Best Affirms Korea’s LG Insurance ‘A-‘ Rating

February 24, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) of South Korea’s LG Insurance Company Limited with a stable outlook.

“The rating reflects LG Insurance’s excellent market profile, flexible liability structure and the short-tailed nature of the business in the Korean market,” said Best. It noted that “LG Insurance recorded a market share of 13.7 percent in fiscal year 2003. Market share of the company increased over the last five years and is expected to increase further as its smaller competitors face increased competition due to liberalization and the changing market environment. LG Insurance is one of the leading non-life insurers of bancassurance, which began in September 2003. Bancassurance will be further expanded as protection type long-term products will be allowed to be sold in the near future.”

Best indicated that “compared to other major non-life players, LG Insurance has a higher composition of floating rate characteristics in its long-term savings reserves, which was 55 percent in fiscal year 2003. The size of the long-term savings reserves was 52 percent of the total assets in fiscal year 2003. Due to this feature, LG has one of the lowest assumed rates of long-term savings reserves in the non-life industry. And compared to other companies, LG has a higher asset composition in loans that have higher yields than other fixed income assets.”

The rating agency also noted that the “company’s risk-adjusted capitalization improved in fiscal year 2003 but is likely to stay at the current level in fiscal year 2004 as its growth momentum is high, and it intends to retain more business in commercial lines. The local solvency ratio was 205 percent, with a risk-bearing insurance leverage of 2.34 times as of fiscal year 2004.”

Partially offsetting these positive factors are the intensified competition in the market from the direct sales channel and the difficult investment environment with low interest rates.

“Historically, LG Insurance’s investments in Lucky Life and Hanaro telecommunications were negative factors exerting volatility on the company’s capital, but LG Insurance has substantially reduced its investments in Hanaro Telecommunications, and Lucky Life’s asset portfolio has been restructured in recent years,” Best explained. “These factors should no longer impact LG Insurance’s capitalization. The market penetration of the direct sales channel of motor insurance continues, and the company’s market share in motor insurance is on a downward trend. Furthermore, the interest rate in the Korean market is likely to remain low in the foreseeable future. LG Insurance will continue to face challenges in this operating environment.”

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