HONG KONG – (COMMERCIAL THREAD) –AM Best confirmed the financial strength rating of A + (superior) and the long-term issuer credit rating of “aa-” (superior) of Construction Guarantee Cooperative (CG) (South Korea). The outlook for these credit ratings (ratings) is stable.
The ratings reflect the strength of CG’s balance sheet, which AM Best considers to be the strongest, as well as its strong operational performance, favorable business profile and appropriate enterprise risk management (ERM).
CG’s risk-adjusted capitalization is valued at the highest level, as measured by Best’s capital adequacy ratio (BCAR), underpinned by its large absolute capital base of KRW 6.5 trillion (5.9 billion USD) at the end of 2020, extremely low net underwriting, leverage and a very favorable liquidity position. The company’s prudent investment portfolio focuses on liquidity for the payment of surety debts and lending to its members as a cooperative and helps maintain the stability of its strong risk-adjusted capital position.
CG’s strong operational performance is supported by its highly profitable bond underwriting performance and stable investment income, as evidenced by a five-year average combined ratio of 54.2% (2016-2020) and an operating ratio. -3.4%, although volatile from year to year. -year. Its bond underwriting results were not significantly impacted by the COVID-19 pandemic due to stable and increasing levels of new construction in the public sector and a still favorable private housing market in South Korea. In 2020, the profitability of its surety line improved further, coupled with a favorable loss experience, which led to a reversal of its provisions for surety claims.
CG’s strong price negotiating power resulting from its dominant market share and the mandatory nature of surety bonds in construction projects partially offset underwriting volatility caused by the strong correlation between its operational performance and the construction industry. . Meanwhile, CG’s insurance business, which accounted for 17% of its gross written premiums (GWP), suffered a very small net loss in 2020, mainly due to the increase in weather-related claims over the course of the year. ‘year. While the impact on CG’s bottom line was minimal, AM Best notes that the company has implemented mitigation measures to ensure its stable performance, such as rate increases and tighter underwriting. A strong flow of investment income provides additional stability to CG’s overall bottom line.
Established in 1963 under the Korea Construction Financial Cooperatives Act, CG is 100% owned by its members, who make up the majority of general construction companies in South Korea. As the government appointed guarantor for general contractors, CG has an established presence in the construction surety segment in South Korea with the largest market share of over 50% based on the total underwriting volume in South Korea. 2020. With regard to the general contractors segment only, CG accounted for a 75% share in 2020. To mitigate its risk of concentration within the national construction surety line, the company has diversified its activities into expanding into overseas construction bonds and construction-related insurance business; these represented around 7% and 17% of the total PRP in 2020, respectively.
AM Best considers CG’s risk management capabilities to be aligned with its risk profile. Its main risk areas are effectively monitored through a comprehensive ERM structure, which includes a sophisticated credit assessment system and real-time monitoring of the financial situation of its members.
Negative rating actions could arise if CG’s operating performance deteriorates significantly due to a large build-up of bond claims resulting from a prolonged downturn in the overall economy and the construction industry.
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