OCTOBER 07, 2020 11:13 AM (EDT)
AM Best Affirms Credit Ratings of Construction Guarantee Cooperative
FOR IMMEDIATE RELEASE
HONG KONG - OCTOBER 07, 2020 11:13 AM (EDT)
These ratings reflect CG’s balance sheet strength, which AM Best categorises as strongest, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management (ERM).
CG’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), is at the strongest level, underpinned by the company’s large absolute capital base and extremely low net underwriting leverage. The company’s highly conservative investment strategy, which prioritises liquidity to secure funds for surety claims and also provide loans to its members, helps maintain stability on its robust risk-adjusted capital position.
CG’s surety segment performance has not been impacted significantly by COVID-19-related losses during the first half of 2020, due to stable and increasing levels of new construction in the public sector and a continuously favourable private housing market in South Korea. AM Best notes that more than 70% of the projects underwritten are from the public sector and involve central and local governments.
CG has continuously demonstrated profitable and stable operating performance over the past five years (2015-2019) with an average combined ratio of 63.6% and an operating ratio of 3.2%, albeit slightly volatile year-by-year. Its underwriting performance remains volatile due to the high correlation of its surety bond business with the construction industry and the overall economy. However, its strong price negotiating power arising from a dominant market position and the compulsory nature of surety bonds in construction projects helps the company mitigate underwriting volatility. The company’s strong operating results are further enhanced by its stable investment income derived from a large asset base and conservative investment portfolio.
Established in 1963 under the Korea Construction Financial Cooperative Law, CG is 100% owned by its members, which comprise the majority of South Korea’s general construction companies. It is a government-designated surety writer for general contractors with a market share in the construction surety bond market that remained at over 50%, based on total underwriting volume in 2019. CG diversified its business by expanding into overseas construction projects and the construction-related insurance business, which accounted for approximately 4% and 15% of its total gross premium written in 2019, respectively, to mitigate its concentration risk in the domestic construction surety segment.
AM Best views CG’s risk management capabilities as aligned with its risk profile. Its key risk areas are monitored effectively through a comprehensive ERM structure, which includes a sophisticated credit evaluation system and real-time monitoring of its members’ financial status.
Negative rating actions could occur if CG’s operating performance deteriorates markedly due to significant accumulation of surety bond claims from a prolonged downturn in the overall economy and construction sector, triggered by the ongoing global COVID-19 pandemic.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.