Best Affirms Korea’s LIG ‘A-‘ Rating

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

“The ratings reflect the company’s solid market profile, stable capitalization and strong performance in the long-term business line,” said Best.

“Earlier this year, LIG changed its corporate identity from LG Insurance to LIG Insurance Company Limited,” the bulletin continued. “The new corporate identity aims to enhance brand value and market awareness. In fiscal year 2005, LIG attained a market share of 14.8 percent in the Korean non-life market. It has been proactive in increasing its distribution capabilities. During the same year, the company maintained a leading position in the bancassurance channel and participated in the direct channel through an investment in Daum Direct in 2003.

“Over the past five years, LIG’s capitalization has remained stable. As of fiscal year 2005, the company’s local solvency ratio stood at 205 percent, a slight decline of 4 percent compared to the prior year. Projections of the risk-adjusted capital as measured by Best’s Capital Adequacy Ratio (BCAR) will remain stable.”

Best also indicated: “LIG has performed well in the long-term business line. In fiscal year 2005, LIG not only increased its market share in the long-term business but also attained one of the highest persistency ratios (13 months after policy inception). LIG maintains the highest composition of 69 percent of floating rate reserves among its major players. This reserve composition increases the company’s flexibility to reduce its future liability in the guaranteed insurance policy in the event of a low interest rate environment. A.M. Best believes that LIG will continue to benefit from the ongoing sales growth in the long-term business.”

However, the rating agency said that the “fierce competition in the direct market, uncertainties in the market deregulation and relatively high expense ratio compared to its major competitors,” constitute partially offsetting factors.

“The direct channels have expanded very rapidly over the past few years,” Best explained. “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 the 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.

“Due to business expansion, LIG incurred a higher expense ratio relative to its peers. LIG recorded an increase in operational expenses due to the increase in recruiting costs, salaries and other marketing expenses. It remains to be seen if LIG can manage its expenses efficiently and achieve the economy of scale going forward.”