S&P Assigns ‘BBB’ Rating to Korea’s Hyundai

January 28, 2005

Standard & Poor’s Ratings Services has assigned its ‘BBB’ counterparty credit and insurer financial strength ratings to Korea’s Hyundai Marine & Fire Insurance Co. Ltd. The outlook on the ratings is stable. S&P also noted that it has withdrawn its ‘BBpi’ public information rating on the company.

“The ratings on Hyundai Marine & Fire reflect the company’s good competitive position, and strategy to stabilize its profitability and improve efficiency,” said the announcement, adding that the ratings “are constrained by its modest capitalization and underwriting performance, among other factors.”

S&P credit analyst, Young Il Choi noted: “By leveraging its business relationships with former Hyundai group companies, particularly in its auto and commercial insurance business lines, albeit to a lesser extent than in the past, Hyundai Marine & Fire should be able to solidify its competitive position. A key issue will be Hyundai Marine & Fire’s success in benefiting from Korean policyholders’ preference for insurance carriers with good brand names and financial strength,” he added.

S&P also said Hyundai may face problems due to the “expanding distribution of online and over-the-counter insurance products by banks, which could erode its “competitive edge in its traditional business lines, and may pressure the company’s profit margins.

The bulletin indicated, however, that the company’s “six-sigma strategy,” aimed at shifting its corporate culture to prioritize efficiency, “is considered adequate, given its relatively rigid cost structure.”

Hyundai “is the second largest non-life insurance company in Korea, with a market share of 14.7 percent in terms of gross premiums for fiscal 2003,” S&P said. “Its major shareholder is Mr. Mong Yoon Chung with 21.67 percent ownership.” Hyundai’s initiative to reduce inconsistencies in asset-liability management “should help the company to manage the risk of negative spread.” S&P also indicated that a “tougher stance by Korean regulators on reserve adequacy may raise the non-life insurance sector’s loss ratio in general,” but Hyundai “is likely to improve its combined ratio to about 103 percent in the near term, from 105.6 percent at the end of March 2004.”

The announcement also noted: “Hyundai Marine & Fire’s capital adequacy is modest compared with its domestic and international peers. Although its ratio of outstanding reserves to premiums for auto insurance is higher than its domestic competitors, this only partly supplements its modest capitalization.

“The company’s expected improvements in capital adequacy will likely happen gradually, given its plan to boost capital mainly with retained earnings.

“Hyundai Marine & Fire’s earnings are relatively modest and volatile, primarily due to: a greater burden from higher interest rates on policies underwritten in the past compared with its major competitors; a higher expense structure than its peers due to a relatively large number of employees to premiums income; and the vulnerability of its investments to stock market swings. Nevertheless, Standard & Poor’s expects Hyundai Marine & Fire will successfully execute its key strategies and consequently raise the quality of its earnings and asset-liability structure over the next few years.”

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