reserves as a percentage of GDP) is at low single-digit levels, and is far below that of other OECD countries. Samsung Life (unrated), the market leader of the corporate pension business and representing a market share of 14.1% as of September 2012, estimates that corporate pension market reserves will grow from KRW29 trillion in FY2010 to KRW104 trillion in FY2015, translating into a growth rate of 359% during this five-year period. EXHIBIT 3 Corporate Pension Reserves as a Percentage of GDP as of % 89.0% % 65.0% % % % 8.0% 1 4.0% Australia UK US Canada Ireland Japan Mexico Spain Korea Source: OECD (2011), Kyobo Life, Moody's» Regulatory developments - We expect the revisions to Korean Employee Retirement Income Security Act, effective from July 2012, to be a key driver for individual retirement pensions. The revised Act provides more options and incentives, and strengthens protections for plan 5 FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

6 participants, 6 and allows sales agents (financial planners) to sell corporate pension plans that are mandatory to newly established workplaces. Overall, we see life insurers, particularly those bigger ones with established sales forces and strong corporate client bases, as more competitive in the pension market. Sales of variable life products are expected to slow. We expect low demand for variable life products after a decade of strong growth, following the September 2012 launch of tighter consumer-protection regulations. For the sale of variable life products, companies are required to (1) include disclosures regarding the details of investment returns; (2) provide summary explanations of the product structure and characteristics; and (3) reinforce the responsibility of fee explanations by sales agents. Asset Quality The tightened RBC regime encourages a shift from loans to bonds. We believe the introduction of the RBC regime in April 2012 will strengthen asset quality as it requires that insurers set aside higher loan-loss provisions on their household loans, as well as use higher risk weightings for these loans when calculating their capital adequacy ratios. This development could promote a shift by investors away from direct lending to bond investments, improving their asset quality and liquidity positions. Insurers have been reducing their direct lending, secured or unsecured, as a share of their total invested assets over the past five years. 7 Real estate exposures contained. While insurers have some property market exposures through loans secured by real estate, we believe that the quality of their lending remains good as these are credits extended on the basis of policyholders insurance contracts. Overall loans as a percentage of total invested assets have declined persistently over the past five fiscal years. Asset quality indicators have been strong, and falling property prices have had limited impact on insurers loan portfolios so far. According to the Financial Supervisory Service, the loan delinquency ratio of local life and non-life insurers was 0.81% as of end-september 2012, compared to 1.12% a year ago. In particular, the delinquency ratio of corporate loans declined by 0.06 percentage points to 1.40%, while the ratio for property project financing loans declined by 0.38 percentage points to 6.28%, during the same period. 6 Unlike the old individual retirement accounts (IRAs) system, which only allows employed workers to enroll in the system, IRP expanded the range of eligible individuals to include those who have already purchased retirement pensions and those who are self-employed without regular income streams. IRPs also offer more tax deferral and deduction benefits. 7 Refer to Weekly Credit Outlook Korean Lending Rules Are Negative for Mutual Credit Institutions, Positive for Insurers, 15 March FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

7 EXHIBIT 4 Industry Loans as a Percentage of Total Invested Assets: FY2007 1H FY % % 25.3% 23.4% 21.4% 19.5% 18.8% 15.0% 1 5.0% FY2007 FY2008 FY2009 FY2010 FY2011 1H FY2012 Source: FSS, Moody's EXHIBIT 5 Industry Loans Secured by Real Estate and Unsecured Loans: FY2007 1H FY2012 Loans Secured by Real Estate Unsecured Loans FY2007 FY2008 FY2009 FY2010 FY2011 1H FY2012 Source: FSS, Moody's (KRW trillions) EXHIBIT 6 Industry Loan Mix: FY2007 1H FY2012 Policy Loans Loans Secured by Real Estate Unsecured Loans Others % 5.4% 5.3% 5.5% 5.2% 5.7% % 21.9% 21.6% 21.7% 22.0% 22.1% % 26.7% 25.9% 25.1% 24.5% 24.2% % 46.1% 47.2% 47.7% 48.2% 47.9% 1 FY2007 FY2008 FY2009 FY2010 FY2011 1H FY2012 Source: FSS, Moody's 7 FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

