Best Affirms Dongbu Insurance ‘A-‘ Rating

November 16, 2004

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

“The rating reflects the company’s excellent capitalization, solid market position and persistency in operating performance,” said Best. “The company’s flexible business strategy is another positive factor.”

Best noted: “Dongbu’s financial position has strengthened in fiscal year 2003, as measured by the Best’s Capital Adequacy Ratio (BCAR). The Korean solvency ratio, which stands at 224.6 percent as of fiscal year 2003, also reflects the company’s strong solvency position.

“Through strengthening its position in commercial lines, Dongbu has been able to maintain its overall premium market share of 14 percent as of fiscal year 2003, when other companies with direct distribution channels have been aggressively penetrating the motor insurance market. The company has successfully entered the bancassurance channel in September 2003, taking the lead position in this channel, and in July 2004 the company launched its direct distribution channel.”

Concerning the company’s finances, Best said: “Net Income deteriorated to KRW 45 billion (USD 38 million) in fiscal year 2003 compared to KRW 79 billion (USD 66 million) in fiscal year 2002. Although the investment income saw a slight improvement due to the bullish stock market, the underwriting income dropped to KRW -69 billion (USD -58 million) in fiscal year 2003 compared to KRW 24 billion (USD 20 million) in fiscal year 2002.” It pointed out that the “deterioration is mainly due to the higher loss ratio in motor insurance business. The company successfully manages to maintain one of the lowest expense ratios in the Korean non-life industry.

“Offsetting these positive attributes are the continuation of the low interest rate environment, increasing popularity of direct distribution channels and the company’s relatively high strategic investments including Anam Semiconductor, Hana Bank and Dongbu Life.”

The rating agency singled out “today’s low interest-rate environment as a concern. I said Dongbu “faces a significant margin squeeze in its long-term savings products. To cope with this problem, the company is shifting its business portfolio towards variable interest products as well as protection type products with fewer savings features attached.”

Best also noted that “market penetration of companies selling products through direct channels will increase. With increased competition from bancassurance and other financial institutions, long-term products, including protection type products, may face severe competition in the near future. Dongbu’s strategic investments (Anam Semiconductor and Hana Bank), including its investment in Dongbu Life, may impose some volatility on its capital.”

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