KFINCO’s rating affirmed with Korean insurer pursuing overseas expansion

Fitch affirms construction guarantee insurer's ratings, noting that limited geographic and business diversification has prompted it to explore expansion opportunities.

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Kfincos rating affirmed with korean insurer pursuing overseas expansion
Kfincos rating affirmed with korean insurer pursuing overseas expansion
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Kfincos rating affirmed with korean insurer pursuing overseas expansion

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(Re)in Summary

• Fitch Ratings affirmed Korea Finance for Construction’s (KFINCO) IFS Rating at ‘A’ (Strong) with a stable outlook, citing strong capitalisation and market dominance.
• KFINCO holds over 62% market share in South Korea’s specialty construction guarantees but has limited geographical and business diversification, prompting it to try to increase geographic spread.
• KFINCO’s capitalisation remains strong with a regulatory capital ratio of 500.7% at end-2023, despite modest profitability and exposure to the cyclical construction industry.

Fitch Ratings on Thursday (13 June) affirmed Korea Finance for Construction’s (KFINCO) Insurer Financial Strength (IFS) Rating at ‘A’ (Strong) with a Stable Outlook. The rating reflects KFINCO’s dominant market position in specialty construction guarantees and strong capitalisation, the rating agency said.

KFINCO primarily provides guarantee and insurance services to member firms in the construction industry. As of the end of 2023, it held a market share of over 62% in specialty construction guarantees for the South Korean market.

The company is supervised by South Korea’s Ministry of Land, Infrastructure and Transport and was established to promote the domestic construction industry. Fitch noted that KFINCO is rated one notch above its standalone credit quality due to the high likelihood of state support if required.

Despite this, Fitch notes the company’s limited geographical and business diversification. To address this, KFINCO has adopted a measured approach towards expanding its business overseas by attracting sound general construction companies, aiming to increase its geographical spread.

Ratings drivers

In its rating assessment, Fitch highlighted KFINCO’s modest profitability, noting that its exposure to the cyclical construction industry makes it vulnerable to broader economic developments and sector-specific shocks.

Return on equity increased to 2.0% in 2023 from 1.5% in 2022, with a three-year average of 2.0%. Its combined ratio has deteriorated slightly due to a rising loss ratio from the guarantee business and reduced inflow of guarantee reserve reversals in 2022 and 2023, Fitch said.

However, KFINCO’s capitalisation remains strong, with a regulatory capital ratio of 500.7% at the end of 2023, well above the regulatory minimum of 100%. “The ratio of guarantee exposure to total shareholder funds was 6.9x at end-2023 (2022: 6.8x), below the 20x threshold,” Fitch said.

Capitalisation, measured by Fitch’s Prism Model score, has been consistently above ‘Very Strong’ for the past five years. Capital is generated solely from members’ share contributions, and the consistent growth in the number of members has resulted in a gradual increase in KFINCO’s capital. Capital exceeded KRW5.9 trillion in 2023, covering over 90% of total assets.

KFINCO has maintained its asset allocation to alternative investments, resulting in a risky-asset ratio of 26% at the end of 2023. The company also recognised impairment losses from a commercial real estate fund and corporate loans. However, Fitch believes KFINCO has a sufficient capital buffer to absorb these losses. The cooperative also maintains a satisfactory level of liquid assets, including cash and investment-grade fixed-income securities, the rating agency added.

Overall, Fitch’s affirmation of KFINCO’s rating underscores the company’s strong capital position and significant role in South Korea’s construction industry.

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