8 Duration gap to narrow. We note this positive development; as insurers invest more in bonds, they should see a lengthening in the maturity of their assets relative to their liabilities. This implies a narrowing in the duration gap, mitigating insurers exposure to interest-rate risk. Nonetheless, we see the positive impact of this development limited by (1) the lack of longer-tenor issuance in the domestic bond market; and (2) current low interest rates, which raise the value of an insurer s liabilities above its assets. The duration mismatch problem will continue to challenge the assets/liability management of insurers, and particularly for conventional insurers that sell significant whole life and longer term life policies. Profitability Low interest rates will continue to weaken profitability Continued low interest rates could weigh on the profitability of insurers because of lower investment earnings, profit compression on spread-based products with interest rate guarantees, and higher reserve increases. In particular, we see a significant negative spread burden from products that carry fixed yields. These include annuity products with long-term guarantees and old legacy savings-type policies carrying fixed-promised yields. EXHIBIT 7 Interest Rates: Korean Ten-Year Government Bonds 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: Bloomberg, Moody's Low interest rates are expected to persist through As a result, the negative spread burden should continue to adversely impact insurers profitability, and could be especially challenging for insurers with weak asset/liability management. This pressure should linger until insurers can lower their overall cost of liability along with increasing sales of high-margin products, including protection-type and floating-rate policies or products with low or non-guaranteed benefits. Another factor weighing on profitability will be a decreased contribution from lending income because of (1) falling lending rates, and (2) the shrinking in loan books, as a share of total invested assets, partly a result of tightened regulations on lending by non-banking financial institutions, including insurers. This trend is expected to continue. 8 FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

9 As a counter to these negative profitability factors, Moody s expects insurers to maintain solid earnings from mortality /morbidity and expense experiences, which remain the key profitability drivers for Korean life insurers. Capitalization Top players maintain solid capital adequacy amid tighter requirements, yet some may face challenges Overall, we expect the industry s capitalization to remain solid, despite challenges including a weaker outlook for profitability. EXHIBIT 8 Shareholders' Equity as a Percentage of Total Assets 1 9.0% 8.4% 9.1% 9.3% 9.6% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 7.2% 6.4% FY2007 FY2008 FY2009 FY2010 FY2011 1H FY2012 Source: FSS, Moody's The main boost to capital will come from more stringent regulations. The new RBC regime introduced in April 2012 requires life insurers to (1) apply higher credit risk charges on mortgage and retail loans, and (2) set higher confidence level -- to 99% from 95% -- to calibrate their insurance risk. These higher standards of risk measurements will result in a decline in insurers RBC ratios, and pressure the weaker insurers to strengthen their capital positions. To the extent more stringent capital requirement promotes higher standard of capturing insurer risks, we see it as credit positive. Insurers should cope with challenges through a higher retention of operating earnings to maintain their current level of risk-adjusted capital, and through stronger risk management. Under the new regime, the RBC ratios of the top three life insurers stay at above 200%, the level that the regulator considers adequate. However, uncertainties in the global financial markets make it difficult for some medium-sized insurance companies to access funds from the capital markets. 9 FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

10 Moody s Related Research Credit Opinion:» Kyobo Life Insurance Co., Ltd Company Profile:» Kyobo Life Insurance Co., Ltd, April 2012 (140937) Sector Comment:» Korean Lending Rules Are Negative for Mutual Credit Institutions, Positive for Insurers, March 2012 (140341) Rating Methodology:» Moody's Global Rating Methodology for Life Insurers, May 2010 (123502) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 10 FEBRUARY 21, 2013 INDUSTRY OUTLOOK: KOREA LIFE INSURANCE INDUSTRY OUTLOOK

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