AM Best Revises Outlooks to Negative for Construction Guarantee Cooperative

AM Best has revised the outlooks to negative from stable and affirmed 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 Credit Ratings (ratings) reflect CG’s balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management (ERM).

CG has a track record of strong operating performance; however, it recorded a noticeable rise in guarantee claims payment and sizeable provision of guarantee claims reserves in 2023, and during the first half of 2024. This is attributed to unfavourable conditions faced by domestic construction industry that led to increased liquidity pressures on some of its members. The amount of guarantee claims payment is expected to remain elevated for the medium term given the continued downcycle in the construction industry.

The revision of the outlooks to negative from stable reflects a deteriorating trend in CG’s underwriting profitability in the recent period, which deviates from its historically strong level. The negative outlooks also reflect AM Best’s expectation that CG’s underwriting results and bottom line will face a level of pressure over the short to medium term amid uncertainty in the recovery of the domestic construction industry. AM Best will continue to monitor the development of CG’s operating performance over the coming periods especially in light of the anticipated interest rate cuts and support from the regulator to resolve the liquidity crisis in the construction sector.

Nonetheless, CG’s risk-adjusted capitalisation is expected to remain comfortably at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), underpinned by a large capital base of KRW 6.8 trillion (USD 5.3 billion) as of year-end 2023, extremely low underwriting leverage, favourable liquidity and a debt-free position. The company’s highly conservative investment portfolio, mainly placed in stable fixed-income assets, also supports its balance sheet strength.

Established under the Korea Construction Financial Cooperative Law, CG is a government-designated surety underwriter for general contractors in South Korea. It has the largest share of the construction surety segment and a strong membership base, which represents more than 70% of the general contractors in the country. The company has been diversifying its business gradually to overseas surety business and construction-related insurance products over the last years to alleviate its concentration risk within the domestic construction surety segment.

AM Best considers CG’s risk management capabilities to be appropriate with a comprehensive ERM structure to manage its key risk areas effectively. The company conducts thorough assessment of its surety bond credit risks annually and monitors its members’ financial and operational issues on a daily basis through an early warning model and watch system.

Negative rating actions could occur if CG’s operating performance continues to deteriorate markedly due to significant accumulation of guarantee claims from a downturn in the overall economy and construction industry. Negative rating actions also could arise if there is a significant deterioration in the company’s balance sheet strength fundamentals. While thought to be unlikely over the medium term, positive rating actions could occur if CG demonstrates a well-embedded ERM framework along with market best practice ERM techniques.

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 use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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 London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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