Best Affirms Dongbu’s ‘A-‘ Ratings

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

“The ratings reflect Dongbu’s stable capitalization, consistent operating performance and diversified distribution channels. The ratings also reflect the company’s stable earning income structure,” said Best.

“Dongbu’s capitalization remains stable with an upward trend in the past five years. In fiscal year 2005, the company’s local solvency ratio improved to 221 percent from 218 percent in fiscal year 2004,” the bulletin continued. Best said it “expects the company’s profitability and capitalization to be maintained.

“Dongbu’s underwriting performance has been consistent for the past five years. The company has achieved the second-lowest combined ratio among the top five largest non-life companies in Korea with its current low expense ratio. This low expense ratio is attributed to the company’s high productivity sales team.

“Dongbu is proactive in expanding new distribution channels to increase its channel revenue sources in the midst of industry deregulation. The company is active in forming alliance channels with home shopping and credit card companies. Expansion in the bancassurance and direct channels is growing at a rapid rate. A.M. Best believes that Dongbu’s diversified distribution channel strategy will strengthen its market competitiveness in the long term.”

Best also noted that the “Company has a stable earning income structure, with interest-bearing assets constituting about 80 percent of the overall investment portfolio, maintaining the stable return of investment. Dongbu intends to increase its fixed income investments to minimize the impact of the fluctuating stock market.”

However Best said that the “fierce competition in the direct market, uncertainties in the market deregulation and Dongbu’s relatively weak commercial lines compared to its major competitors,” constitute “offsetting factors.”

The rating agency noted that “direct channels have expanded very rapidly over the past few years. The excessive price competition in the direct market has worsened the industry’s overall loss ratio. A.M. Best believes that the market competition in auto direct sales will remain intense, and insurers need to be cautious about entering the market without forgoing profitability.

“The increasing deregulation in the industry will pose challenges for the non-life insurers in the market. Insurers must be proactive in formulating strategies to respond to these deregulations in order to compete effectively in the market.

“Dongbu has a relatively weak commercial business performance. However, the company has slightly increased its market share by underwriting non-affiliated business and expanding businesses. The stability and profitability of the commercial lines business are expected to improve going forward.”