A.M. Best Assigns 'A-' -Excellent- Rating To Samsung Fire and Marine
A.M. Best Co. has assigned an ``A-'' (Excellent) rating to Samsung Fire & Marine Insurance Co. Ltd., Seoul, South Korea. The rating reflects the company's dominant market position, strong capitalization and distribution capability in the non-life insurance sector in South Korea. It also reflects the company's predominantly short-tail property book of business and insignificant exposure to earthquakes. The company's capital and liquidity positions are strengthened by a recent capital increase of roughly 108 billion won. In addition, Samsung's loan portfolio is financed by assets with good quality and positive bad-loan write-off history.
Samsung writes three major lines of business: motor insurance, which accounts for 43%; commercial lines, 9%; and long-term savings, 48%. Its insurance underwriting profitability (on an adjusted basis) has been consistent and uninterrupted since 1992. The majority of the long-term savings portfolio are policies that combine small personal insurance coverage and a regular bank savings deposit account. Therefore, Samsung's risk profile includes not only typical insurance risks, but also bank risk as a result of asset accumulation from the deposit business.
During October 1997 and February 1998, the Korean insurance market experienced a "mini bank-run," in that many long-term savings policies were canceled in anticipation of economic hardship, such as unemployment and substantial wage reduction. The cancellation of deposits caused tremendous liquidity pressure for the Korean insurance industry.
A.M. Best, however, believes the company had enough financial resources to prevent a funding dislocation that would have caused investment losses and capital erosion. In fact, Samsung's strong financial and market resources allowed it to react quickly to improve its liquidity without incurring investment losses during the initial wave of cancellation. A case in point is the recent capital increase of 108 billion won, which further improved the company's liquidity and capital position.
A.M. Best also believes the reduction of the long-term savings business has a long-term positive effect by alleviating bank risk and the fundamental asset-and-liability mismatch caused by the absence of a domestic long bond market. In assessing South Korea's sovereign risk exposure, particular attention was paid to "transfer risk," or the company's ability to convert its domestic cash flow into a foreign currency to service foreign currency denominated insurance claims in a timely fashion. Based on the assessment of the company's foreign currency denominated premium volume, paid losses during the past three years, reserves, investments and overseas operational funding needs, A.M. Best believes the company has insignificant transfer-risk exposure. Offsetting these positive rating factors are increased funding costs, fluctuating investment income and an unstable long-term savings portfolio as a result of cancellation. In addition, the absence of a domestic long bond market creates a fundamental asset-and-liability mismatch for the whole Korean insurance industry.
At the same time, the South Korean insurance market is undergoing fundamental changes, from a regulated and closed market to a deregulated and liberalized market. These negative factors, together with the ongoing economic and financial restructuring in South Korea, will create an uncertain operating environment. Mitigating this factor is the fact that the company, in A.M. Best's opinion, is better positioned than most of its peers to take advantage of the changes in market condition and has strong long-term viability. A.M. Best Co., established in 1899, is America's oldest and most widely recognized insurance rating and information source.