Fitch Affirms Korea's Construction Guarantee IFS at 'A'; Outlook Stable

Thu Jul 24, 2014 12:49am EDT

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(The following statement was released by the rating agency) SINGAPORE/HONG KONG, July 24 (Fitch) Fitch Ratings has affirmed South Korea-based Construction Guarantee's (CG) Insurer Financial Strength rating (IFS) at 'A'. The Outlook is Stable. KEY RATING DRIVERS The rating reflects CG's strong government support, given the company's key role in the construction industry and heavy state involvement in its operations. The rating also takes into account its solid capital position commensurate with its business portfolio and its strong liquidity position. However, CG has high business concentration risk in the domestic construction sector, which is closely correlated with the economy. The Stable Outlook reflects Fitch's expectation that CG will maintain its healthy financial fundamentals, based on the company's prudent management approach. CG has maintained its ratio of guarantee premiums written to total equity at below 0.5x at end-2013 and at end-March 2014. Profitability has improved as the company places higher emphasis on proper pricing discipline. Net income amounted to KRW87bn for 2013 and KRW41bn for 1Q14 respectively, compared with KRW38bn for 2012. Pre-tax return on assets amounted to 2.6% for 2013 (2012: 1.2%). CG operates under a regulatory capital regime that is modelled after the Basel II capital framework. Its regulatory capital ratio amounted to 316.56% at end-2013 and 303.14% at end-March 2014 - well above the regulatory minimum of 100%. It is crucial for the company to maintain a healthy capital level to provide a cushion for its potentially volatile business portfolio. CG continues to face the challenge of managing risks inherent in a niche business that is vulnerable to South Korea's economic conditions given limited business and geographical diversification. To address this, CG plans to diversify overseas to support the construction activities of Korean companies abroad. CG is a cooperative established in October 1963 to promote the growth and development of the construction industry by offering financing and guarantee insurance services to its members. CG is governed and regulated by the Ministry of Land, Transport and Maritime Affairs and must obtain prior approval from the ministry on various operational activities. It sources its business solely from the South Korean market. RATING SENSITIVITIES Key rating drivers for an upgrade are prudent risk management of its business concentration in the construction sector and business diversification away from the construction sector, while maintaining its sound financial fundamentals, including a consistently solid capital buffer to support domestic and overseas business growth. Conversely, key rating drivers for a downgrade include a significant deterioration in the credit profile, for example an increase in its ratio of guarantee premiums written to equity to consistently above 2x. Contacts: Primary Analyst Wan Siew Wai Senior Director +65 6796 7217 Fitch Ratings Singapore Pte Ltd. 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Jeffrey Liew Senior Director +852 2263 9939 Committee Chairperson Stephan Kalb Senior Director +49 69 768076 118 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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