Best Affirms LG Insurance ‘A-‘ Rating

December 29, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) and assigned an issuer credit rating (ICR) of “a-” to South Korea’s LG Insurance Company Ltd. with a stable outlook.

“The ratings reflect LG Insurance’s excellent market profile, enhanced by multi-channel distribution capabilities, stable investment income due to a flexible long-term liability structure and adequate capitalization,” said Best.

The rating agency noted that “LG Insurance increased its distribution capabilities in recent years both in traditional distribution channels and in new distribution channels such as bancassurance and direct channels. The company has exposure into the direct distribution auto insurance market with an investment in Daum Direct, which is a direct channel insurance provider.

“LG Insurance’s direct premium market share in the Korean non-life market has increased steadily in the last few years standing at 14.2 percent as of fiscal year 2004 and is expected to grow further. The company believes that it can improve its cost structure and reduce its expense ratio through achieving higher economies of scale.

“At 63 percent as of fiscal year 2004, LG Insurance has a high percentage of floating rate characteristics in its long-term savings reserves when compared to other major non-life peers. Long-term savings reserves were at 54 percent of total assets as of fiscal year 2004. Due to this fact, LG has one of the lowest assumed rates of long-term savings reserves in the non-life industry.

“The company’s risk adjusted capitalization was maintained at a stable level in fiscal year 2004 with little improvement, as the company’s growth momentum is high and as it intends to retain more commercial business. The local solvency ratio was 210 percent, with a risk-bearing insurance leverage of 2.3 times as of fiscal year 2004.”

However, Best indicated that “partially offsetting these positive factors are the intensified competition in the market from direct sales channels and the difficult low interest rate investment environment.

“As the market penetration of lower expense loading direct sales channels continues, major non-life companies will have to further reduce their expense ratios. Market consensus is that more than 20 percent of the non-life products will be sold through these alternative channels in a few years.

“In fiscal year 2005, LG Insurance’s investment income may not meet the company’s expectations if Daum Direct requires further capital injections for business growth and Lucky Life requires further capital to support its solvency. The absolute amount will not impact the capitalization of the company and LG Insurance expects that overall income in fiscal year 2005 will be higher than in 2004.”

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